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A foot on the pedal

Photo: BloombergPremium
Photo: Bloomberg

  • With geopolitical tensions showing no signs of cooling off, crude oil prices could remain on the boil for long. This has dimmed the hope of India’s import bill coming down in the near future, as oil is a big import for us

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India’s export momentum is going strong. Unfortunately, so is our trade deficit. Official data released on Wednesday showed outbound shipments of goods rose 20.6% in May from a year earlier to $38.9 billion. But imports rose a far stronger 62.8% to $63.2 billion, sending India’s trade deficit to a record $24.3 billion. Combined with the effect of capital outflows, this will exert downward pressure on the Indian rupee. Our currency’s exchange value has already taken a beating as foreign investors have liquidated domestic holdings and exited weakening asset markets.

Unfortunately, with geopolitical tensions showing no signs of cooling off, crude oil prices could remain on the boil for long. This has dimmed the hope of India’s import bill coming down in the near future, as oil is a big import for us. Fuel demand tends to be rather price inelastic, which means the best option for us to control the deficit is to boost exports to the extent possible. A weaker currency would make our goods more competitive abroad but also add to inflation. All in all, we face a worrisome set of trade-offs. But an export thrust has no downside. Don’t take the foot off this pedal.

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