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India’s trade deficit hit high of $31 billion in July — and it isn’t easing soon

Commerce Secretary B.V.R. Subrahmanyam Says Country's Trade Deficit Surged In July As Elevated Commodity Prices And Depreciating Rupee Inflated Its Import Bill.

Representational image | Photo: Pixabay

New Delhi: Financial year 2022-23 is creating one headwind after another for the Indian economy. First, it was the high fiscal deficit, then the fall in rupee, and now the current account deficit, a large portion of which is the rising trade deficit.

India’s preliminary data for July shows that the trade deficit in merchandise goods surged to a historic high of $31.02 billion in July compared to $26.18 billion in June — it was $10 billion in the same period last year. For the first four months of the current financial year — April to July — the deficit stood at $100 billion, up from the $42 billion in the same period last year, primarily led by a fall in exports.

Barring 2019-20, when global trade collapsed under the impact of the Covid pandemic, India’s trade deficit has been gradually falling due to an increase in Indian exports. In 2021-22, India’s exports touched a record $418 billion.

However, the current year is proving to be a challenging one for India’s exports.

Commerce Secretary B.V.R. Subrahmanyam, while briefing reporters on Tuesday, said the country’s trade deficit surged in July as elevated commodity prices and the depreciating rupee inflated its import bill.

Impact of windfall tax on petroleum exports

While the growth in imports of the top 10 commodities remained flat when compared to June, it is really the decline in exports that has contributed to the record deficit in July.

India’s petroleum exports have contracted by 7 per cent in comparison to last year but, when compared with June, the exports have fallen by around 37 per cent. Exports of engineering goods have contracted by 2.5 per cent, non-oil exports such as gems and jewellery by 5.2 per cent, drugs and pharmaceuticals by 1.4 per cent, and handloom products by 28.3 per cent.

Experts say the fall in petroleum exports can be attributed to the windfall tax levied by the government in July on oil companies.

In a surprise move, the Modi government — on 1 July 2022 — announced a windfall tax on the export of crude and petroleum products like petrol, diesel, and air turbine fuel (ATF) to tax the gains of the oil producing and oil marketing companies.

However, the government has been revising the rate of these export duties on a fortnightly basis to align them with the increase or decrease in global crude oil prices.

Gaurav Sengupta of IDFC FirstBank expects the trade deficit to moderate in the coming months on the back of moderation in the value of oil imports as global crude oil prices soften.

“We expect the trade deficit to moderate in the coming months with recovery in oil exports as the tax on petroleum products was reduced and units in SEZs were exempted. On the imports front, we could see some moderation in oil imports with decline in crude oil prices and reduction in volumes,” he said.

Imports continue to remain strong with petroleum imports rising by 70.4 per cent in July when compared with the same period last year, and coal imports showing a jump of 164.4 per cent. Of the 10 major commodities, it is only gold whose imports fell 43.6 per cent from last year as the government increased the import duty to 15 per cent.

Global demand to remain weak

Another major factor behind the widening trade deficit for July is weakening global demand, which is now reflecting in the export figures, while the import demand remains broad-based, reflecting robust domestic demand as well as continued price pressures.

Global market research firm Nomura, in a report released after India’s trade data, said a downturn in exports has already started and will accelerate in the remaining part of 2022. It foresees a recession in the United States, euro area, United Kingdom, Japan, South Korea, Australia, and Canada, leading to a growth slowdown globally going forward.

“The sharp deterioration in global growth prospects is likely to further weigh on export growth over coming months,” Nomura economists Sonal Varma and Aurodeep Nandi said in a note.

The International Monetary Fund (IMF) in its July World Economic Outlook lowered its estimate for global GDP growth by 40 basis points in 2022 to 3.2 per cent, and in 2023 by 70 basis points to 2.9 per cent. They also lowered the estimate for growth in global trade volume for goods and services by 90 basis points to 4.1 per cent for the current year, and by 120 basis points to 3.2 per cent for the next year.

Barclay’s Rahul Bajoria said in a note that the trade deficit in July has added to risks of India’s current account deficit staying elevated, despite the recent fall in commodity prices.

“While we still expect the trade deficit to hit US$265 billion, the risks are skewed towards an even larger deficit, which poses risks to our forecast for the current account deficit to widen from the present $115 billion for FY23,” Bajoria added.