Surge in oil imports points to recovery; trade deficit widens

Surge in oil imports points to recovery; trade deficit widens

Exports and imports retained their growth momentum in January. Imports, however, are rising much faster than exports, leading to an increase in the trade deficit. We expect FY10 trade deficit to be lower than in FY09.

Maintaining their momentum, India’s exports grew 11.5% in January—the third straight month of growth. Imports grew much faster at 35.5%—the second straight positive month. In FY10 year-to-date (YTD) (April-January), exports and imports have contracted 18% and 20%, respectively.

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In January, oil imports rose 56% year-on-year (y-o-y) following the 42.8% growth in December. Since August, oil imports have been between $6.3 billion and $6.5 billion a month. In January, however, oil imports were $7.1 billion, the highest in the last 15 months. This reflects the effect of the rebound in international oil prices.

After turning positive in December, non-oil import growth maintained its positive trend with 28.8% y-o-y growth in January—the strongest in the previous 16 months. Stabilization in this category indicates significant improvement in industrial activity and domestic demand.

In January, the trade deficit continued to widen, but the pace has slowed down. During January, it rose to $10.4 billion from $10.1 billion in the previous month, the highest trade deficit in the last 14 months. For FY10 YTD, it stood at $86.6 billion. Additionally, in Budget FY11, the government has extended the 2% interest subvention on pre- and post-shipment export credit till 31 March 2011. The move will help exporters keep their interest costs low.

India’s trade deficit has risen almost five fold, from $2.2 billion in February 2009 to $10.4 billion in January, mainly owing to rebound in international commodity prices, particularly oil and the revival in domestic demand.

As domestic demand is likely to remain strong and oil prices hold above $75 per barrel, we expect trade deficit to be high in FY10 and FY11. India’s new-found natural-gas resources, on the other hand, are replacing the use of petroleum products such as naphtha and fuel oil, especially in fertilizer production. This could reduce imports of fertilizers and help contain trade deficit.

Graphic by Yogesh Kumar/Mint