A rising trade deficit puts more pressure on the rupee and aids growth-staking inflation.
A rising trade deficit puts more pressure on the rupee and aids growth-staking inflation.
Official data on India’s merchandise trade for April gives reason for happiness at first glance. Emerging from the record export performance during the recently concluded financial year, Outward shipments up 24.2% for the month From a year ago, electronics and chemicals showed healthy expansion, while petroleum products more than doubled. However, imports continued to outpace exports, rising 26.6% to widen the goods trade deficit, which widened from $18.5 billion in March to $20.07 billion. The trade deficit – the extent to which the import bill exceeds export receipts – breached a worrying $200 billion for the first rolling 12-month period in April, primarily impacted by petroleum imports of $172 billion. Global crude oil prices have risen by more than 40% in 2022 in the wake of Russia’s war on Ukraine, an increase in the import bill. The onset of the Indian summer, coupled with a heatwave, setting the pace for coal imports, has boosted power demand, which grew 136 per cent last month, despite record production by major domestic supplier Coal India. For the first time, the power ministry has set a timeline for states to import coal in the next few months, much from the 16% year-on-year decline in fuel imports in the April 2021-January 2022 period. is far. And there is a clear indication that the bill for overseas purchase of coal is also going to increase.
Monitoring of trade deficit is important as it has a direct bearing on the current account deficit (CAD). Disappointingly, FDI, which usually helps bridge the CAD, has seen a decline. And, the wider the current account deficit, the greater the downward pressure on the rupee, which has weakened significantly since the start of the conflict in Eastern Europe in February. A weaker rupee, in turn, makes imports costlier, potentially widening the trade deficit, and thus triggering a vicious cycle. The RBI has sought to stabilize the rupee against wild swings, evident as a fall in forex reserves to $600.4 billion (April 22) from $640 billion (April 22) six months ago. But a central bank can draw reserves to depreciate any rupee depreciating only to a limited extent. The RBI is also full of battle against imported inflation as global commodity prices have risen sharply. To help avoid additional stress, the government should consider additional incentives for exports, while encouraging local production of goods that affect the import bill. The coal crisis could have been avoided with better advance estimates of power demand as the country emerged from the worst of the pandemic and optimal allocation of coal-carrying rail wagons. Policy makers cannot afford to let down their guard on trade imbalances and risk growth-blocking inflation and further pressure on the rupee.