Trade deficit climbs to 18-month high in December

by Manasi Swamy

India’s merchandise trade deficit in December 2020 exceeded its pre-Covid level. Trade deficit spiked to USD 15.7 billion in December 2020 from USD 10 billion in November 2020. This was the highest deficit recorded since June 2019. The widening of trade deficit was largely led by a surge in imports. For the first time since February 2020, imports grew over their year-ago level. They were 7.6 per cent higher than in December 2019. Exports, on the other hand, alleviated their year-on-year (y-o-y) contraction at 0.8 per cent.

India’s import bill soared to a 19-month high of USD 42.6 billion in December 2020. Imports of petroleum, oil & lubricants (POL), at USD 9.6 billion, rose to their highest level since the lockdown. Consequently, y-o-y contraction in POL imports reduced to 10.4 per cent. This is for the first time since March 2020 the POL import fall dropped below 30 per cent.

POL imports witnessed both, a rise in unit value of imports and higher demand. Price of the Indian basket of crude oil increased to USD 49.9 per barrel in December 2020 from USD 43.5 per barrel in November 2020. Consequently, the y-o-y fall in prices reduced to 23.8 per cent in December from 30.4 per cent in November. Implicitly, import volumes rose in double-digits after having contracted in seven of the first eight months of fiscal 2020-21. Demand for petroleum products in India has nearly reached its pre-Covid level. As per a report in Business Line, IOCL, the country’s largest state-run refiner, operated at near 100 per cent capacity in December 2020.

Non-POL imports entered the green zone in December 2020, after contracting for 18 consecutive months. They rose by 14.3 per cent compared to their level in December 2019.

Imports of jewellery, which includes gold, silver, precious metal jewellery, precious & semi-precious stones and other precious & base metals, recorded a robust y-o-y growth of 43.5 per cent to USD 6.9 billion in December 2020. Silver imports continued to decline y-o-y. They reported a steep 90.5 per cent contraction in November 2020. On the other hand, import of pearls, precious & semi-precious stones together climbed by 7.8 per cent. And, import of gold surged by about USD 2 billion, an 81.82 per cent jump over its level in December 2019. The jump in gold during December 2020 was the steepest among all imported items.

Non-POL non-jewellery imports amounted to USD 26.1 billion in December 2020. They penciled a y-o-y growth of 8.4 per cent. Imports of vegetable oil and electronic goods increased the most among major non-POL non-jewellery products, rising by 43.5 and 20.9 per cent, respectively, from a year ago. Other commodities that recorded over 20 per cent y-o-y growth in imports were pulses, sulphur & unroasted pyrites, chemical material & products, dyeing/tanning/colouring materials, artificial resins & plastic materials, non-ferrous metals and organic & inorganic chemicals. Imports of textile, project goods, wood & wood products, machine tools, iron & steel, fertilisers, medicinal & pharmaceutical products, electrical & non-electrical machinery and fruits & vegetables too increased y-o-y in December 2020. Their rate of growth, however, was modest.

India’s export earnings improved to USD 26.9 billion in December 2020, nearly touching their year-ago level. Before this, exports had fallen by 8.7 per cent in November 2020 and 4.8 per cent in October 2020. An improvement was seen in both POL and non- POL exports.

Y-o-Y contraction in POL exports moderated to 40.5 per cent in December 2020 from nearly 50 per cent in the preceding two months. Sequentially, POL exports rose to USD 2.2 billion in December 2020 from USD 1.5 billion in November 2020.

Non-POL exports in December 2020 rose to USD 24.7 billion. This was highest monthly level attained by them since May 2019. They exhibited a 5.3 per cent over their year ago level. This expansion in exports is especially noteworthy considering that India’s major trading partners re-imposed restrictions and some even resorted to lockdowns due to increasing Covid-19 infections.

Exports of major commodities like drugs & pharmaceuticals, organic & inorganic chemicals and electronic goods gained the most in December 2020, rising by 17.4 per cent, 10.7 per cent and 16.4 per cent, respectively, over their year ago levels. Other commodities whose exports grew in December 2020 were oil meals, cereal, spices, fruits & vegetables, rice, meat, dairy & poultry products, iron ore, jute, handicrafts, carpet, ceramic products & glassware, cotton yarn/ fabrics/ made-ups, handlooms products, gems & jewellery, mica, coal & other ores, tea, engineering goods.

Rise in both, exports and imports, is a positive sign for the Indian economy as it reflects an improvement in aggregate demand. The consequent increase in trade deficit is not a cause for concern. India’s current account is currently in surplus and the country is experiencing more-than-adequate capital inflows to finance any rise in merchandise trade deficit. India is stilling on a record high foreign currency assets, enough to cover more than 12 months of imports.