Trade deficit: What message does it hold for India's economy?
India’s trade deficit, at $6.32 bn, has declined by 62.49% than the $16.84 bn deficit in May 2019. Rising exports have been a major saving grace for the economy. However, muted imports continue to remain a concern as it mirrors weak activity levels in the domestic market.
Emerging demand in international markets post lockdown continues to act as a tailwind as exports continue to grow. As per the latest data, India's exports grew in May to $32.21 billion in May 2021 from $19.24 billion in May last year. What is even more heartening is that exports exceed the pre-COVID levels, which were at $ 29.85 billion in May 2019.
Exports Growing on Pre-Covid Levels
The comparison with 2019 data suggests that exports have grown even on the pre-Covid levels. It signals that global economic activities are seeing a sharp rebound. The demand is increasing in the developed countries after the ease of restrictions and faster vaccination drive.
A comparison with May 2019 data suggests that oil exports increased 7% and non-oil exports by 8% in May 2021. Export of engineering goods grew by 16%. Exports of chemical products were up by 8%, and 69% in ores and minerals. Exports of electronics and agriculture rose 5% and 12%, respectively. Other leading export sectors like gems and jewellery and textiles fell by 13% and 6%, respectively.
Weaker Imports
While exports are riding on the strong recovery in the international market, India's imports are not reflecting the same buoyancy. Imports in May 2021 were at US$45.5 bn, which continues to remain below pre-Covid levels. In May 2019, imports stood at $46.68 billion.
Non-oil imports registered a fall of 15% over
May 2019. The consumption-led imports were also weak, with a fall in oil and gold being the major contributors. Oil imports for the month were at $9.45 billion, down from $12.59 billion in May 2020. Gold imports also declined by 86% for the same period.
Among the other sectors, imports of electronics declined by 12%, while that of capital goods and base metals and ores declined by 21% and 11%, respectively. Agriculture and chemical industries bucked the trend and reported 51% and 11% growth, respectively.
Lower imports are the direct indication of the subdued activity level in the domestic market. India's manufacturing sector heavily depends on imported raw materials, and imports have remained lower as activity levels decreased due to the restrictions.
Closing Comments
Going forward, as the economy starts to open up, imports are expected to gain momentum. But it will be a challenge to maintain exports at the current elevated levels.
The imports are likely to get further encouragement as Indian Rupee (INR) is expected to strengthen against the US dollar. As is the case, INR emerged as the topperforming Asian currency in May after months of underperformance. It is expected to pick up strength due to RBI’s interventions, declining COVID-19 curve, and Fed’s assurance of continuous asset purchases.
On the other hand, China is also trying to influence international commodity prices to bring the inflation down. If China succeeds in its attempt, it will bring the overall commodity prices down, encouraging Indian manufacturers to import more.