Opinion India’s trade deficit has a wider gap

According to the official trade data released for October, India’s trade deficit hit a record high in October. The merchandise exports grew by 6.29 per cent while the merchandise imports grew by 14 per cent. In absolute terms, in October, India exported goods worth $33.57 billion while importing goods worth over $65 billion. A trade deficit refers to the excess of imports over exports in a country that trades with the rest of the world. While any developing economy, such as India, typically has a gap between its exports and imports — with imports leading the exports — the quantum of this gap and what is causing it are key to reading trade data. The trade deficit should ideally not become too high, especially in relation to the overall size of the economy (read the gross domestic product).

On the export front, the increase in October should be seen as a welcome development given the rather anaemic performance of the country in this sector in the recent past. For instance, October is only the second month when merchandise exports have grown in the current financial year that started in April. If one takes the calendar year, October is just the third month when exports have risen. Leading the pack in terms of growth rate were drug and pharma exports, which grew by over 29 per cent in October to $2.42 billion. Electronic goods, engineering goods and agricultural items also did well. But beyond the growth rate relative to October 2022, the picture changes somewhat. The fact is that in October 2021, India’s exports stood at $35.7 billion. That India’s exports in October are roughly 6 per cent below what they were two years ago puts this latest increase in perspective. On the import front, the story is slightly different. Even though import growth has also been negative for India for the most recent months, yet in absolute terms, they have continued to grow from October 2021 ($53.6 billion) to 2022 ($57.9 billion) to $65 billion now.

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While both exports and import growth rates have either been negative or muted, October saw a massive divergence between the two trend lines. As a result, India’s trade deficit at a monthly level has grown to $31.5 billion in October — a record high. A big culprit has been the near doubling of gold imports in October — from $3.7 billion to $7.2 billion. Even though it is only a monthly spike, a high trade deficit should always be monitored. That’s because when India imports more than it exports, the domestic currency’s strength relative to other currencies such as the US dollar takes a hit. A relatively weaker rupee further worsens the trade deficit because more rupees are required to buy the same set of imports in the future.