Home / Markets / Mark To Market /  Why it will be hard to shrink trade deficit

India’s trade deficit in June came in at the highest level ever of $26.2 billion. The previous high was in May, when the deficit had stood at $24.2 billion. The trade deficit is the difference between goods imports and goods exports.

The main reason for this has been a jump in oil imports. The total oil import bill in June almost doubled to $21.3 billion from a year earlier. This jump has primarily been because of a surge in global crude oil prices. India imports around 86% of the oil that it consumes.

Uncomfortably high 
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Uncomfortably high 

Data from the Petroleum Planning and Analysis Cell suggests that the average price of the Indian basket of crude oil in June stood at $116 per barrel, around 61% higher than the average price of $72 per barrel in June 2021. Oil imports now form around a third of India’s overall goods imports. They formed around a fourth in June last year.

Further, oil prices fell in July because of fears of an economic recession. On 14 July, the price of the Indian basket of crude oil was $99.8 per barrel, lower than the June average, but still around 36% higher than the average price of $73.5 per barrel in July 2021. While oil price has dropped from its recent highs, it is still much higher than it was a year ago. Typically, higher prices tend to dampen demand, but given how essential crude oil and its products are for the economy to function effectively, their consumption tends to be pretty inelastic and hasn’t gone down with an increase in price.

Other than oil imports, coal imports have also gone up big time. In June, they more than tripled to $6.8 billion from $1.9 billion in the year earlier. Given this, oil and coal imports form a little more than 42% of total goods imports. This is the main reason behind the overall goods imports in June jumping to $66.3 billion, the highest ever and around 58% higher than the imports of $42.1 billion in June last year.

While imports reached their highest levels in June, goods exports had their second best month in absolute terms. Total goods exports stood at $40.1 billion, only the second time they have crossed the level of $40 billion. The only other time was in March, when they had stood at $44.5 billion.

While goods imports grew by 58% from last June, goods exports grew by a much lower 24%. This explains the highest ever level of the trade deficit.

How do things look from here on? The prices of oil and other commodities have fallen in the recent past as fears of a recession have mounted. Nonetheless, as we saw earlier, oil prices are still considerably higher than last year. Prices need to fall to around $75-80 a barrel for the oil import bill to be similar to last year, assuming the volume of imports stays the same.

At the same time, the government has increased the import duty on gold to discourage people from buying the yellow metal. While India produces some oil, we produce almost no gold though we consume a lot of it. The move is expected to contain gold imports to some extent.

Nonetheless, the trade deficit might still continue to remain high. The reason is that while imports may come down as the fears of a recession become real, so will the exports. In fact, this seems to be already happening if we look at non-oil exports, which stood at $31.5 billion in June, or around a little over 10% higher than June 2021. The growth rate of non-oil exports in April and May stood at around 18% and 13%, respectively.

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