India’s trade deficit hit the highest on record in June at $25.6 billion as imports soared to $63.6 billion. The biggest challenge for India’s external account comes from imports of energy, from crude oil to coal, showed the trade data.
Petroleum and crude imports were at $20.7 billion, recording growth of 94.2% year-on-year and 8% month-on-month. These imports accounted for 32.6% of all merchandise imports in June. Imports of coal, coke and briquettes also rose to a record high of $6.4 billion, a rise of 241.8% year-on-year and 18.3% month-on-month. This category now makes up for a tenth of all merchandise imports.
Together, the items comprised 42.7% of India’s merchandise imports, compared to a share of 29.8% at this time last year.
The increase in the energy import bill is driven entirely by an increase in prices, even as import volumes have declined, said Ritabrata Ghosh, vice president for corporate ratings and industry research at ICRA Ltd. Prices continue to trend at nearly two-three times the average of the last 10 years, Ghosh said.
The imported coal-based power plants had imported coal of more than 45 metric tonnes per year from 2016-17 to 2019-20. This dropped to 18.89 metric tonnes in 2021-22, according to a press release by the Ministry of Coal in June. This year, too, generation by imported coal-based plants remains very low due to high price of imported coal, it said.
With global prices still elevated, relief on the coal import bill is not likely over the next few months.
The problem is expected to continue to linger in July-September quarter, said Ghosh, adding that any relief will depend on how quickly Coal India Ltd. is able to ramp up production.
Total domestic coal production in the April-June quarter was 205.6 metric tonnes, 31.9% higher than a year ago, according to monthly statistics by the Ministry of Coal.
“We don’t see significant softening in prices and a reversion to pre-pandemic price levels appears unlikely,” Ghosh said. Sanctions against Russia, how the ongoing Ukraine conflict pans out, and readjustment time after that, will determine the trajectory of coal prices globally, he said.
The crude oil import bill also depends on global prices. Overnight prices fell sharply as fears of a U.S. recession took hold. Still prices remain close to $100 per barrel. Oil prices are expected to remain sticky at higher levels, said Indranil Pan, chief economist at Yes Bank.
The high energy import bill will widen India’s current account deficit. A note by QuantEco research forecasted FY23 current account deficit at $105 billion, up sharply from $39 billion in FY22. Yes Bank pegs it at 2.6-3.2% of the GDP in FY23 with oil price averaging at $100-120 per barrel.
The dichotomy on external trade continues to appear stark with risk of global stagflation marring economic outlook, said QuantEco Research in its note. On the one hand, evidence of moderation in global economic activity is growing. On the other hand, international commodity prices continue to remain elevated on account of the Russia-Ukraine conflict and persistent supply disruptions in a few commodities.
Both these factors are having an adverse impact on India’s trade deficit, which in the first three months of FY23 has more than doubled to $70.3 billion from $31.4 billion in the corresponding period in FY22.
“While some relief would be likely with India gradually diversifying its oil import with additional inbound shipments from Russia, we nevertheless expect risks of widening of trade deficit to materialise,” QuantEco Research said.