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India’s Trade Deficit Near Three-Year High As Exports Fall 

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India's trade deficit in October widened significantly as exports fell for the first time in 15 months, while higher crude and metal prices inflated the import bill.

Trade deficit, the gap between imports and exports, stood 25 percent higher compared to last year at $14 billion, according to data released by the Ministry of Commerce. The trade gap had stood at $8.9 billion in September.

This trade deficit is the widest since November 2014.

The value of outbound shipments in October fell 1.1 percent over last year to $23.1 billion. This was in stark contrast to the 26 percent rise in exports to a six-year high in September.

Indian exports have been on a downtrend since 2014-15, adversely impacted by a global slowdown, a sharp fall in commodity prices and currency fluctuations. It started recovering in July 2016 and had been on the rise since, but the growth was offset by India’s large import bill led by higher import of gold and oil.

Gems and jewellery exports, typically the second largest contributor to the export bill, fell 24.5 percent over last year to $3.3 billion. Export of engineering goods in October, the largest contributor, went up 11.7 percent to $5.9 billion, but moderated from September when they'd gone up 44.2 percent.

Last month, Credit Suisse equity strategist Neelkanth Mishra cautioned against undue excitement on the strength of Indian exports “till we get a split of where the surge is happening from”. The sustainability of the pick-up in exports in September is “hard to assess” as it might have featured over-invoicing by exporters looking to claim tax credit under the Goods and Services tax, Mishra said.

India's import bill increased 7.6 percent over last year to $37.1 billion. The value of oil imports rose 27.9 percent year-on-year to $9.2 billion. Crude prices have surged in the last two months after exporting countries triggered production cuts to drain the global oversupply. The Asian benchmark Brent crude prices have rebound 41 percent from the year's low in June to trade over $60 per barrel.

Since India imports nearly 80 percent of its oil needs, fluctuation in oil prices have a cascading impact on the trade deficit. “Even an average annual $1 increase in oil price can lead to an increase in oil imports by $1.56 billion, annually,” wrote Soumya Kanti Ghosh, chief economic adviser at State Bank of India.

Gold imports fell for the second straight month to $2.9 billion, 16 percent lower than the same month last year. Demand for gold was expected to slow down under India’s new sales tax regime, according to the World Gold Council.

A higher import bill increases India’s risks of a fiscal slippage at a time when it is facing its worst slowdown in three years. India had exhausted 91.3 percent of its budgeted target for fiscal 2018 by September. It is trying to bring down its fiscal deficit to 3 percent of the GDP by 2019.

Import Highlights

  • Non-oil imports rose 2.2 percent over last year to $27.8 billion.
  • The value of coal, coke and briquettes imports went up 66 percent to $2 billion.
  • Imports of non-ferrous metals too increased 30.1 percent to $6.6 billion.
  • Iron and Steel imports went up 20.7 percent to $1.1 billion
  • Organic and inorganic chemicals increased 30.5 percent to $1.6 billion

Export Highlights

  • Organic and inorganic chemical exports increased 22.3 percent to $1.4 billion.
  • Drugs and pharmaceutical exports fell 8.7 percent to $1.3 billion.
  • Readymade garment exports fell 39 percent to $0.8 billion.

Upasna Bharadwaj of Kotak Mahindra Bank decodes the trade deficit number.

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