A yawning gap

In July, India’s trade deficit touched a five-year high of $18.02 billion driven, to a large extent, by a jump in the oil import bill. Subhayan Chakraborty explains the implications.

What are the reasons for the fiveyear high trade deficit in July? Monthly trade deficit, the difference between merchandise exports and imports in a particular month, reached $18.02 billion in July. This was the second straight month when the widening trade deficit had remained above the five-year high limit. This was primarily fuelled by a jump in the crude oil import bill, which rose more than 57 per cent to $12.35 billion in July, up from $7.84 billion a month back. The deficit has come at a time when exports have managed to retain double digit growth, thanks in part to the sudden rise in gems and jewellery exports.

Will the geo-political situation in West Asia aggravate the situation? Over the past few months, the volatile political scenario in West Asia has increasingly affected India’s trade fortunes. Prices of the primary offering of the region — crude oil — have shot up since last year and continues to do so under production cutback by oil-rich nations such as Saudi Arabia. The same — rising crude prices — has also helped India rake in higher receipts on the exports side. Shipments of processed petroleum, a major foreign exchange earner, swelled by 30 per cent in July to nearly $4 billion.

Experts feel the most significant impact of the fast changing political landscape is yet to hit India. In November, the United States will initiate further sanctions against Iran, in anticipation of which India is looking to shift its import lines from Iran to other nations. Are only oil imports to blame? Despite India’s huge dependence on oil, it has not been the largest contributor to the trade deficit. Experts have pointed out that Brent crude prices in 2013-14, and subsequently the oil import bill, were more than double the average for 2017-18. Trade deficit soared to $161 billion in 2017-18 from $134 billion in 2013-14.

On the other hand, non-oil and nongold imports have figured prominently in India’s import list in 2018. Driven up by burgeoning demand for input materials such as coal, iron and steel, as well as finished goods such as electronics and machinery, imports in the category grew by nearly 19 per cent in July.

With growth in the category above 10 per cent every month in the current financial year so far, imports are expected to rise further. There is a silver lining. Considered an indicator of industrial demand that will, in turn, boost manufacturing growth, these imports have been hailed by economists as a sign of revival in the industrial sector.

July gold imports hit seven-month high. Can it widen the trade deficit, putting further pressure on the rupee?

Interestingly, the second largest import category — gold — has also shot up by more than 40 per cent in July. The $2.96 billion worth of gold imports in July are expected to only rise from August, having remained in the negative territory for the first six months of 2018. Imports of the shiny metal have remained low ever since news about the ~140-billion Nirav Modi scam broke earlier this year.

How will this affect India’s current account deficit ?

The current account deficit is likely to widen to $16-17 billion or around 2.5 per cent of the gross domestic product in Q1 FY2019, from $14 billion in Q1 FY2018, with higher commodity prices offsetting the benefit of the contraction in gold imports for the first six months of this year, according to Aditi Nayar, principal economist at ICRA. This is set to put pressure on the current account deficit in the second 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 quarter before.

Is India staring at a serious balance of payment crisis?

India is not facing a balance of payment crisis yet. According to the Reserve Bank of India, foreign exchange reserves were at $402 billion in the week ending August 3, down by a mere $1.5 billion from the preceding week. This is comfortable by global standards and sufficient to mitigate any undue volatility in the foreign exchange market, Finance Minister Arun Jaitley recently said. India’s last run-in with a such a crisis was in end-1990, when, during the run-up to the Gulf War, reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations.