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

Source: The post is based on the article “Understanding the all-time high in India’s trade deficit” published in The Hindu on 7th July 2022.

What is the News?

A surge in imports combined with slow growth in exports has pushed India’s merchandise trade deficit to a record high of $25.6 billion in June.

What is driving up imports and denting exports in India?

Reason for Increase in Imports

Imports have literally been fuelled by energy sources — oil and coal. The demand for oil driven by higher prices and the demand for coal driven by India’s domestic coal supply crunch compelling power producers to import more each passing month.

Moreover, non-oil, non-gold imports (also known as core imports) also grew robustly due to higher inflows of plastics, chemicals, electronics and vegetable oils. This is in line with steady domestic demand.

Reason for Slowdown in Exports

The slowdown in exports is due to an underlying slowdown in external demand with weakness seen in exports of engineering products, chemicals, pharmaceuticals, cotton yarn and plastic products.

Note: These four categories are part of India’s top ten exports.

What will be the trade trajectory of India in the coming months?

Oil and gold prices have corrected a bit recently but still, it remains significantly high. Moreover, coal imports will only surge further as Coal India’s production levels slide through the monsoon. 

The weakening rupee will continue to make imports costlier while slowing exports may not be able to capitalize enough on it.

Hence, Indian exporters don’t expect a change in the narrative till the war in Europe abates, along with the high volatility in commodity prices. 

But India is not alone in this. Even super-exporter Germany recorded its first trade deficit in 30 years this May but a minor one.