India’s merchandise trade deficit peaked at USD 81.3 billion in the quarter ended September 2022. The deficit has been widening continuously for more than a year. It had shrunk below USD 10 billion in the June 2020 quarter on the backdrop of Covid-19 induced lockdown. But it was quick to return to its pre-Covid level of USD 30-45 billion between the December 2020 quarter and the September 2021 quarter. The deficit widened to USD 60.1 billion in the December 2021 quarter and after an aberration of the March 2022 quarter, it expanded further to USD 65.2 billion in the June 2022 quarter and USD 81.3 billion in the September 2022 quarter.
The rapid expansion in trade deficit is becoming a cause of concern for India. The rising trade deficit is fuelling domestic inflation. This is because the current widening of trade deficit has emanated from rise in prices of imported commodities, particularly of energy fuels. Besides, the rising deficit is not accompanied by an increase in foreign capital investments. This in turn has exerted pressures on the Indian rupee.
India’s import bill has been scaling new highs every quarter for the last one year. From USD 147.4 billion in the September 2021 quarter, it increased to USD 193.8 billion by the September 2022 quarter. About 60 per cent of the rise came from imports of energy fuels petroleum oil and coal. Import bill of the two fuels increased by 62.2 per cent to USD 74.5 billion during this period. This was driven by 52.5 per cent rise in prices of petroleum oil and 56.3 per cent rise in prices of coal. India imports these fuels because of its insufficiency to produce quantity enough to meet its domestic demand.
India also meets a bulk of its demand for inorganic chemicals, fertilisers and vegetable oils through imports because of inadequate domestic supplies. Import bill of these increased by 38 per cent, 53.9 per cent and 24.4 per cent, respectively, between the quarter ended September 2021 and September 2022. The rise was driven by soaring prices of these commodities globally. Besides, aluminium imports also swelled due to rise in prices. The four commodities made about 10 per cent contribution in the increase in India’s import bill over last one year.
India’s exports were on an upward curve post the first Covid-19 lockdown until June 2022. These increased from USD 75.8 billion in the December 2022 quarter to USD 121.1 billion by the June 2022 quarter. The trend reversed in the September 2022 quarter, with exports shrinking to USD 112.4 billion. The government had imposed restrictions in the form of duties or bans on exports of the products that contributed to the bulk of this fall. These include sugar, petroleum products and iron & steel.
In May 2022, the Central Government restricted sugar exports till October 2022 to contain the rise in domestic prices. Following this, India’s earnings from sugar exports shrunk by 59.7 per cent to USD 1.1 billion in the September 2022 quarter compared to the preceding quarter. On October 29, 2022, the government extended these restrictions for another year.
Exports of petroleum products and iron & steel declined by 5.3 per cent and 44.2 per cent, respectively, in the September 2022 quarter over the preceding quarter led by shrinkage in volumes. In May 2022, the government slapped 15 per cent export duty on exports of finished steel items and hiked duty on exports of iron ore by up to 50 per cent. On July 1, 2022, the government imposed export duties on diesel, petrol and ATF. The government has been reviewing levy every fortnight since then. Currently, diesel attracts an export duty of Rs.12 per litre and ATF of Rs.3.5 per litre, while petrol exports are exempted from any levy.
Another major contributor to the sequential fall in exports in the September 2022 quarter was textiles, readymade garments and raw cotton. Overseas demand for these commodities shrunk as the global economy started slowing down. Export demand for jewellery, electronics, transport equipment and machinery remained broadly intact in the September 2022 quarter. But we expect exports of these items also to start feeling the heat of the global slowdown soon.
We expect India’s total exports to shrink further from USD 111.7 billion in the September 2022 quarter to USD 106 billion in the December 2022 quarter and record only a seasonal improvement to USD 108 billion in March 2023 quarter.
Imports, on the other hand, are expected to remain firm. In our forecast released on October 1, 2022, we had projected imports to ease from USD 187.9 billion in the September 2022 quarter to USD 179.4 billion in the December 2022 quarter and USD 165.8 billion in the March 2023 quarter. This was based on an expectation that prices of major imported commodities including vegetable oils, fertilisers, coal, metals and crude oil would soften going forward. We still believe that prices of these commodities, but for crude oil will weaken as the global economy slows down. Our outlook on crude oil prices, however, has changed since OPEC and its allies decided to go for deep output cuts of 2 million barrels per day from November 2022. These cuts have come ahead of the peak winter season. We now expect India’s imports to top USD 184 billion in the December 2022 quarter and USD 178 billion in the March 2022 quarter. Consequently, trade deficit is expected to remain elevated at USD 78 billion in the December 2022 quarter and USD 70 billion in the March 2022 quarter.
This means that India’s current account deficit will remain high and the depreciating rupee may not find any respite until capital investment inflows pick up.