Trade deficit may have shrunk in Q1 FY20, but India must watch for these factors going ahead

Currency movement, crude prices and trade wars are few of the factors that may impact India’s trade deficit in the coming months, analysts said.

Even as the trade deficit narrowed in the last month, the economy needs to be watchful going ahead, analysts said. Currency movement, crude prices and trade wars are few of the factors that may impact India’s trade deficit in the coming months, they added. The trade deficit lowered to $15.28 billion in June from $16.6 billion in June 2018, the government data released on Monday showed. While exports declined by 9.71 per cent to $25.01 billion, imports too fell by 9 per cent to $40.29 billion in June 2019, the data showed.

“The YoY contraction in imports of items such as transport equipment, machinery and fertilisers should be viewed with caution, as they suggest that the underlying demand dynamics are weak. The increase in customs duty on gold may curtail imports in the next few months, which would modestly shrink the size of the trade deficit”, Aditi Nayar, ICRA said.

Any movement in crude oil prices, especially in relation with the USA-Iran standoff and shale production by the former along with the reaction of OPEC would be important to watch out for, CARE Ratings said. The continuation of Sino-US trade war and India’s stance on the American  imports is also imperative, it added.

“Overall growth prospects in the west. Presently signals sent by the Fed and ECB indicate that there could be slower growth than was expected which indicates less buoyancy in our exports,” it added. The movement in currency and its impact on the export competitiveness is also an important factor, the rating agency said.

“The increase in import duty on gold announced in the Budget should help to slowdown the growth of the metal though there can be a shift to the grey market,” CARE Ratings said.