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Home / Economy / What  explains  the sudden jump in trade deficit?

India’s dream run of record-breaking exports came to a halt in November with exports hitting a nine-month low, while the trade deficit widened to a new high of $23.3 billion. Mint explains the underlying factors at play:

Why did the trade deficit rise so sharply?

The record high print in November was on account of a relatively faster pace of sequential decline in exports vis-à-vis imports, led by gems and jewellery and petroleum products, which together accounted for 58% of the decline. Engineering goods and chemical products accounted for 33% of the decline. While imports of petroleum products have consolidated at $14.6 billion levels, gems and jewellery fell to $6.5 billion in November from $8.5 billion in October. Coal imports to meet domestic shortage hit a new high of $3.6 billion during the month.

What will be the impact?

Most economists are revising their current account deficit (CAD) forecasts upward. The sharp drop in crude oil prices may reduce the upward pressure on imports, but coal imports are likely to be higher than usual because of low inventory. Emkay Global Financial Services Ltd, last week, said with its revised Brent crude forecast of $73.5 per barrel, it is revising its CAD for FY22 to 1.7% of gross domestic product (GDP) from 1.1% estimated earlier. IDBI First Bank said it has revised CAD to 1.6% of GDP from 1.4% of GDP for FY22.

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Can India  hit  the $400 billion exports target in FY22?

The Union commerce ministry has set a merchandise exports target of $400 billion for FY22 and $500 billion for FY23. During April-November, exports averaged $32.9 billion a month, but need to average $34.4 billion in the remaining four months of the fiscal year to hit $400 billion. This looks daunting.

What could be the impact of Omicron?

Many European countries have reimposed travel and mobility curbs amid concerns over the Omicron variant. India has so far reported 21 cases of the variant. Rapid spread of the variant could have trade implications globally via price as well as demand. Demand from India’s trading partners could moderate. In a severe impact scenario, India won’t remain insulated. In this case, lockdown could be re-imposed, thereby creating supply side constraints to exports. Curtailed domestic demand will reduce  trade  deficit.

What’s the global trade outlook like?

The United Nations Conference on Trade and Development says the positive trend for international trade in 2021 is the result of a recovery in demand because of the easing of curbs, economic stimulus packages, and increases in commodity prices. However, the forecast for 2022 remains very uncertain because of slowing economic recovery, disruptions in logistics networks, and increases in shipping costs. Global semiconductor shortages, and geo-political factors are the other headwinds.

 

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