Opinion Surging imports and slowing exports will make current account deficit rise. Weaker currency will help ease pressure

A surge in imports combined with tepid growth in exports has pushed India’s merchandise trade deficit to a record high of $25.6 billion in June. In fact, for the entire first quarter (April-June), the deficit was more than double the level observed last year. While the government has taken a spate of measures, which include increasing the import duty on gold, levying taxes and imposing restrictions on exports of petroleum, these are unlikely to have a significant moderating influence on the deficit. Moreover, healthy services exports will only partly offset the goods deficit. The combination of slowing global growth, which will have adverse consequences for exports, and steady demand for imports, implies that the current account deficit will likely continue to widen in the coming quarters. At a time of capital outflows, some analysts are, in fact, penciling in a current account deficit upwards of 3 per cent of GDP in the ongoing financial year, up from 1.2 per cent last year. This will add further pressure on the Indian currency — on Tuesday, the rupee fell to a low of 79.36 against the dollar.

The disaggregated trade data shows that while overall exports grew at just under 17 per cent in June, excluding oil products, growth moderated sharply to 5.5 per cent. Weakness was observed in engineering products, drugs and pharmaceuticals, yarn and plastics. This is a worrying sign as it points towards slowing global demand. On the other hand, merchandise imports grew by a staggering 51 per cent in June, driven in part by a combination of high commodity prices and healthy domestic demand. Three commodities — gold, crude, and coal — accounted for most of the increase in imports in June. Imports of gold rose by almost 170 per cent, petroleum products by 94 per cent, and coal by 242 per cent — the last is indicative of the coal shortages witnessed across the country.

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In the current macro-economic environment, where private consumption and investment remain lacklustre, and the capacity of central and state governments to drive growth is constrained by their high debt burdens, exports could provide the much needed fillip to growth. However, a slowdown in global growth implies that the impetus from exports to India’s growth may moderate. A weaker currency could provide some fillip. While in the near term, it may exert pressure on the trade deficit, a weaker currency will trigger the much needed correction in the current account. At the same time, it must be pointed out that even as the rupee has fallen against the dollar, it has risen against other currencies. While the stated policy of the RBI is that it intervenes in the currency markets only to smoothen out excess volatility, it should allow the currency to depreciate, and not actively intervene to stem its slide.

This editorial first appeared in the print edition on July 6, 2022, under the title, ‘Stemming the slide’.