Import demand push, possible fall in exports due to Omicron may keep trade gap elevated, say analysts

NEW DELHI: India posted a fresh record-high merchandise trade deficit of $23.2 billion in November as export momentum declined and imports remained sticky. While global oil prices have eased, the unfolding economic activity in the country might continue to drive up imports, analysts said.

On the other hand, the emergence of the Omicron strain of the coronavirus and attendant curbs on activity in some countries could take a toll on external demand from India’s trading partners. This could further affect exports, thus keeping the trade deficit elevated.

“We expect the current account deficit (CAD) to widen to 3.3 per cent of GDP in Q4 2021 (October-December) from an expected 1.4 per cent of GDP in Q3 (July-September). We raise our FY22 CAD projection to 1.6 per cent of GDP from 1.5 per cent earlier,” economists from Nomura wrote.

Growth in exports eased to 26.5 per cent year-on-year in November from 43.1 per cent in October, while import growth was at 57.2 per cent year-on-year as against 62.5 per cent a month ago, data released by the Reserve Bank of India on Wednesday showed.

In the case of exports, sequential momentum registered a decline for both oil and core items, with the former suffering a sharper slowdown, Nomura said, adding that within the broader export basket, top contributors included petroleum products, yarns & fabrics, chemicals, electronic goods, marine products and plastics.

The slowdown in export growth was driven mainly by gems and jewellery and petroleum products, which together accounted for around 58 per cent of the sequential fall in headline exports, economists from QuantEco Research wrote. “Besides these, drag also emanated from engineering goods and chemical products, which together accounted for ~33 per cent of the sequential decline in headline exports. As such, the above four categories of products explained ~91 per cent of the sequential decline in headline exports during Nov-21,” QuantEco said.

On imports, petroleum products saw improved momentum, probably on account of a rise in imported volumes as well as high crude oil prices for the month, Nomura’s report said.

Growth in core imports stayed firm, printing at 41.5 per cent year-on-year in November, up from 40.2 per cent a month ago. The largest contributors included coal, chemicals, vegetable oils, artificial resins and plastics, non-ferrous metals, gold and electronic goods.

The increase in coal imports could be a reflection of the impact of the coal shortage in India, the foreign firm said.

According to Nomura, the paradigm of a high trade deficit could persist in coming months and while India’s balance of payments should remain in the surplus zone in 2021-22 (Apr-Mar), a lot of this has already likely occurred.

QuantEco’s economists were of the view that the softening of global commodity prices following the detection of the Omicron strain could continue, given the weaker demand outlook in the near term.

“While this would impact both exports and imports, the price impact would dominate India’s import basket, thereby providing a bias for moderating its trade deficit,” the research firm said.

In the event of a severe impact of the Omicron strain in India, however, the merchandise trade deficit would likely ease as fresh curbs on activity would act as a drag on domestic demand and imports.

While the longer-term assessment of the impact of the new strain on the trade requires more clarity, in the immediate term, there exists the possibility of an upward bias for India’s trade deficit, QuantEco said. “This can provide some upside risk to our existing current account deficit forecast of $40 billion.”


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