India’s trade deficit is shifting in a negative direction as Indians are buying more than they sell to the world.

By Prashansa Srivastava

India’s trade deficit reached a 56-month high in January driven by a sharp rise in petroleum, chemicals, silver, pearls and machine tools imports. This is according to new data from the Commerce and Industry Ministry. The country’s trade deficit increased in spite of a rise in exports for three consecutive months.

A look at exports

Exports rose by 9% reaching $24.3 billion but were outweighed by a 26% increase in imports at $40.6 billion. This leaves a trade gap of $16.3 billion, the highest since May 2013. Most exports saw an increase, although both natural and readymade garments faced an export decline.

According to the data, the export of engineering goods rose 15.77% last year to $6.36 billion, whereas the gems and jewellery exports grew by over 0.89% to $3.02 billion. Exports of organic and inorganic chemicals registered an enormous increase of 33.60% to $1.61 billion. With higher crude prices, the value of exported petroleum products rose as well. Outbound shipments of petroleum products went up by over 39.5% to $3.8 billion in January.

The downward trend of the textile industry continued, with exports of readymade garments falling by 8.4% to $1.39 billion and cotton yarn and fabric exports declining by 9.6% to $0.84 billion. A reduction in tax exemptions granted to exporters after the implementation of the Goods and Services Tax and appreciation in the Indian rupee against the dollar has contributed to the steady decline of exports.

The shifting of import orders to competing countries has further worsened the situation. Bangladesh, Cambodia and Vietnam now offer lower production costs due to cheaper electricity and are thus preferred export destinations. This decline in the export of readymade garments indicates India’s failure to capture global market share, which is especially disappointing given the space in the industry being vacated by China as it shuts down textile units due to environmental concerns. However, unfavourable government policies combined with a reduction in overall tax exemptions may push Indian exporters further backwards.

The imports side

Petroleum and crude oil imports continued to inflate the country’s import bill, increasing it by over 42.64%. The import of pearls and precious stones also jumped by over 55.71%. However, gold imports declined 22% to $1.59 billion last month. Although exports of organic and inorganic chemicals increased by a substantial amount, it was surpassed by an import increase of 48.43% which represents an expenditure of $1.79 billion.

Five sectors—coal, chemicals, precious metals, petroleum and machinery—showed at least a $500 million increase in imports from the year before. If such trends continue, the trade deficit would touch the $150 billion mark this year.

GST woes

The slowdown of exports from labour-intensive sectors, such as garments, carpets, man-made textiles and handicrafts, is due to the financial crunch being faced by these industries after the implementation of the GST. Delays in the refund of tax credits are harming overseas exports. Since tax refunds have declined or been blocked completely under the new system, the country’s exports have shown a fast downward trend.

The marginal growth of exports has been far surpassed by the expansion of imports, and such persistent trade deficits have far-reaching consequences. They are usually associated with falling currency values, inflationary pressure and the high threat of unemployment. If the structural problems with the GST are not handled soon in order to ease the trade deficit, this trend may begin to have dangerous effects on the overall economy.

Feature Image Source: Flickr

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