Watch the gap: On widening trade deficit

The widening trade deficit puts more pressure on the rupee and aids growth-retarding inflation.

Updated - May 06, 2022 10:21 am IST

Published - May 06, 2022 12:12 am IST

Official data on India’s merchandise trade for April give reason for cheer at first glance. Emerging from a record export performance during the just-concluded financial year, outward shipments for the month rose 24.2% from a year earlier, with electronics and chemicals showing healthy expansion, while petroleum products more than doubled. However, imports continued to outpace exports, growing by 26.6% to broaden the goods trade deficit, which widened to $20.07 billion from $18.5 billion in March. The trade deficit — the extent to which the import bill exceeds export receipts — worryingly breached $200 billion for a rolling 12-month period for the first time in April, impacted predominantly by petroleum imports of $172 billion. Global crude oil prices have surged by more than 40% in 2022 in the wake of Russia’s war on Ukraine, swelling the import bill. The early onset of the Indian summer, with a heatwave, has bolstered power demand, setting the pace for coal imports, which grew 136% last month, notwithstanding record output by key domestic supplier Coal India. For the first time ever, the Ministry of Power has set timelines for States to import coal over the next few months, a far cry from the 16% year-on-year decline in imports of the fuel in the April 2021-January 2022 period and a clear portent that the bill for overseas purchases of coal is also set to swell.

Monitoring the trade deficit is crucial as this has a direct bearing on the current account deficit (CAD). Disconcertingly, foreign direct investment, which typically helps bridge the CAD, has seen a moderation. And, the wider the CAD, the greater the downward pressure on the rupee, which has already weakened considerably since the conflict in eastern Europe began in February. A weaker rupee, in turn, makes imports costlier, potentially widening the trade deficit, and thus triggering a vicious cycle. The RBI has sought to steady the rupee against wild swings, evident in the dip in foreign exchange reserves to $600.4 billion (April 22), from $640 billion just six months earlier. But a central bank can draw on the reserves to ease any rupee weakening only to a limited extent. The RBI also has its hands full with the battle against imported inflation as global commodity prices remain sharply elevated. To help avoid added stress, the Government must consider additional incentives for exports, while encouraging local production of items that strain the import bill. The coal crisis could have been averted with better advance estimates of power demand as the country emerged from the worst of the pandemic, and optimal allocation of coal-carrying rail wagons. Policymakers can ill afford to let their guard down on trade imbalances and risk growth-retarding inflation and more pressure on the rupee.

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