The widening merchandise trade deficit is reason for concern. It’s easy to pin the blame on high oil prices. However, oil prices were much higher in fiscal year 2013-14, the year of the taper tantrum, but the trade deficit was lower then. More fundamental factors are at play.

Crude oil imports have been the Achilles’ heel of India’s external trade. But Brent crude prices in 2013-14 were more than double the average for 2017-18. The oil import bill in 2017-18 was much lower than in 2013-14. Why then did the trade deficit shoot up from $134 billion in 2013-14 to $161 billion in 2017-18?

The other convenient culprit is India’s supposedly insatiable appetite for gold. But gold imports are yesterday’s story. Gold and silver imports reached their peak in fiscal year 2011-12. Six years later, in 2017-18, they were a mere three-fifths of that level. It isn’t bullion imports that led to the rise in the merchandise trade deficit in recent years. They had already fallen from $61.4 billion in 2011-12 to $31.9 billion in 2013-14 and thereafter increased modestly to $36.9 billion in 2017-18.

No, it’s neither crude oil nor gold that is to blame—the problem lies in the non-oil, non-gold part of our trade.

Cast your eyes on the chart above, which shows the trade deficit after taking out oil and petroleum products from both exports and imports and also leaving out gold and silver imports. We’ll call it the non-oil, non-gold trade balance.

The chart shows the non-oil, non-gold trade deficit shooting up from a mere 0.4 billion in 2013-14 to 53.3 billion in 2017-18.

Could it be that our exports are not competitive? Well, between 2013-14 and 2017-18, our non-oil merchandise exports increased from $252 billion to $266 billion. That’s a compound annual growth rate (CAGR) of just 1.36%. It’s not their finest hour.

How did our non-oil, non-gold imports fare over the same period? They moved up from $252 billion to $319 billion. That’s a CAGR of 6.07%, well above the rate of growth of non-oil exports. It is this trend that is responsible for the ballooning of the trade deficit.

Look at it another way. While the deficit on account of the oil trade, or crude oil and petroleum products imports less exports, fell from $102 billion to $71 billion between 2013-14 and 2017-18, the deficit on account of the non-oil, non-gold trade went up from $0.4 billion to $53.3 billion. There’s no escaping it—the rise in the merchandise trade deficit in the last four years is not due to high oil prices or an increase in bullion imports, but it’s on account of the deficit in non-oil, non-gold trade.

As a percentage of GDP, the non-oil, non-bullion merchandise trade deficit increased from a negligible fraction in 2013-14 to 2% in 2017-18. That’s over a period when the overall merchandise trade deficit as a percentage of GDP went down, thanks to lower oil prices.

Data also show that between 1994-95 and 2004-05, the non-oil, non-gold trade balance was positive, which suggests a structural change has occurred in the nature of the deficit. That raises the question: has Indian industry become less competitive?

This increase in the trade deficit would have been of less concern if it was the result of a boom in imports of capital goods. But it is consumption rather than investment that has driven both economic growth and imports in India in the last few years. That is not a healthy trend.

What of the future? Financing the current account deficit will be more difficult, due to our dependence on portfolio inflows and in view of monetary tightening in the US. Vulnerable emerging market currencies are already facing the heat. And with the opening salvos in a global trade war now being fired, the risks are rising for the external sector.

Manas Chakravarty looks at trends and issues in the financial markets. Respond to this column at