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After a positive start to goods exports in the first quarter of 2024-25, there has been a decline in exports.
Export values declined 1.5% in July to an eight-month low, and then it further declined to 9.3% in August.
The import bill hit $64.4 billion in August, and this led to a merchandise trade deficit of $29.7 billion, the second highest after the record $29.9 billion gap in October 2023.
There was a decline in exports in the past two months but no such trends in imports were seen. The imports grew 7.5% over last July and 3.3% in August.
This lifted the deficit to a nine-month peak of $23.5 billion in July and that gap widened by around $6.2 billion in August.
On the exports front, 18 of India’s top 30 segments recorded growth in July and August, but the large sectors like petroleum, and gems and jewellery, have declined significantly.
Oil exports were down 22.2% in July and 37.6% in August, while jewellery exports have dropped well over 20% in both months.
In August, growth also slowed significantly in sectors like drugs and pharmaceuticals, and the emerging export growth engine of recent times, electronic goods.
As oil prices declined about $6 a barrel in August, India’s oil import bill dropped by almost a third to $11 billion, bringing the petroleum deficit to a three-year low as per QuantEco Research.
However, the widening of the merchandise trade deficit was predominantly led by a decline in exports of gems and jewellery. The gems and jewellery exports slipped below $2 billion in August.
India’s gold imports more than doubled in August to an all-time high of $10.1 billion. This figure was contrasting with a 10.7% drop in gold imports in July.
This surge in imports was led by the reduction in gold import duty from 15% to 6% announced in the Budget and domestic jewellery players stocking up for the festive season.
India is growing at a pace above the world average, and hence, the country's domestic economy is strong.
This acceleration results in the demand for more items from other nations, meaning the Indian market is growing very strongly.
This trade deficit is not fearsome for an emerging economy, especially when the economy is in the growth phase of an economy that has huge growth potential like India.
As of August 2, India's foreign exchange reserves have reached a record $675 billion, providing a cushion against the shocks that may hit the economy. These are enough to cover 11.6 months of imports.
Positive inflows of foreign capital have continued in recent months, which strengthens the confidence in the soundness of the Indian economy. Inflow helps investment and economic activities, thereby strengthening the overall financial system.
Services exports have risen by over 10% between April and August. They are the most significant contributor to the economy. A strong services sector can absorb worldwide shocks and also balance trade.
Imports are likely to remain over $60 billion, but the economic fundamentals permit this level. So long as foreign exchange is stable, the higher import levels are not something to worry about.
International Trade Growth and Its Expectations:
International trade is expected to grow faster in 2024 than in 2023. However, demand in developed markets is too soft to provide any short-term growth impetus.
The existing geopolitical tensions such as the Russia-Ukraine war further weigh over the trade prospects that impact market stability. U.S. elections and possible tariff policies by the new regime might complicate the trade environment.
Increased U.S. tariffs on China imports mean heightened competition in the non-U.S. market for Chinese players.
Declines in import demand in China would lead to losses in terms of price positioning, mainly in the Indian and other local producers' markets.
Low oil prices are more likely to prevail due to low demand and geopolitical issues.
Low oil prices could further decline India's prospects of increasing oil exports, which is likely to make revenue projections difficult.
A slowing global economy or surging trade barriers might impact exports.
Increased tariffs and non-tariff barriers after the pandemic have made it difficult to open up markets for Indian exporters.
The Carbon Border Adjustment Mechanism by the EU would serve as a significant barrier to Indian exports.
Having such rules may require more investments and adjustments on the part of the exporter Indian.
In this case, the growth strategy of the government should be sustainable, where the improvement in trade balance over time and boosting exports should be prioritised. Manufacturing and innovation-friendly policies might make India more competitive in its offerings in the international markets.
Export Targets in services and products of $1 trillion by 2030, which is a very aggressive growth target set by the Indian government must be supported by conducive government policies such as Product-linked incentive schemes.
Sustaining a sound macroeconomic platform such as good governance, capital market regulations and favourable taxation should provide a basis for boosting confidence that Indian structural challenges are being overcome.
Infrastructure and human capital investments are required which will further consolidate India's economic stance.
India's growth trajectory aligns well with some of the global economic uncertainties and hence remains an attractive play for investment. An economy that is well-resilient with strong fundamentals can be better protected against many external economic shocks than its counterparts.
Important articles for reference:
Carbon Border Adjustment Mechanism
Sources:
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PRACTICE QUESTION Q.Recently there has been a trend of the widening trade deficit in the Indian economy. How significant are the risks posed by wide trade deficits in India? Discuss by citing recent examples. ( 150 words) |
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