A trade bump represents a “temporary increase” in trade activity. Generally, it happens due to short-term factors like government policies, international events, and market disruptions. For investors, understanding a trade bump is important as it shows economic stability and the latest market trends.

Importantly, as per a recent economic survey, India’s “trade deficit” is likely to decrease in the coming years. This is largely due to the expansion of the Production-Linked Incentive (PLI) scheme. For the unaware, this initiative encourages domestic production. Additionally, India implemented several Free Trade Agreements (FTAs) that are expected to boost exports. Recently, FTAs have been entered into with Mauritius, Australia, and the UAE.

All these measures are expected to act as a trade bump and boost the Indian economy. In this article, let’s understand the meaning of trade bump, its various causes, and see how it generally boosts the Indian economy.

• A trade bump is a temporary increase in trade activity.
• India's trade deficit is expected to decline in the coming years due to the expansion of the Production-Linked Incentive (PLI) scheme.
• India has also entered new Free Trade Agreements (FTAs) that will boost exports.
• Sectors like IT, manufacturing, and pharmaceuticals are expected to gain from trade bumps.

A "trade bump" is a sudden and temporary increase in trade activities between countries. It happens when trade volumes rise sharply for a short period. Usually, it leads to a sudden increase in exports or imports and impacts the balance of trade. Some common examples are:

• Say a new trade deal boosts exports
• The removal of tariffs lead to increased imports
• Supply chain shifts lead to an increase in trading volumes

Now, be aware that these bumps are not permanent. But, they are important and significantly impact the “balance of trade” and economic growth in the short term.

Mostly, geopolitical events like “sanctions” or the “lifting of trade restrictions” cause a trade bump. When sanctions are imposed, affected countries increase trade with alternative partners. On the other hand, when restrictions ease, it leads to a surge in trade as countries re-establish economic ties. For example,

• Say two countries resolve a political dispute.
• Now, their trade volumes temporarily rise due to newly opened opportunities.
• This creates a trade bump and positively impacts both countries.

Apart from this, these factors also contribute to trade bump:

• Trade agreements (new or revised FTAs)
  A new or revised Free Trade Agreement (FTA) also triggers a trade bump. That’s because FTAs generally reduce tariffs and make it cheaper to import and export goods. This results in a spike in trade volumes shortly after the agreement is enacted.
• Rising demand for specific products
  Sudden shifts in market demand for certain products also create a trade bump. If there is an increase in demand for specific goods (say electronics, oil, or agricultural products), countries see a surge in exports or imports.
  For example, currently, there is a huge demand for electric vehicles (EVs) due to concerns about climate change. Consumers are increasingly choosing EVs over traditional cars. This shift has prompted manufacturers worldwide to increase production of EVs.
  Countries that adapt quickly to this trend, like China and Germany, have substantially enhanced their trading volumes.

A trade bump can significantly boost India’s economy, particularly in key sectors like:

• Information technology
• Manufacturing
• Pharmaceuticals

An increase in international demand for Indian IT services could lead to increased exports and more revenue in this sector. Also, in manufacturing, a temporary rise in exports of goods (say textiles and automobiles) can:

• Strengthen production capacities
  and
• Encourage foreign investment

Moreover, the pharmaceutical sector, known for its generic drugs, can also see heightened demand during global health crises. Additionally, India's trade relations with major partners such as the US, China, and the EU also influence trade bump. Mostly, stronger economic ties lead to increased exports and enhance India’s global standing.