India’s runaway trade deficit has emerged as a major headache for policymakers and has again caught the attention of the Prime Minister’s Office, people with knowledge of the matter said.
With the Indian rupee depreciating against the US dollar and commodity prices remaining high, the government expects the trade deficit to widen and is chalking up plans to control it, they added.
India’s import bill hit a record high of $612 billion in FY22. The trade deficit – the difference between total exports and imports – shot up to $190.7 billion in FY22 from $102.6 billion in FY21 and $161.3 billion in FY20, before the pandemic.
The PMO had looked into the matter of widening trade deficits twice earlier – in 2016-17 and 2018, when it had become the focus of the trade discourse.
So far this financial year, the monthly trade deficit has risen from $20.4 billion in April to $23.3 billion in May. While figures for June haven't yet been released, officials hinted the deficit continued to inch upwards.
“Cumulatively, the trade deficit of $43.7 billion in April-May was sharply higher than the $21.8 billion trade deficit in the corresponding months of FY22. It was even higher than April-May FY20, before the pandemic began, when it was $33.2 billion,” an official said.
The fast pace at which the trade deficit is widening has attracted attention and discussions have started within the government to stem the problem, the official added. This includes a move to again classify top categories of Indian imports that can be effectively substituted with local products and institute stricter product standards to cut down on mostly consumer goods imports.
Other ideas include expanding the scope of performance-linked incentive (PLI) schemes to boost domestic manufacturing and stricter non-tariff barriers against import sources such as China, he added.
“There is still no word on wide-ranging import duty hikes. Last week’s decision on higher tariffs for gold was not only made to check the spiralling gold import bill but also had other monetary policy consequences,” another official said. The government has not attempted to increase import duties since the pandemic struck.
Commodity prices
A global super-cycle kept commodity prices high throughout 2021 and is expected to continue through 2022. Last year, the Bloomberg Commodity Spot Index, which tracks prices of a basket of 23 globally traded raw materials, shot past a 10-year high. In 2022, it has risen more than 36 percent.
According to global data and market intelligence provider IHS Markit, spiralling inflation, which began in early 2021 mainly due to a build-up of global supply chain issues after the outbreak of the pandemic and a lack of global freight containers, has not subsided. Instead, prices have continued to build on those levels as industries in many nations started firing up.
Subsequently, widespread input shortages became evident. The geopolitical risks arising from the Russia-Ukraine conflict are expected to incrementally push the import bill higher for key items beyond petroleum and edible oils, according to India Ratings and Research (Ind-Ra).
“A $5/barrel increase in crude oil prices will translate into a $6.6 billion increase in the trade deficit,” Ind-Ra said in a report earlier this year.
Apart from copper, most commodities in the metals and energy categories are continuing to rise, Motilal Oswal Commodities Research said on July 4.
Weakening rupee
The falling rupee is expected to expand the trade deficit further since a lower domestic currency makes imports costlier. The rupee traded at 79.03 to the dollar early July 4, a steep fall since January 1, when it traded at 74.50.
The rupee has continuously fallen in 2022 as foreign portfolio investors pulled out money from the stock and bond markets amid global uncertainties caused by the war in Ukraine.
While imports are set to get costlier, the cascading effect of a fast-depreciating currency is set to result in higher prices of imported gems and jewellery, fertilisers and capital goods, Ind-Ra said.
However, the government hopes the weak rupee will also raise the competitiveness of India’s exports and spur outbound shipments. A weakening home currency makes Indian products more competitive vis-a-vis those from other nations. Overseas buyers gain more purchasing power over Indian products and in a price-sensitive global market, they are more likely to pick Indian products.
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