India trade deficit: Merchandise trade deficit will once again be a pressure point for policymakers with it having climbed to $30.43 billion in June. This is the highest in five months as well as considerably higher than last year’s figures. Imports surged 31% on-year to $70.84 billion while exports were slower by 16% to $40.41 billion.
The most obvious culprit for widening the trade deficit is crude oil. The oil import bill rose 40% to $19.33 billion in June. International oil prices had hardened during much of the month as geopolitical tensions in West Asia rattled energy markets. Unlike discretionary purchases, oil imports cannot be postponed. They are the unavoidable cost of keeping transport moving, industries running and households supplied with fuel.
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While India is paying higher for imported crude, a more nuanced picture is that it is also importing more because its factories are producing more, consumers are spending more and manufacturers rely heavily on overseas supply chains.
The June numbers cannot be explained by oil alone. Another notable thing is June numbers is an extraordinary rise in electronics imports, which jumped 59% to $13.36 billion. Electronics have become one of India’s biggest import categories, second only to crude oil. This may sound paradoxical given the government as well as media celebrates record smartphone exports and expanding electronics manufacturing under the production-linked incentive scheme. However, both trends are true.
The rising electronics bill
India today assembles far more electronic products than it did five years ago. Companies have expanded production with rising exports, better manufacturing capacity and PLI incentives. The problem is that while India has done much to improve the segment, the value addition still happens elsewhere. Semiconductors, display panels, memory chips, sensors, precision machinery and numerous specialised components continue to arrive from countries such as China, Taiwan, South Korea and Vietnam before being assembled in Indian factories. India has become an important manufacturing hub but is yet to become a complete manufacturing ecosystem.
It is because of this dependence that electronics feature in both exports as well as imports figures. Electronic goods exports rose 19% to $4.93 billion in June. But imports grew much faster because domestic production is contingent upon global supply chains. The takeaway from the electronics case is rising imports cannot and should not always be seen as an evidence of industrial weakness. They can also indicate expanding manufacturing activity.
Among other notable import categories, fertilisers imports tripled to $2.30 billion as farmers are stocking ahead of the agricultural season. Raw cotton imports almost tripled to $185 million after the government removed import duty to ease pressure on textile manufacturers facing tight domestic supplies. None of these imports are driven by consumer demand but are inputs feeding agriculture and industry.
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Gold is usually seen as a perennial external sector headache but it did not have much impact this time. Imports rose 7% to $1.97 billion, far below the pace seen in oil or electronics. This comes after Prime Minister Narendra Modi nudged Indians to buy less gold given tight economic conditions. For policymakers, this will bring small comfort as gold imports have historically widened the trade deficit without adding to productive capacity. June’s numbers show the pressure has shifted to categories which are unavoidable.
India trade deficit: Stronger June exports cushion impact
Even at a time of heightened global uncertainties, the exports have not been weak. The headline deficit may suggest that export picture is dismal but given a sluggish global economy and persistent trade uncertainty, a 16% growth over last year is not a mean feat. Engineering goods once again led the way with exports rising 21% to $11.48 billion. Petroleum product exports increased 9% to $4.87 billion while electronics exports maintained their upward trajectory.
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According to estimates, services exports stood at $33.03 billion in June against imports of $17.92 billion, generating a surplus of $15.11 billion. Software services, consulting, financial services and business process management continue to cushion the merchandise deficit.
Another thing that is going well in India’s favour is engineering exports. Unlike commodity exports, engineering products exports only happen if there is industrial competitiveness. India is now exporting automobiles, industrial machinery, electrical equipment and engineering components which shows that Indian made products are in demand despite slower growth in advanced economies. That matters because engineering exports have replaced traditional labour-intensive sectors as the backbone of India’s merchandise trade.
Recently, Commerce Secretary Rajesh Agrawal pointed to a recovery in shipments to West Asia, where exports rose 7% to $5 billion after disruptions due to regional conflict. Singapore, Malaysia and African economies continued to feature among India’s important export destinations. This goes on to say that exporters are diversifying beyond their traditional markets. The United States is India’s largest overseas market, although exports there slipped marginally to $8.17 billion from $8.27 billion a year earlier.
Then there is China. Imports from China jumped 40% to $13.34 billion while India’s exports to China rose nearly 32% to $1.81 billion. Despite repeated efforts to reduce dependence on Chinese supply chains following the Galwan clash, the bilateral trade imbalance is deeply entrenched. Indian manufacturers continue to source machinery, chemicals, electronics and industrial intermediates from China because domestic alternatives are either unavailable or more expensive.
Simply put, India’s manufacturing ambitions have a contradiction. Programmes such as Make in India and the production-linked incentive schemes have succeeded but building domestic supply chains is a far more difficult task. Countries do not become manufacturing powerhouses by assembling products alone but by becoming specialised suppliers. China spent over three decades building that ecosystem. India is only beginning.
The June numbers are an evidence that the economy still depends heavily on imported energy and industrial inputs even as it expands its manufacturing base. India is an economy that is producing more, exporting more and integrating more deeply into global production networks.
The policy challenge is not to simply narrow the trade deficit but to reduce the import intensity of growth itself. That means producing more electronic components at home, strengthening domestic supply chains, lowering dependence on imported energy and moving further up the manufacturing value chain.