The January trade deficit at $16.3 billion was sharply higher than the $15 billion reported in the previous month. This indicates that India’s trade deficit in the next fiscal year could be closer to the $200 billion mark for the full year. The markets are definitely worried and that was obvious from the way the INR fell sharply by 30 paisa on Friday. Higher trade deficit puts pressure on the INR, the sovereign rating and yields. Here is why the government needs to act fast.
Numbers are not adding up…
There is a slightly scary trend in the numbers. With exports at around $24 billion and imports at above $40 billion, the gap is just getting too large. We may end the year with total imports of goods to the tune of $500 billion and despite a consistent rise in the forex reserves, India may be left with just about 9-10 months of import cover. If you compare India with other BRICS economies, that is not a very comfortable situation to be in. If this trend in trade deficit continues then the next fiscal year could see the total full year trade deficit crossing the level of $200 billion. Of course, that is assuming that oil prices do not go up sharply. If Brent crude was to get closer to $80/bbl then we may have a trade deficit situation that is much worse. The learning for the government is that trade situation is almost becoming unsustainable for the Indian economy. Trade deficit needs to come down!
Wither merchandise exports…
Export growth at 9% is hardly helping the cause. With pharma exports almost static and the “Make in India” hardly making any dent, there is little respite on the exports front. Additionally, an artificially strong INR is also denting the little advantage that India enjoyed on the exports front. And if India persists with policies like in the case of denying data to foreign exchanges, there is going to be little by way of enthusiasm for Indian products. Even the services sector, which was a major contributor, has become a marginal player. The IT sector, which was driving the growth in services, is struggling to adapt to the new digital model. The news on the overall exports front isn’t encouraging!
Time to check imports…
India needs a big shift on two fronts. Firstly, gold imports are still continuing unabated and it does not make sense wasting precious forex resources on an unproductive asset like gold. Secondly, as long as India is 85% dependent on imported crude, our trade account is going to be skewed in favor of deficits. Other countries have made rapid progress in policies for ethanol blending and alternate fuels. If the trade deficit has to be rectified then there is urgent action required on the gold and the crude oil front. If this is not stemmed now, the trade account may spiral out of control by next year!
