In Charts: What’s Behind India’s Widening Trade Deficit?

Imports surged while export growth was moderate, resulting in the widest merchandise trade deficit in five years.
Export containers stacked for shipping (Photographer: Aaron Showalter/Bloomberg) 
Export containers stacked for shipping (Photographer: Aaron Showalter/Bloomberg) 

India merchandise trade deficit of $157 billion in 2017-18 was the widest it has been since 2012-13. At the time, the country had reported a merchandise trade deficit of $190 billion, which slowly moderated towards $100 billion in 2016-17.

Much of the progress on this front was undone last year when imports surged and export growth remained moderate. Reasons for this range from short-term concerns like the disruption caused by the implementation of GST, to longer term issues like losing the competitive edge in categories like textiles and agricultural exports. Some inexplicables, like the surge in gems and jewelry imports have also led to a widening of the trade deficit.

The expansion in imports was nearly twice as high as export growth in 2017-18, which led to the merchandise trade deficit widening by 44 percent, commented ICRA economist Aditi Nayar. She added that this will push the current account deficit for the year to close to 1.9 percent of GDP.

More than exports, the story of 2017-18 was a surge in imports. Petroleum prices were rising which led to an increase in the value of imports in this category. Commerce ministry data collated by BloombergQuint suggests that imports of petroleum and petroleum products rose at their fastest pace in FY12. Data for FY18 is incomplete as the ministry has only uploaded year-on-year growth in Dollar value of imports until February. But the March data is unlikely to change trend dramatically.

Imports of electronics and gems and jewelry also rose at the fastest pace since FY12. It is the latter category that has some analysts perplexed.

While gold import volumes have moderated, imports of precious stones and pearls have not. As the latter are hard to value objectively, they hint at capital flight, and are worryingly large now, particularly given the drop in jewelry exports.
Neelkanth Mishra, Credit Suisse

Export growth in 2017-18 was better than in the previous year but failed to capitalise on the jump seen in global trade volumes.

India’s exports grew 9.8 percent in the 12 months ended March 2018, after a growth of 5.2 percent in the 2016-17. And, this, is at a time when global demand has been strong. According to the World Trade Organisation, global trade grew at its strongest pace in six years in 2017 at 4.7 percent.

Export growth remained in single digits and well below the growth seen in FY11 and FY12. It is also worth mentioning that the Dollar value of exports remains at close to $300 billion. Indian exports have been oscillating close to that mark since FY12 now.

Trends across export segments were mixed. Exports of gems and jewelry and textiles were sluggish. In contrast some pick up was seen in growth rates for agricultural and chemicals exports.

However, even in these segments, the dollar value of exports is below the peaks seen in previous years. For instance, agricultural exports had hit a high of $33 billion in FY14 but stood at about $24 billion in the April-February 2018 period. Agricultural exports had grown rapidly in the 2012-2014 period partly because of demand for items like guar gum, which is used hydraulic fracking - a process used in shale gas production.

We used to run a surplus in agricultural trade. It used to be $20 billion a couple of years back. But now it is down to $5 billion. So, there is shrinkage of the surplus that we have in agriculture. The economies which are growing fast right now are Europe or US. Our exports are not growing that well in these economies. So, there are competitiveness issues and there are issues related to specific sectors.
DK Joshi, Chief Economist, CRISIL

This analysis is based on the value of exports, as complete volume data for the year is not yet available.

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