Is the spike in India’s trade deficit a worry?

The story so far: After a positive start to goods exports in the first quarter of 2024-25, there has been a blip in momentum. Outbound shipment values shrank 1.5% in July to an eight-month low, and the contraction deepened to 9.3% in August. This has coincided with a record import bill which hit $64.4 billion in August, and translated into a merchandise trade deficit of $29.7 billion, the second highest after the record $29.9 billion gap in October 2023

What has triggered the wider trade deficit?

While exports have shrank in the past two months, imports have not — they grew 7.5% over last July and 3.3% in August. This lifted the deficit to a nine-month peak of $23.5 billion in July and that gap widened by around $6.2 billion last month. On the exports front, 18 of India’s top 30 segments recorded growth in July and 19 in August, but the big-ticket sectors like petroleum, and gems and jewellery, have tanked significantly. Oil exports were down 22.2% in July and 37.6% in August, while jewellery exports have dropped well over 20% in both months. In August, growth also slowed significantly in sectors like drugs and pharmaceuticals, and the emerging export growth engine of recent times, electronic goods. With the Chinese economy slowing, some segments like stone, plaster, cement, and iron ore, also retreated. Interestingly, as oil prices declined about $6 a barrel in August, India’s oil import bill dropped by almost a third to $11 billion, bringing the petroleum deficit to a three-year low, QuantEco Research economists pointed out in a note.

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“The widening of the merchandise trade deficit was predominantly led by gems and jewellery, along with a minor impact from miscellaneous products and electronic items,” they said. While gems and jewellery exports slipped below $2 billion, India’s gold imports more than doubled in August to an all-time high of $10.1 billion. This is in sharp contrast to a 10.7% drop in gold imports in July and the range of $3 billion-3.4 billion seen since April. Top trade officials attributed this surge to the reduction in gold import duty from 15% to 6% announced in the Budget, the recent rise in gold prices, and domestic jewellery players stocking up for the festive season. Economists believe the full impact of the duty cuts announced on gold and other items will continue to play out, weighing on the import bill in coming months.

Could wider trade deficits pose a risk?

There is no significant risk to the economy at this point. As Commerce Secretary Sunil Barthwal has emphasised, India is growing faster than the world, so its demand for global products is bound to outpace the world’s demand for its exports. “The deficit should not be a matter of concern for a developing economy with high growth and to the extent there are no foreign exchange issues, it should not matter,” he asserted this week. Foreign capital inflows have stayed positive in recent months, and India’s foreign exchange reserves had reached a record high of $675 billion as of August 2, which the Finance Ministry reckoned last month to be sufficient to cover 11.6 months of imports. That cover may be a tad lower if imports continue to hover over $60 billion in coming months, but services exports, reckoned to have risen over 10% between April and August, provide some comfort.

What about foreign trade in goods?

Global trade is expected to grow faster in 2024 than 2023, but for now, demand remains tepid in most developed markets. The festering geopolitical risks and conflicts aside, the upcoming election in the U.S. and its tariff hikes on Chinese goods even as Beijing grapples with a faltering domestic economy, presents a double-edged sword for players like India. While China’s demand for imports slip, it has more reason to dump its products in non-U.S. markets at throwaway prices. Moreover, this interplay of downward pressures is expected to keep oil prices low, hurting India’s oil export hopes, even as concerns about overall global demand impulses have increased. Beyond the short term, the road ahead for India’s trade — the government aims to scale up services and goods exports to a trillion dollars each by 2030 — is not likely to be smooth.

There are challenges to boosting the export growth engine, Chief Economic Adviser V. Anantha Nageswaran said, with the global economy slowing down, tariffs and non-tariff barriers proliferating with countries adopting “active industrial policies” since the pandemic, and new trade walls such as the European Union’s Carbon Border Adjustment Mechanism and Deforestation Rules coming into play. There could be a year or two that offer the chance to ramp up exports, but all in all, it’s going to be a hard time, he concluded.

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