Rising imports force India's trade deficit to reach 10-month high

Government-released trade data showed on Tuesday that India’s trade deficit reached a 10-month high of $29.7 billion in August 2024, a 22 per cent increase year over year, sparking concerns about the country's economic growth. This surge, driven mainly by record imports and declining exports, highlights structural challenges in the Indian economy.

Indian exports drop

India's merchandise exports (physical products produced in the country) fell by 9.3 per cent in August 2024, marking a second consecutive month of decline. Exports dropped to $34.7 billion from $38.28 billion a year ago, reflecting a slowdown across several key sectors.

These include the slowdown in China, one of India's largest trading partners, which is experiencing economic turbulence. This has sharply reduced demand for Indian goods, particularly in sectors like textiles and electronics.

Falling petroleum prices

Global oil prices have softened, leading to a sharp drop in revenues from petroleum product exports, a significant contributor to India's export basket.

Economic slowdowns in advanced economies like the US and Europe have further dampened demand for Indian goods, affecting sectors like textiles, gems and jewellery.

Logistical challenges

Geopolitical tensions have rerouted shipping paths, increasing transportation costs and causing delays. This has further eroded the competitiveness of Indian exports.

While Commerce Secretary Sunil Barthwal has downplayed concerns, stating that trade deficits are not unusual for emerging economies like India, long-term sustainability remains critical if the deficit is not matched by robust export growth or foreign investments.

Surging imports

Imports surged to $64.4 billion in August 2024, up from $62.3 billion a year ago. The most significant factor behind this increase was a doubling of gold imports, which reached $10 billion, driven by seasonal demand and lower import duties.

Other sectors contributing to the rise in imports include coal (up 8.88 per cent), electronic goods (up 12.78 per cent), and non-ferrous metals (up 22 per cent).

Conversely, petroleum imports saw a notable contraction of nearly one-third, reflecting softer global oil prices. "Brent crude prices dipped to below US$ 70/Bbl from US$ 81/Bbl on 26th August due to softening demand, particularly in China and weak outlook projected by OPEC and EIA (US Energy Information Administration)," analysts at Philips Capital said in a note on September 11.

Economic implications

The significant widening of the trade deficit has raised concerns about India's economic stability, particularly its current account deficit (CAD: The value of its imports of goods, services, and investment income exceeds the value of its exports).

Analysts project that the CAD could rise to 1.5–2 per cent of GDP in the second quarter of FY25.

The implications of this are far-reaching.

Pressure on currency: A widening CAD puts downward pressure on the Indian rupee, leading to potential depreciation, making imports more expensive, and contributing to inflation.

Inflation and monetary policy: Rising inflationary pressures could force the Reserve Bank of India (RBI) to adopt more stringent monetary policies, including raising interest rates to control inflation.

Foreign investment dependency: An increasing CAD heightens India's reliance on foreign capital inflows, which may become more challenging to attract in a tightening global financial environment. The global economic landscape is exerting considerable pressure on India's trade performance. China’s slowdown, in particular, has severely affected India’s export activities. As a major global consumer and trading partner, China’s reduced demand has rippled through the Indian economy.

Recession in advanced economies: Persistent economic downturns in the US and Europe have led to muted global demand for Indian goods, particularly in sectors like textiles, gems and jewellery.

Commodity price declines: The softening of commodity prices, especially oil and metals, has negatively impacted India’s export revenues.

Petroleum products, which constitute a significant portion of India’s exports, contracted by 37.5 per cent. Furthermore, global trade disruptions caused by geopolitical tensions have led to higher transportation costs, which, coupled with logistical bottlenecks, have made it difficult for Indian exporters to remain competitive. Some sectors do perform

Despite the overall decline, some sectors showed resilience. Non-petroleum and non-gems and jewellery exports grew by 2.4 per cent. Growth in the following sectors points to opportunities for diversification: Engineering goods (up 4.36 per cent); electronic goods (up 7.85 per cent); drugs and pharmaceuticals (up 4.67 per cent); textiles (up 11.88 per cent).

This growth suggests that while traditional export sectors are struggling, there is potential for India to diversify into more value-added and high-tech products that can withstand fluctuations in global demand.

Earlier months’ showing

The sharp increase in the trade deficit in August 2024 stands out compared to previous months.

In July 2024, for example, the deficit was $23.5 billion, indicating a sharp deterioration in just one month. Merchandise exports were slightly higher in July at $33.98 billion, but the growing import bill is driving the widening gap. This volatile trend underscores the vulnerability of India’s external trade to global economic conditions and domestic challenges.

No gains from FTAs

In a note to investors, Systamtatix Institutional Equities said that in recent years India has aggressively shifted towards free trade agreements (FTAs) along with policy incentives. The objective has been attracting FDI into manufacturing, creating export hubs and generating employment.

Evidence, however, shows that such gains have been inadequate.

"After the initial years, India’s trade deficit with FTA partners increased substantially as India's reduction of high import duties allowed greater market access to the FTA partner countries. India’s merchandise trade deficit with FTA partners increased significantly from 2007-09 & 2020-22; 300 per cent with ASEAN countries, 161 per cent with South Korea, and 138 per cent with Japan. Conversely, India’s exports gained little as FTA partners typically had low import duties. Thus, notwithstanding the easing of FDI regulations, the narrowing of relative import duties has not incentivised export-oriented FDIs."

Policy implications

The widening trade deficit is a symptom of deeper structural issues in India’s trade and economic policies. Several strategies need to be adopted to mitigate the effects of the trade deficit and bolster economic resilience.

Boost export competitiveness: India must focus on enhancing the competitiveness of its export sectors by investing in high-value and technology-driven industries. Expanding the scope of the Production Linked Incentive scheme to sectors like electronics, pharmaceuticals, and engineering goods can help.

Diversify export markets: It is essential to reduce reliance on traditional trading partners, especially China and advanced economies. India should explore new markets in Africa, Latin America, and Southeast Asia. Trade agreements with these regions could open new avenues for growth.

Address logistical challenges: Improving infrastructure, particularly at ports and in transportation networks, is critical for boosting export efficiency. Trade facilitation measures to reduce customs delays and improve shipping logistics can help Indian exporters remain competitive in a challenging global environment.

Manage import dependencies: It is vital to reduce dependency on volatile commodities like gold and petroleum. Promoting domestic manufacturing and encouraging the development of alternative sectors, such as renewable energy, can help reduce the import burden over time.

Enhance services exports: India’s services sector, particularly in IT and financial services, continues to grow, with a 6.9 per cent rise in services exports contributing to a trade surplus of $14.9 billion. Leveraging this strength while simultaneously working on goods exports can help balance the overall trade deficit. India’s widening trade deficit in August 2024 paints a complex picture of the country's economic health. While the global economic slowdown and logistical challenges are significant, structural weaknesses in India’s export competitiveness and reliance on critical imports like gold have exacerbated the issue.

Go for multi-pronged strategy

To address these challenges, policymakers must adopt a multi-pronged strategy focused on export diversification, infrastructural improvements, and reducing import dependencies. If effectively managed, these efforts can help stabilize India’s trade balance and ensure long-term economic resilience in the face of global uncertainties. In the short term, continued imbalances in trade are likely. However, sustained growth in services exports, combined with targeted policy interventions, can mitigate some of the negative impacts and lay the groundwork for a more stable and diversified trade environment in the future.