Trade deficit set to widen further - Capital Economics
India Economics

Trade deficit set to widen further

India Economics Update
Written by Darren Aw
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India’s goods trade deficit widened again in November and is set to reach its pre-pandemic levels over the coming months, especially given recent positive developments on a COVID-19 vaccine. But we think the external risks will remain manageable.

  • India’s goods trade deficit widened again in November and is set to reach its pre-pandemic levels over the coming months, especially given recent positive developments on a COVID-19 vaccine. But we think the external risks will remain manageable.
  • The widening in India’s monthly goods trade deficit from $8.7bn in October to $9.9bn in November leaves it close to its pre-lockdown level in March. (See Chart 1.) The breakdown showed that both import and export growth weakened last month. (See Chart 2.)
  • The renewed weakness in imports isn’t too worrying. Oil and gold imports dropped in y/y terms but growth in non-oil and non-gold imports – which we think gives a better indication of underlying demand – continued to improve. (See Chart 3.) That adds to the evidence that domestic activity is on the mend.
  • The likelihood that domestic demand continues to pick up somewhat perversely bodes well for exporters too. Anecdotal evidence suggest that container shortages caused by limited incoming shipments have been a factor behind the decline in export growth over the past two months. And with global demand also likely to continue its gradual recovery, export growth should rebound soon enough.
  • On balance though, we expect the trade deficit to widen further over the coming year, especially given the latest COVID-19 vaccine developments. Admittedly, India is likely to be a net exporter of vaccines given that it has large onshore production capacity. (The Serum Institute of India is one of the largest producers of vaccines in the world.) But pharmaceuticals historically account for just 3% of total goods exports. And widespread vaccination would speed up the domestic recovery and boost imports. What’s more, we think an effective vaccine will support oil prices, and we are forecasting the price of Brent crude to rise to $60pb in 2021.That would be consistent with oil imports rising to around $9bn per month, from $6.3bn currently.
  • With all that said, the external position still is unlikely to become a problem any time soon. India recorded a rare current surplus in Q2 and we think it will flip back into a small deficit over the coming quarters. (See Chart 4.)

Chart 1: Goods Trade Balance (US$bn)

Chart 2: Goods Exports and Imports (US$, % y/y)

Chart 3: Goods Imports (US$, Excl. Oil and Gold)

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

Sources: CEIC, Capital Economics


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