Imports rise to record highs

This is the first time that merchandise imports have scaled a record high of $56.4 billion. This is 84% higher on a yoy basis and more than 25% higher on a sequential basis. This has resulted in the merchandise trade deficit surging to a record high level of $23 billion. This is despite the sharp spike in exports, so there is obviously huge pressure from the imports front. This would also be the first month in a long time, when the forex chest is offering below 12-month cover of annualized goods imports. 

Exports not up to the mark

Merchandise exports have exceeded the pre-pandemic levels for 7 months in a row, but it is still not good enough. In fact, exports at $33.3 billion are nearly 57% above the previous year levels and 24% above the pre-pandemic levels. The exports have been strong in value added sectors like engineering goods and gems & jewelry. The export boost has disappointed as India has struggled to make hay while global demand has been on a recovery path. Unless exports show a meaningful surge, merchandise trade deficit will only widen further. 

Crude oil holds the key

If there is one factor really causing pain on the import list, it is the crude oil bill. In the last one year, the price of Brent Crude surged from $30/bbl to $80/bbl. However, the demand supply gap in the global crude market is significant. OPEC is unable to bring in adequate supplies as promised. On the other hand, the US supply is also impacted by the hurricane leading to a sharp drawdown in US crude inventories at Cushing, OK. That situation is unlikely to get rectified any time soon. That is why, most analysts are betting on crude prices inching to the $100/bbl mark over the next few months. That is bad as it adds to the current account deficit for India. 

Time for curbs on gold

Look at the import concentration; crude accounts for $17.4 billion, electronics $6.9 billion and gold $5.1 billion. That is lot of precious forex reserves paid to import an unproductive asset like gold. Gold imports are up 750% yoy on huge stocking ahead of the festive season. The one thing India must immediately do is to put curbs on gold imports. This is a totally unproductive asset class and precious foreign exchange cannot be thrown. This calls for curbs that are quantity–based and also levy–based. It may sound unfair to jewelers but it is time for the government to bite the bullet. That is the only way to stem the relentless surge in the trade deficit.