Why trade deficit can remain high

The main reason for this is the boom in oil imports. The total oil import bill in June nearly doubled from a year earlier to $21.3 billion. This jump is mainly due to the jump in global crude oil prices. India imports about 86 per cent of its oil consumption.

Data from the Petroleum Planning and Analysis Cell shows that the average price of the Indian basket of crude oil stood at $116 a barrel in June, which is almost 61% higher than the average price of $72 a barrel in June 2021. Oil imports are now approx. Third of India’s total goods imports. They constituted about a quarter in June last year.

In addition, oil prices fell in July on fears of an economic slowdown. On July 14, the Indian basket of crude oil was priced at $99.8 per barrel, lower than the June average, but still about 36% higher than the July 2021 average of $73.5 per barrel. While the price of oil has fallen recently. High, it’s still a lot higher than it was a year ago. Typically, higher prices reduce demand, but given how essential crude oil and its products are for the economy to function effectively, their consumption becomes highly inelastic and does not decrease with a rise in price. Has been.

Apart from oil imports, there has also been a big increase in coal imports. In June, they tripled to $6.8 billion from $1.9 billion a year earlier. In view of this, oil and coal imports account for a little over 42% of the total goods imports. This is the main reason behind total merchandise imports reaching $66.3 billion in June, which is the highest ever and almost 58% higher than imports of $42.1 billion in June last year.

While imports reached their highest level in June, goods exports had the second best month in absolute terms. Total merchandise exports stood at $40.1 billion, which crossed the $40 billion mark for the second time. The only other time was in March, when they were $44.5 billion.

While imports of goods increased by 58 per cent since June last, exports of goods decreased by 24 per cent. This explains the all-time high level of trade deficit.

How do things look from here? Oil and other commodity prices have tumbled in recent days as fears of a recession mount. However, as we saw earlier, oil prices are still significantly higher than they were last year. For the oil import bill to be the same as last year, prices need to fall to around $75-80 a barrel, assuming import volumes remain the same.

At the same time, the government has increased the import duty on gold to discourage people from buying the yellow metal. While India produces some oil, we do not produce almost any gold, although we do consume a lot of it. The move is expected to curb gold imports to some extent.

However, the trade deficit may still remain high. This is because while the fears of recession become real, exports may decline. In fact, this is already happening if we look at non-oil exports, which stood at $31.5 billion in June, or about 10% more than in June 2021. The growth rates of non-oil exports in April and May were around 18% and 13%, respectively.

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