Trade Deficit

Why the government needs to be actually worried

The trade deficit for the month of December came in sharply higher at $15 billion. That is nearly $2 billion higher than normal months. While the spurt in the trade deficit is understandable due to higher imports, there are some larger issues that India needs to be worried about. Here are 3 issues that India needs to focus on top priority

The import surge

At the current strike rate, India could end up with an import bill of nearly $500 billion for the full year. But the bigger worry is the two key factors that are driving these imports. First is oil. There is hardly any element of surprise on this front as crude oil prices in the Brent market have gone up to $70/bbl. On a YOY basis, oil is higher by nearly 30%. Even at these prices, the demand for crude oil continues to be higher than supply and the OPEC appears keen on continuing its supply cuts till the end of the current year. Options bets on crude oil are pegging Brent crude prices at above $100/bbl by end of the year. That could really throw a lot of calculations on the Indian trade deficit front off track. The second big contributor to higher imports is gold and gold imports were up by nearly 70% on a YOY basis. Gold imports are worrying because it represents the utilization of precious foreign exchange to import a commodity that is essentially unproductive. On top of all these factors, the strong rupee is also encouraging imports.

Export growth falters

After a rather flattering growth in exports in the previous month, the growth rate in exports fell sharply in the month of December. There are few obvious reasons for the same. Firstly, the strong rupee is working against exporters as Indian goods are becoming artificially more expensive in the global markets. Hence they are losing their competitive edge. Secondly, India really does not have any export USP at this point in time with two of its biggest export earners (IT and Pharma) having their own set of structural problems. Finally, poor quality of last-mile infrastructure is also hampering the smooth flow of exports out of India, although that is work-in-progress.

What about forex reserves?

One of the key metrics to evaluate an emerging market economy is to measure the months of imports covered by the forex reserves. Over the last 1 year, this forex reserve cover has fallen from 13 months import cover to just about 9 months import cover. That is lower than the kind of import cover that other BRICS economies enjoy and that could have implications for the value of the rupee and for the sovereign rating of India. The government has to ponder on three key areas viz. How to curb gold imports, how to boost exports in select sectors and how to manage the INR value at an optimum level! ©

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