Trade deficit widens to five-yr high
A sharp rise in crude oil bill led to India's trade deficit widening to a 61-month high in June, despite sustained growth in engineering and pharmaceutical products that boosted exports by 17.57 per cent.
The trade deficit increased to $16.61 billion, up from the $14.62 billion gap in May. This was primarily fuelled by a jump in crude oil imports, which rose more than 56 per cent to $12.72 billion in June, up from $11.5 billion a month back.
The overall imports rose at a fivemonth high pace of 21.31 per cent as compared to the 14.85 per cent rise seen in May. Total imports stood at $44.3 billion in June as compared to $ 43.48 billion in May. This is set to put pressure on the current account deficit in the first quarter of the current financial year, after it stood at 1.9 per cent of GDP in the fourth quarter of 2017-18 compared to 2.1 per cent in the third quarter.
“The monthly merchandise trade deficit is likely to print at an uncomfortably high average of $15.5-16 billion over the remainder of FY2019. Crude oil imports accounted for 57 per cent of the YoY rise in merchandise imports in June 2018, in line with the spike in crude oil prices,” said Aditi Nayar, principal economist at ICRA.
The cost of the overall oil imports is expected to grow in the coming months. Experts predict that India’s oil bill will continue to rise in the current financial year as external pressures, such as the fallout of the Iran deal and a possible cut in production by oil producers, might heat up prices. The growth of non-oil non-gold merchandise imports also remained in double-digit in June, driven by inputs such as machinery, coal, chemicals, fertilisers, iron and steel, and non-ferrous metals, as well as electronic goods.
The current account deficit is likely to widen to $16-17 billion, or around 2.5 per cent of GDP, in Q1 FY2019, from $14 billion in Q1 FY2018, with higher crude oil prices negating the contraction in gold imports, Nayar added.
However, India continued to take advantage of the same rising global crude prices on the exports side, as receipts from processed petroleum exports swelled by 52.53 per cent to $4.06 billion.This was albeit lower than the 102 per cent growth seen in May.
Overall, the country exported goods worth $ 27.7 billion in June, thereby ensuring that outbound shipments rose for the third straight month.
Among major sectors, engineering goods exports maintained a sustained growth of 14.19 per cent in June to ship out merchandise worth $6.74 billion, down from the 14.77 per cent rise seen in May. Pharma exports also rose to $ 15.8 billion, growing by 14.71 per cent in June, down from the 25.67 per cent rise in the previous month.
However, major labour-intensive sectors showed signs of built up stress reducing and growth approaching. Export of ready-made garments continued to drop in June, contracting by 12.34 per cent, albeit lower than the 16.62 per cent fall seen in May. Industry experts pointed out that the sector has seen a downturn since since October, 2017.
On the other hand, gems and jewellery exports rose by 2.72 per cent after months of contraction. The level of fall in the category had slowly been reducing over the past few months. May exports had fallen by 6.47 per cent. Despite this, gold imports continued to remain in negative territory for the sixth consecutive month, a position it has remained in, ever since news about the ~140-billion Nirav Modi scam broke earlier this year. However, the fall in gold imports slowed down for the third straight month to register a total bill of $2.38 billion. Imports of the shiny metal fell by only 2.8 per cent in June as compared to the much larger 29.85 per cent fall seen in May.
“The MSME sectors of exports are still feeling the pinch of liquidity crunch as banks and lending agencies have continuously been tightening their lending norms. In June, yet again exports have been provided a cushion by the petroleum sector, as it not only outperformed all other sectors of exports but also helped maintain an overall double digit growth trajectory,” Ganesh Kumar Gupta, President of the Federation of Indian Exports Organization said.
Of the 30 major product groups, 22 recorded growth in May, down from the 23 a month ago.