India set to face a wider trade deficit

Impacted by a consumption slowdown, India's economy faces another peril, that of rising trade protectionism, which, along with tensions in parts of the Middle East, will hamper merchandise exports and widen the trade deficit, as it did in April.

The fact that India has had a trade deficit since 1988 might not come as a surprise, for unlike its East Asian neighbours, the country relies more on internal consumption for its economic growth. But a wider trade deficit at this time will come as a double-whammy for the economy, which already faces a slowdown in internal consumption. The trend seems to continue with April data showing a widening gap. However, the data from 1988 to 2018 shows that overall trade balance as a percentage of GDP has dropped substantially.

"The data clearly suggest that the trade deficit is primarily on account of imports of intermediary products and not the finished goods," Export Promotion Council of India Chairman Mohit Singla told IANS.

"The trend also suggests that slowly, we are moving away from non-renewable energy to renewable energy sources, which depicts, that in time to come, our import bill owing to import of oil will be much less."

Singla also said that "due to sustained efforts of the government", finished products have been replaced by intermediary products which will definitely reduce India's trade deficit.

According to Madhavi Arora, lead economist at Edelweiss Securities, global growth is likely to remain patchy, implying weaker exports demand and weaker manufacturing production.

"With India's exports now more demand- and income-sensitive, slower global growth will hit exports growth as well. With trade losing its shine as an engine of global growth, some economies are also looking inward to spur up domestic demand."

"Besides, to give boost to exports, the country needs to work on its competitiveness, thus implying focusing on improvement in productivity of all factors of production rather than simply relying on exchange rate as a lever for exports boost," she added.

In April, India's merchandise exports inched up 0.64 per cent on a year-on-year basis to $26.07 billion from $25.91 billion in the corresponding month last year. On the other hand, imports grew 4.48 per cent to $41.40 billion, from $39.63 billion reported in the corresponding month in 2018.

Segment-wise, oil imports in April were $11.38 billion, which was 9.26 per cent higher in dollar terms, compared to $10.41 billion in April 2018. Additionally, the trade deficit during the month under review widened to $15.33 billion against the deficit of $13.72 billion in April 2018.

Nonetheless, on an overall basis, India's exports including merchandise and services in April are estimated to have grown by 1.34 per cent to $44.06 billion over April 2018.

Federation of Indian Export Organisations (FIEP) president Ganesh Kumar Gupta said that $26.07 billion with a growth of 0.64 per cent "is not at all encouraging as almost all the labour-intensive sectors, including leather and leather products.