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Why India’s February Trade Deficit Figures are Likely to Expand

Published 15-03-2019, 10:49 am

The Ministry of Commerce & Industry, Government of India, is likely to announce its Trade deficit numbers for February 2019 later today. The trade deficit figures for January 2019 published last month were $14.73 billion. The deficit was higher for January compared to $13.08 billion trade deficit in December 2018. But it was lower when compared with November and October figures of $16.67 billion and $17.13 billion, as the below chart shows.

The trade deficit is arrived through the difference in imports and exports. In January, India imported goods worth $41.09 billion, while it exported only $26.36 billion worth of goods. The most significant component impacting India’s imports is the crude and petroleum products, which accounted for over 27% of total imports for India in January. Gold was another component that saw a 38% growth in imports in January on a year-over-year basis, although it still accounts for less than 6% of India’s overall imports.

India's Trade Deficit

I expect the February trade deficit numbers to grow simply because the Brent crude showed some increase in February mainly due to the supply cuts led by producer cartel OPEC. US sanctions against Venezuela and Iran were also instrumental in this increase.

Another reason for the widening trade deficit is that I expect the growth of exports to come down. This is mainly due to the slowdown in the global economy that we are experiencing in the last few months. Prevailing global headwinds were the main reason why RBI decided to cut the repo rate in its Monetary Committee meeting last month. In January, India registered a nominal 3.74% growth in exports on a YoY basis.

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You should note that the widening trade deficit puts pressure on current account deficit (CAD) numbers for India. The CAD has already widened from 1.1% in fiscal Q2 2018 to 2.9% in fiscal Q2 2019. A higher CAD puts pressure on USDINR rate and could raise the cost of borrowing overseas.

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