Domestic demand drives foreign trade

by Madhumita Gokhale

India’s merchandise trade deficit rose to USD 22.9 billion in September 2021, as per preliminary data released by the Ministry of Commerce. This is the highest ever level of trade deficit recorded in the country. In September 2019 in comparison, the trade deficit had amounted to USD 11.7 billion. India recorded double-digit growth in both imports and exports in September 2021, over the corresponding period in 2019. But the increase in imports was much sharper, resulting in a widening of the trade deficit.

India has recorded extremely high levels of both imports and exports since March 2021. In September 2021, merchandise imports reached an all-time high of USD 56.3 billion. This was higher than the value of imports seen in September 2019 by almost 50 per cent. In comparison, the past three months had seen a much smaller increase in imports, of less than 14 per cent over the corresponding pre-pandemic level. The sharper increase in imports in September indicates improvement in domestic demand.

Imports of petroleum, oil & lubricants (POL) grew by 91.7 per cent over September 2019, amounting to USD 17.4 billion. However, the surge in global prices of crude oil contributed significantly to this spike in the POL import bill. Crude oil prices in international markets amounted to USD 73 per barrel in September 2021. This was almost 80 per cent higher on a y-o-y basis. In comparison to September 2019, it was higher by 21.3 per cent higher.

Non-POL imports also witnessed a considerable increase, of 36.1 per cent over September 2019. Gold and silver prices were much higher in September 2021 as compared to the same month in 2019, contributing to this increase. Since June 2021, India has recorded a sequential increase in the growth of non-POL imports over the corresponding pre-pandemic level. Non-gold, non-POL imports also increased substantially during June-August 2021. This reflects the continued improvement in domestic demand and the increased pace of economic recovery from the second wave.

India’s merchandise exports amounted to USD 33.4 billion in September 2021. This was a 28.4 per cent increase over September 2019. The increase was similar to the growth seen in August, but slightly lower than in June and July 2021. India had recorded an all-time high level of exports in July 2021, amounting to USD 35.5 billion. With the second wave and consequent lockdowns adversely impacting domestic demand, it is likely that manufacturers in India had increased their focus on exports instead of domestic markets during the past few months. The tapering of exports growth in August and September indicates a possible recovery in domestic demand.

Growth in overall exports in September 2021 can be traced to both POL and non-POL commodities. The value of non-POL exports stood at USD 28.5 billion in September 2021. This was 26 per cent higher than in September 2019. Growth in non-POL exports over the pre-pandemic level has remained consistently high since June 2021, in the range of 25 per cent and 30 per cent. This indicates the persistence of strong external demand from India’s trading partners.

Similarly, the value of POL exports also rose in September 2021, reaching an all-time high of USD 4.9 billion. This was 42.7 per cent higher than the same month in 2019. Like imports however, the surge in crude oil prices is likely to have contributed partly to the increase in value of India’s POL exports in September 2021.

The sharp rise in imports and exports over the pre-pandemic level indicates the continued improvement in aggregate demand, both in the domestic economy as well as in India’s trading partner countries. Although the merchandise trade deficit rose to an all-time high level in September 2021, the cumulative trade deficit during April-September 2021 remained much lower than seen in the corresponding period in 2019. India’s merchandise trade deficit amounted to USD 78.8 billion during April-September 2021, against USD 88.9 billion in the same period in 2019.

While India’s trade deficit has increased, it has done so on the back of an increase in both exports and imports. The rising deficit is therefore a sign of increasing economic activity. Using the most recent official data on GDP, the trade deficit in the quarter ended June 2021 works out to a mere 4.5 per cent. It was 6.8 per cent in the quarter of June 2019 or, 5.7 per cent in the quarter of September 2019. Between 2014-15 and 2020-21, on an average, India’s trade deficit was 5.6 per cent of GDP. In the preceding seven years it was 8.5 per cent of GDP. Compared to these levels, even if the 4.5 per cent of the June 2021 quarter rises a bit in the September 2021 quarter, India’s trade deficit would still be well below its recent historical levels.

India’s merchandise trade
  Exports Imports
USD billion    
  Apr 21 30.7 46.0
  May 21 32.3 38.8
  Jun 21 32.5 42.1
  Jul 21 35.5 46.0
  Aug 21 33.4 45.0
  Sep 21 33.4 56.3
% change over corresponding month in 2019    
  Apr 21 18.1 8.6
  May 21 8.2 -16.8
  Jun 21 29.8 2.5
  Jul 21 35.3 13.8
  Aug 21 28.5 13.0
  Sep 21 28.4 49.5