Why has the trade deficit widened so sharply for month of December 2020?

For the month of December 2020, the Indian economy recorded growth in exports and imports. Here are some of the key highlights for the month.

· After a long gap, there was positive 7.56 growth in imports on a year-on-year basis as imports scaled above the $42.50 billion mark for Dec-20.

· The merchandise trade deficit touched a 25-month high of $15.44 billion in Dec-20, more than 50% higher compared to $9.87 billion in November of 2020.

· Exports saw marginal growth of 0.14% in Dec on a yoy basis but sequential growth was very sharp at $27.15 billion for the month of Dec-20.

· The big boost to exports came from sectors like pharmaceuticals, electronics, and gems and jewellery exports. However, oil exports continued to decline.

· Actually, if oil and gems and jewellery were removed from the export basket, then outbound shipments would have grown by 5.5% to $22.22 billion in Dec-20.

· The sharp pick-up in exports in the month on a sequential basis by over 15% can be largely attributed to the pick-up in manufacturing and better health of MSMEs.

· While higher crude prices were partially responsible, the trade deficit was driven higher by a surge in non-oil imports on the strength of pent-up demand.

· If you consider the 9-month period of this fiscal, then exports were lower by 15.73% at $200.80 billion compared to $238.27 billion in the corresponding period last year.

· However, the EEPC has cautioned that exporters continued to face headwinds of extreme nature as major economies were in the midst of a demand recession.

· On the services front, the estimated value of services export was $17.31 billion, while that for imports was $10.32 billion.

· The only apprehension is that due to the sharply higher trade deficit, the current account surplus could sharply reduce below $2 billion in Q3 from $15.5 billion in Q2.