– By Namrata Mittal
India’s goods trade deficit expanded to $30 billion in August 2024, the highest level in the past 10 months and notably larger than July’s deficit of $24 billion. For context, the average monthly trade deficit last year was $20 billion, while this year, we anticipated a figure of around $23 billion per month. This expectation stems from a modest recovery in exports, which has driven an increase in non-oil, non-gold imports. So far, our outlook has been accurate.
The critical question now is whether this spike is a one-off occurrence or if we need to reconsider our FY25 current account balance assumption of below 1% of GDP, as well as our balance of payments (BoP) estimate of $50 billion.
The higher trade deficit, up $6.1 billion from July, was primarily driven by a surge in gold imports, which rose by $7 billion. Gold imports are typically volatile, showing spikes every five to six months. The reduction in import duties introduced in the July budget may have prompted this sudden increase. While we expect this trend to continue for one or two months, we anticipate that gold imports will eventually stabilize around $3 billion per month, reflecting fundamental demand.
Merchandise exports remained flat at $35 billion, although this represents a 9% y-o-y decline due to a high base last August. Imports climbed to $64 billion in August, up 3% y-o-y compared to $57 billion in July (a 7.5% y-o-y increase). Non-oil, non-gold imports saw a slight increase to $43 billion in August, up 5.4% y-o-y, compared to $40 billion in July (6% y-o-y). Conversely, the oil import bill decreased to $11 billion from $14 billion in the previous month, against a run rate of $17 billion per month in the first half of 2024.
To summarize the August versus July trade dynamics: exports remained stable, oil imports decreased by $3 billion, and non-oil, non-gold imports increased by $3 billion, effectively offsetting the benefits from the lower oil bill. However, the rise in gold imports added $7 billion to the trade deficit. We view this as a one-off situation and maintain our forecast of a monthly trade deficit of $23 billion for FY25.
The services surplus held steady at $15 billion, reflecting a 10% y-o-y growth compared to 18% the previous month, which aligns with our FY25 expectations. Both service receipts and outflows have remained stable, averaging $28-30 billion and $14-16 billion per month, respectively, over the past year.
We are sticking to our FY25 trade deficit assumption of 7% of GDP (up from 6.8% in FY24), a current account deficit of $30-40 billion (0.8-1% of GDP), and a BoP surplus of $50 billion, down from $64 billion in FY24. Commodity prices are softening, which bodes well for India’s external account situation. While exports have shown slight growth in FY25, the RBI’s interventions have led to a gradual depreciation of the rupee over the past two years.
Significantly high trade deficit due to sharp spike in gold imports – It is most likely one off
India’s gold import spikes in August
Oil Import bill softens
(Namrata Mittal is a Chief Economist at SBI Mutual Fund.)
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