Opinion | Any joy from lower trade deficit will be short-lived

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Shishir Asthana

India's trade deficit did fall to $13.98 billion in September, the lowest in five months, but this is no cause for celebration. The collateral damage from the trade war between China and US is reflected in these numbers.

Also, the country's current account deficit is likely to rise to a multi-year high, thanks to rising crude oil prices, and this is seen exerting more pressure on the rupee.

A part of the reason for the fall in India's trade deficit is a marginal drop in exports, which have declined for the first time this financial year, despite the rupee depreciating sharply.

Exports fell 2.15 percent to $27.95 billion in September, although a part of that is because of last year's high base. Another reason for exports falling is the trade war between US and China.

While China recorded a trade surplus with US of $225.79 billion for the first nine months of this financial year, suggesting that the US is losing ground, the number will come down after the latest round of tit-for-tat tariffs gets implemented.

China is expected to feel the pressure as its exports are bound to slow down. There are visible signs of stress in the Chinese economy, with the country's central bank pumping in liquidity to stabilise the economy.

The real impact of the trade war will be felt after the implementation of tariffs on $200 billion of Chinese exports to the US. The US will also feel the heat, firstly because its cost of buying these goods will go up, and secondly because Chinese restrictions are on US agriculture products.

In September, the World Trade Organisation (WTO) cut its estimates for world trade growth by half a percentage point to 3.9 percent for 2018. In 2019, world trade growth is expected to decelerate to 3.7 percent. This does not augur well for India's exports, which have been struggling to gain sustained momentum in any case.

It should be noted that the India's import growth decelerated in September, coming in at 10.45 percent year on year, compared to 25.41 percent in August. The rate of growth was the second lowest for the current year.

How will imports grow from hereon? 

A depreciating rupee pushed the government to raise import tariffs. Last month, the government raised import duties on 19 non-essential items,  including refrigerators, air conditioners, jewellery, diamonds, and jet fuel, accounting for annual imports worth Rs 86,000 crore.

Just last week, the government increased customs duty on a host of items as well, including on telecommunication equipment, from the existing 10 percent to 20 percent.

However, these tariff hikes may only have a limited impact in stemming imports. For one, the trade war and other protectionist measures taken by the US and Europe are resulting in steel from China, Japan and Korea entering India.

Though the Indian government has taken measures to protect domestic steel players by creating barriers for import, a supply glut in the global market and increased demand in in the domestic market has resulted in higher steel imports.

Secondly, the rising prices of commodities, particularly oil, and a falling rupee is likely to keep the oil import bill high.

The net impact of this is that any joy from the lower trade deficit number will be short-lived. A higher import bill and the increasing likelihood of slow export growth because of the trade war will push the trade deficit back to higher levels. It should be noted that the merchandise trade deficit of $49.4 billion in the second quarter is the highest in six years.

Current account deficit (CAD) is expected to triple to $19-21 billion in the second quarter of FY19, or around 3 percent of GDP, according to estimates from Aditi Nayar, Principal Economist at ICRA. Even for the whole financial year, the CAD is projected at 3 percent levels.

A higher CAD will have an impact on the rupee. Given the volatility in the currency market and more financial tightening in the US, the pressure on the rupee is expected to continue.