India’s Trade Deficit Reaches New Highs: Key Factors and Risks
22-09-2024
10:31 AM
1 min read
What’s in today’s article?
- Why in News?
- Reasons behind the triggering of the wider trade deficit
- Risk associated with wider trade deficits
- Foreign trade in goods
- Long-Term Challenges for India’s Export Growth
Why in News?
- After a strong start to goods exports in the first quarter of 2024-25, momentum slowed, with export values dropping 1.5% in July and further contracting by 9.3% in August, reaching an eight-month low.
- Meanwhile, imports hit a record $64.4 billion in August, leading to a merchandise trade deficit of $29.7 billion, the second highest after October 2023's record $29.9 billion gap.
Reasons behind the triggering of the wider trade deficit
- Export Contraction Amid Rising Imports
- In July and August 2024, India's exports saw a decline, with a 1.5% drop in July and a sharper 9.3% fall in August.
- Despite this, imports grew by 7.5% in July and 3.3% in August, pushing the trade deficit to a nine-month high of $23.5 billion in July and widening it by $6.2 billion in August.
- Sectoral Performance and Key Export Declines
- While a majority of India's top export segments showed growth, major sectors like petroleum and gems and jewellery significantly dropped.
- Oil exports plunged 22.2% in July and 37.6% in August, while jewellery exports fell by over 20% in both months.
- Growth also slowed in key sectors like pharmaceuticals, electronics, and materials like stone and iron ore, especially due to the slowdown in China's economy.
- Oil Import Bill and Trade Deficit Dynamics
- In August, the drop in oil prices ($6 per barrel) led to a 30% decline in India's oil import bill, reducing it to $11 billion—the lowest in three years.
- Despite this, the widening trade deficit was largely driven by shrinking gems and jewellery exports, with some contribution from miscellaneous products and electronics.
- Gold Import Surge
- India's gold imports surged to a record $10.1 billion in August, more than double the July figure and in sharp contrast to the 10.7% drop in July.
- This was due to a reduction in gold import duties (from 15% to 6%) in the Budget, rising gold prices, and festive season stockpiling by domestic jewellery players.
- Economists expect the impact of these duty cuts to continue affecting the import bill in the coming months.
Risk associated with wider trade deficits
- No Significant Economic Risk Amid Trade Deficit
- Despite the growing trade deficit, experts emphasized that India’s high growth rate means its demand for global products will naturally outpace global demand for its exports.
- They asserted that the trade deficit is not a concern for a developing, fast-growing economy, as long as there are no foreign exchange issues.
- Strong Foreign Capital Inflows and Forex Reserves
- India's foreign capital inflows have remained positive in recent months, and as of August 2, 2024, the country's foreign exchange reserves reached a record $675 billion.
- The Finance Ministry estimates this is enough to cover 11.6 months of imports, though this may slightly decrease if imports remain above $60 billion.
- Services Exports Provide Stability
- India’s services exports, which have grown by over 10% from April to August 2024, offer some stability and provide an additional buffer against the widening trade deficit, contributing positively to the economy.
Foreign trade in goods
- Global Trade Outlook for 2024: Tepid Demand in Developed Markets
- While global trade is expected to grow faster in 2024 than in 2023, demand remains weak in most developed markets.
- Geopolitical risks, ongoing conflicts, and the upcoming U.S. election, coupled with tariff hikes on Chinese goods, create a challenging environment for India and other players.
- Impact of U.S.-China Trade Tensions
- As China's domestic economy falters and U.S. tariffs on Chinese goods rise, China may shift its focus to non-U.S. markets, dumping products at low prices.
- This could negatively impact India, particularly as China’s demand for imports declines.
- Oil Prices and Export Concerns
- Low global demand is expected to keep oil prices down, affecting India’s hopes for oil exports.
- While lower oil prices benefit importers, it weakens India’s oil export prospects, with overall concerns about global demand continuing to grow.
Long-Term Challenges for India’s Export Growth
- India’s goal to scale up services and goods exports to $1 trillion each by 2030 faces significant hurdles.
- Economic experts highlighted global economic slowdown, the rise of tariffs and non-tariff barriers, and new trade policies such as the EU’s Carbon Border Adjustment Mechanism and Deforestation Rules as major challenges.
- They noted that while short-term opportunities for export growth may arise, the long-term outlook will be difficult.
Q.1. What caused India's trade deficit to widen in 2024?
India's trade deficit widened due to shrinking exports, particularly in petroleum and gems and jewellery, coupled with rising imports. The deficit hit $29.7 billion in August 2024, driven by record-high imports, including a surge in gold imports.
Q.2. Is India’s trade deficit a significant economic risk?
Experts believe the trade deficit is not a major concern for India's fast-growing economy. With strong foreign capital inflows and robust foreign exchange reserves, India is well-positioned to manage its trade imbalance without significant risk.