Understanding the all-time high in India’s trade deficit

• India’s exports moderated in the first quarter of this year.
• Overall goods exports declined for the third month in a row in June.
• Imports continued to rise sharply, triggering fresh peaks for India’s monthly trade deficit.

Change in merchandise trade balance

• Total goods exports in 2021-22 : $422 billion, up from pre-COVID levels of $313 billion in 2019-20.
• first time in years that an official export target ($400 billion) was surpassed.
• Gap between exports and imports has widened in the first quarter of this year.

Reasons for rising imports and denting exports

• Ukraine crisis: Raised commodity prices globally, triggering runaway inflation, hurting global growth prospects and trade demand.
• Weak external demand: Weakness seen in exports of engineering products, chemicals, pharmaceuticals, cotton yarn and plastic products.
• Imports fuelled by energy sources: Oil driven by higher prices and coal by India’s domestic coal supply crunch compelling power producers to import more.
• Import of gold: Volatility in financial markets and inflation have driven up imports of gold.
• Core imports: Grew by 31.7%. spurred by higher inflows of plastics, chemicals, electronics and vegetable oils.
• Import volume: Import volumes are also growing with steady domestic demand.

Future prospects

• Accelerated Dip: Several developed economies expected to fall into recession.
• Weak outbound volumes: Fresh taxes and restrictions imposed on petroleum exports.
• Volatile: Oil and gold prices may have corrected a bit, but still remain high.
• Declining Coal: Imports to surge further as Coal India’s production levels slide through monsoon.
• Weakening rupee: Continue to make imports costlier while slowing exports may not be able to capitalise enough on it.

Conclusion

• India is not alone, and can take solace that even super-exporter Germany recorded its first trade deficit in 30 years, although a minor one.