Trade deficit likely to widen further - Capital Economics
India Economics

Trade deficit likely to widen further

India Economics Update
Written by Darren Aw
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The widening in India’s goods trade deficit to an 18-month high in December still has further to run, particularly as a recovery in both domestic demand and global oil prices pushes import values higher. That would be enough to tip India’s recent current account surplus back into a small deficit this year.

  • The widening in India’s goods trade deficit to an 18-month high in December still has further to run, particularly as a recovery in both domestic demand and global oil prices pushes import values higher. That would be enough to tip India’s recent current account surplus back into a small deficit this year.
  • India’s monthly goods trade deficit widened from $9.9bn in November to $15.4bn in December, its largest since June 2019. (See Chart 1.) We expect the deficit to continue widening over the coming months.
  • Admittedly, exports should receive a boost from unprecedented global demand for vaccines over the coming quarters given that India is home to the world’s largest producer (the Serum Institute). But exports more broadly are unlikely to receive a major lift even as the global economic recovery continues, given that they have already rebounded back to near pre-virus levels. Indeed, the latest data showed a lacklustre recovery in goods exports, which rose only marginally by 0.1% y/y in December. (See Chart 2.)
  • Meanwhile, import values are likely to continue rising, partly as domestic demand recovers further. (For more, see our India Economic Outlook, 11th January.) This has been a key factor behind the recent improvements in goods imports, which swung sharply into y/y growth last month.
  • In addition, oil import values (which were still down by 10.6% y/y in December) should rebound as global oil prices grind higher this year on the back of stronger global demand. That said, we expect global oil prices to remain a long way below their levels from the years 2010 to 2013 when India faced significant balance of payment strains. (See Chart 3.) The impact of a rise in oil imports on the trade deficit should be manageable.
  • Bringing all of this together, we think India’s rare current account surplus will tip back into a small deficit of around 1.0% of GDP this year, and 1.5% of GDP in 2022. (See Chart 4.) In turn, the rupee should continue to weaken gradually in nominal trade-weighted terms. But with the US dollar also likely to weaken as global risk appetite improves, we are forecasting the rupee to appreciate slightly to 72/$ by the end of 2022.

Chart 1: Goods Trade Balance (US$bn)

Chart 2: Goods Exports (US$)

Chart 3: Oil Prices and Imports

Chart 4: Current Account Balance (% of GDP, 4Q Sum)

Sources: CEIC, Capital Economics


Darren Aw, Asia Economist, darren.aw@capitaleconomics.com