India’s trade deficit likely to stay high, current account deficit to widen: Nomura

“The surge in oil prices will enhance India’s import bill, aided by the broader rise in commodities and fertilizers and an anticipation that gold imports will remain high,” the report said. 

March 03, 2022 03:41 pm | Updated 03:41 pm IST - NEW DELHI 

Representational image.

Representational image.

India’s trade deficit, which shot back up to $21.2 billion in February, is expected to stay elevated in coming months and the current account deficit could widen to 2.6% of GDP in 2022-23 from 1.7% of GDP this year, Nomura said in a report on March 3. 

“The surge in oil prices, amid a pickup in domestic demand, will significantly enhance India’s import bill, aided by the broader rise in commodities and fertilizers and an anticipation that gold imports will remain high as investors look to hedge against market volatility and inflation,” the report said. 

The situation is ‘especially aggravated by the ongoing Russia-Ukraine conflict’, Nomura economists Sonal Varma and Aurodeep Nandi noted, adding that there are ‘marginal downside risks to exports due to weaker demand from Russia and potentially from global spillover effects’. 

“Oil drove much of the widening of the trade deficit in February [as] imports rose by nearly 43% month on month, after a 31% decline in January, while core imports (non oil, gold and gems and jewellery) rose by only 1.9% (after a flat reading in January),” the report pointed out. 

“We expect the current account deficit to widen to 2.6% of GDP in 2022-23 from 1.7% of GDP in 2021-22, assuming oil prices average $86.6 a barrel; so, if oil prices sustain at current high levels, then risks are skewed towards a much wider deficit,” the report noted. 

Brent Crude oil prices had touched $120 a barrel by Thursday. The Union Budget for 2022-23 had assumed an average oil price of $75 a barrel. The trade deficit had shrunk to $17.9 billion in January after hitting a record high of $22.9 billion in November 2021 and averaging $21.7 billion between September and December.

A 10% rise in global crude oil prices would widen India’s current account deficit by 0.3% of GDP, Nomura economists estimated. “Given the lag between spot oil prices and the signing of new oil contracts, we should see the full effect of the current rise in oil prices in the April/May trade data,” they pointed out. 

Russia accounts for just 0.8% of India’s exports but risks to export demand would increase if the slowdown in Russia’s economy has ripple effects. Pharmaceutical products, telecom instruments, iron & steel and marine products comprise the bulk of India’s exports to the Commonwealth of Independent States region.

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