Current account deficit widening by 40 bps for every 10 per cent increase in crude prices.
Mumbai: Trade deficit has ballooned to USD 88 billion between April and October, up 60 per cent from the comparable period a year ago due to weak exports and a sharp rise in imports, says a report.
"The problem is two-fold; weak export growth of 9 per cent year-on-year, coupled with a sharp 23 per cent rise in imports during the April-October of this fiscal year, taking the overall trade deficit to USD 88 billion, which is up 60 per cent year-on-year," Singaporean brokerage DBS said n a report on Wednesday. But the report expects exports to pick up once the GST-driven distortions subsided, but it warned that the traditional product mix will hinder its ability to participate in the ongoing trade upturn."
The composition of the export basket, even if well- diversified, has prevented the economy from benefiting from the upturn in the regional export cycle this year, it noted.
The upturn is largely led by electronic shipments, including semi-conductors and consumer electronics, which makes up less than a tenth of exports. Instead, two-thirds of the basket comprises traditional product groups, including gems and jewellery, pharma, textiles, engineering goods, food, and fuel.
Further, GST-related uncertainty and the effect of duty-drawback have added to the headwinds, the report noted. Imports, on the other hand, will be influenced by the rising crude prices, even as supply-chain disruptions ease in the second half, it added.
Oil imports quickened by 20 per cent till date from last financial year's 12 per cent. Demand for other commodities also remained strong, the report noted.
"Looking ahead, we expect the lift in imports from GST-related uncertainties to be ironed out by policy fine- tuning and relief measures," the report said.
But the report warns that lower exports and higher imports spells trouble for the current account deficit.
"Oil prices will be watched closely, given its potential to elevate crude imports and pressure the trade deficit," it noted.
Brent crude prices for this financial year have so far averaged USD 53 a barrel against USD 50 last financial year.
"If this rises to USD 58-60 a barrel, trade deficit is likely to widen by 40 per cent and weigh on the current account. Our analysis shows the current account deficit widening by 40 bps for every 10 per cent increase in crude prices," the report warned.
It, however, noted that as demonstrated by recent market volatility, "the country must reassure investors that a wider current account deficit does not necessarily imply pressures on the balance of payments."
Foreign direct investment trends in the fiscal have been encouraging, with the run rate in April-September more positive than in the comparable period last year, it said.