Trade deficit rises due to hike in oil prices

Trade deficit rises due to hike in oil prices Wed, 16 May 2018

Trade deficit rises due to hike in oil prices

External trade is a critical component in India’s growth. In 2013, trade accounted for 55.8% of India’s GDP. This has sharply fallen to 40.6% of the GDP by 2018 (by estimates). Simultaneously, India’s trade account balance also shows a disturbing trend.

India’s trade account deficit has widened to a three-month high as on April 2018. Trade account deficit or negative balance of trade occurs when the value of imports exceeds the value of exports. From almost negligible exports last month, the country's exports had just rebounded during April, but a surge in oil prices has pushed the trade account gap wider. India is the world’s third-largest oil consumer, hence the surge in oil prices negatively impacts our trade account balance in terms of higher import cost. Compared to 2017, the oil import of India has soared by 41% this year. 

The high cost of import has come amid weakness in the rupee which is driving up the import cost further. The rupee has been Asia’s worst performing currency this year which raises concerns as it erodes our foreign exchange, pushes the current account gap wider and makes our economy vulnerable in terms of financing this deficit. Even though the imports of the country has been rising only at a slower pace, the export rebound is still weak to counter the surging oil prices and the falling rupee. 

In order to push exports, it is imperative that domestic issues such as access to credit especially for MSMEs and pending GST refund, which affect exports, should be looked into seriously. Amidst surging oil prices and a weakening rupee, the increasing trade deficit is crippling the economy and it needs to be addressed immediately to ensure macroeconomic stability. Otherwise, as India Ratings and Research predict, India’s trade deficit will reach a four-year high of 6.4% of the GDP by 2019, drastically affecting domestic economy and growth. 

Is this the economic growth that the PM promised? Some kind of deficit surely exists in the PMO and the Finance Ministry as well.

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