India Trade Deficit To Ease From Record High But Likely To Remain Elevated, Economists Say
India’s trade deficit hit a record high in July. While it could ease hereon, it will remain elevated, said economists.
The trade deficit rose to $31.02 billion in July, $5.4 billion higher than in June. In seasonally adjusted terms, the gap widened to $37 billion from $32 billion in the previous month, HSBC's chief economist Pranjul Bhandari said in a note.
Why The Surge
Exports fell 0.76% year-on-year to $35.24 billion. Month-on-month, it fell 12.2%, led by a decline in exports of petroleum products.
The slump in overall exports was aggravated by windfall export taxes on petroleum products imposed by the government to boost its fiscal coffers, “highlighting the trade-offs between controlling both inflation and fiscal deficit, and managing the external account”, said a research note co-authored by Sonal Varma and Aurodeep Nandi, India economists at Nomura.
On Tuesday, while the tax on export of diesel was cut to Rs 5 a litre from Rs 11, that on jet fuel was scrapped, an official notification showed.
Non-oil exports rose 0.5% on an annual basis and were lower 5.3% month-on-month. Exports of engineering goods, gems and jewellery, organic and inorganic chemicals also dropped, while that of pharmaceuticals was stable. Much of the fall until last month, Bhandari said, has been led by weaker volumes, likely reflecting slowing global demand.
Also, according to Nomura, the lacklustre performance is a sign of weakening global demand, while import demand remains broad-based, reflecting robust domestic demand as well as continued price pressures.
Overall, imports rose 43.6% year-on-year to $66.3 billion in July. Imports of coal, coke and briquettes eased but remained elevated. Month-on-month, imports fell 0.1%. Barring petroleum, they rose 0.3% over June.
Core imports, non-oil and non-gold imports, remained “high and sticky”, Bhandari said. Some of the core imports which have risen sharply this year are coal, electronics and machinery goods, she said.
Has Trade Deficit Peaked?
“We expect trade deficit to moderate in coming months with recovery in oil exports as the tax on petroleum products was reduced and units in SEZs were exempted,” IDFC First Bank said in a note. “On the imports front, there could be some moderation in oil imports with decline in crude oil prices and reduction in volumes.”
There has been a significant pickup in crude oil import volumes over the last few months, indicating frontloading of imports from Russia, IDFC First Bank said. Imports from Russia now account for 5% of India’s total merchandise imports in Q1 FY23 compared to 1.6% in FY22.
In July 2022, Indian crude basket price had declined 8.7% month-on-month. But crude oil imports remained elevated at $21.1 billion, it said.
According to Bhandari, with commodity prices having fallen 20-40% over the last few weeks, the trade deficit may have likely peaked. But global coal prices have been on the rise and oil prices still remain elevated. As such, the trade deficit, too, will likely remain elevated, she said.
Current Account Balance Forecasts
Despite such an adverse print, the trade deficit is expected to narrow in the coming months, according to IDFC First Bank. It forecasts current account balance at 3.5% of the GDP against 1.2% in FY22.
Nomura, however, said even as the reduction of windfall taxes may lead to a slight rebound in oil exports, the current account deficit is expected to remain on a deteriorating path in the next few quarters, due to steady domestic demand, inelastic demand for select commodities and a global growth slowdown.
On the funding side, Bhandari said, while the portfolio outflows have stopped and there have been some inflows recently, startup funding, which had risen sharply in the pandemic period but are now down 40% since last year. FDI flows, according to her, are slower to leave but also slower to return compared to FII flows, and may thus remain weaker for longer.
“We expect rupee depreciation to resume given the balance of payments deficit in FY23 and the [U.S.] Fed likely to continue hiking rates in the remainder of 2022,” IDFC First Bank said, which forecasts the Indian currency to hit 81 in FY23.