Trade deficit at 25-month high as imports rise 7.56%

India’s trade deficit widened to a 25-month high in December as growth in merchandise imports outpaced exports, signalling a pickup in domestic demand after the pandemic devastated Asia’s third-largest economy.

Imports expanded 7.56% last month, the first time in 10 months, while exports grew 0.14%—leaving a trade deficit of $15.44 billion, according to data released by the commerce ministry on Friday.

China’s exports, in contrast, rose 18.1% in December, the fastest growth since February 2018, while imports grew 6.5%, leading to a record trade surplus of $78.17 billion.

Major Indian exports that helped India’s outbound shipments turn the corner include gems and jewellery (6.75%), drugs and pharmaceuticals (17.5%), chemicals (10.8%), engineering goods (0.3%) and electronic goods (16.5%). A sharp contraction in readymade garments (-15%) and petroleum products (-35.4%) kept overall exports growth minimal.

The rise in imports was led by gold (81.8%), vegetable oils (43.5%), chemicals (23.3%), artificial resins (32.3%), pearls (7.81%), iron and steel (12.7%), non-ferrous metal (28.1%), machinery (0.57%) and electronic goods (20.9%).

Aditi Nayar, principal economist at ICRA Ltd, said she is hopeful exports will strengthen in the coming months as the covid-19 vaccine rollout gathers pace in India’s major trading partners.

“As the economic activity has normalized, the merchandise trade deficit has enlarged by $20 billion to $34 billion in Q3 FY21 from $14 billion in Q2 FY21. Accordingly, we expect the size of the current account surplus to shrink to under $2 billion in Q3 FY21, and the re-emergence of a small deficit can’t be ruled out at this point,” she added.

India’s merchandise trade had been weakening even before the pandemic hit the economy and external demand. In 15 of the past 18 months starting June 2019, exports have been negative. Since March 2020, both exports and imports started declining in high double digits, even temporarily leading to a trade surplus in June for the first time in 18 years.

Data compiled by the World Trade Organization (WTO) showed global merchandise trade declined by 21% in the June quarter. WTO now projects volume of world merchandise trade to decline 9.2% in 2020, followed by a 7.2% rise in 2021. In April, it had projected global merchandise trade to drop by 13% to 32% in 2020 because of covid.

The Indian economy is officially projected to contract by a record 7.7% in FY21 for the first time in 41 years with the National Statistical Organisation, assuming 0.6% growth in the second half (October-March) of FY21. The Asian Development Bank has projected the Indian economy to contract at a slower pace of 8% against its earlier estimate of 9% in FY21 on the back of a faster recovery in Asia’s third-largest economy.

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