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Source: This post is based on the article “A matter of import: On spectre of wider trade and current account deficits” published in The Hindu on 5th Jul 22.
Syllabus: GS3 – Indian Economy – Issues related to growth and development
Relevance: Boosting India’s exports
News: India’s monthly merchandise trade deficit hit a fresh record of $25.6 billion in June, as per preliminary estimates released by the Commerce and Industry Ministry.
This is the third occasion in seven months and the second month in a row that the trade deficit has widened to all-time highs.
The trade deficit for Q1 adds up to a record $70.25 billion, over two times higher than a year ago.
What is the situation wrt India’s exports and imports?
Exports
Four of India’s top 10 export items — engineering goods, cotton yarn, drugs and pharma and plastic products — contracted from a year ago.
Petroleum exports were up 98% from June 2021, but about $0.7 billion lower than May 2022.
Imports
Even as exports growth slid, imports surged by over 51% to $63.6 billion in June, crossing the $60 billion mark for the fourth month in a row.
Coal imports, and petroleum inflows, drove nearly three-fourths of this surge.
And although gold imports moderated from over $6 billion that month to $2.6 billion in June, they were still 169% higher than a year ago.
What are the associated concerns?
The tangible slowdown in exports, due to weaker global demand, is unlikely to change much soon, with recessions or sharp growth slowdowns expected in several developed markets.
Domestic demand for imports of oil, fertilizers, coal and even gold is largely inelastic, and elevated global prices for these will continue to escalate the import bill through this year.
The weakening rupee will raise import costs further. Analysts expect the rupee to scale the 82 to a dollar mark by the October to December quarter before recovering.
– Robust forex reserves notwithstanding, the persistent outflows of foreign capital from the financial markets have triggered concerns about the balance of payments situation.
The current account deficit is expected to more than double to around 3% of GDP this year from 1.2% in 2021-22.
Coal imports, are further expected to keep hitting record highs as the monsoon will affect domestic output.
Efforts by the govt
The Government has imposed a windfall tax on crude oil production that could help bridge concerns about the fiscal deficit.
It also placed restrictions on petroleum products’ exports and raised customs duties on gold imports to 15% from 10.75%.
Policymakers must avoid missteps and domestic inefficiencies hurting exports must be reviewed urgently.
