InvestorQ : With a record trade deficit in the month of July 2022, should India worry about its current account deficit?
Arya Nanda made post

With a record trade deficit in the month of July 2022, should India worry about its current account deficit?

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Anjana Aiyar answered.
2 months ago
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In one word, the answer is yes. India and Indian policy makers should be worried by the burgeoning trade defcit and the likely impact on the current account deficit. We don’t yet have the final trade deficit number but we do have the preliminary estimaters put out by the Minsitry of Commerce. Trade deficit for July 2022 is estimated at $31.02 billion and is a literal shocker, with deep implications. This is on the back of exports trending lower, while the imports of goods have remained absolutely flat.

Let us turn to how the trade panned out in July 2022. For the month, exports fell on a sequential basis due to supply chain constraints. In addition, the fears of recession also impacted exports. However, imports were not too much impacted during the month. There was not much of respite on crude, coal and fertilizer imports. As a result, impact of commodity inflation on trade deficit actually got amplified. While these are preliminary numbers, the actual numbers have only been worse than estimates.

For the first 4 months of FY23, total trade deficit has crossed $100 billion. This is in contrast to $189 billion in the whole of FY22. A simple extrapolation would peg the trade deficit at closer to $300 billion for the full year FY23. Surprisingly, the trade deficit is rising at a time when commodity prices are tapering globally. Higher trade deficit means that India is importing inflation from the rich nations. Monthly imports are rising; not on volumers but on value. India is absorbing a lot of global inflation and that is unnecessary.

However, the real issue is the likely impact on the current account deficit. Of trade deficit gets closer to $300 billion for FY23, then the current account deficit for FY23 would be around $160 to $170 billion. That would be anywhere between 4.8% and 5.2% of GDP, surely a scary scenario. In 2013, current account deficit had crossed 5% leading to a surge in FPI outflows from debt and a 20% fall in the rupee. The CAD is again approaching the 5% range. The impact on the rupee and on ratings could pose nightmares for India!

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