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India’s trade deficit hits 11-month high on gold import

India last year increased import duties on gold and imposed a rule that required a fifth of all bullion imports be re-exported.

A surge in gold imports widened India’s trade deficit to an 11-month high in June, adding to the uncertainty from global oil prices that could pile more pressure on its current account balance.

The trade deficit swelled to $11.76 billion last month, its highest level since July 2013, after a central bank decision to ease tough gold import rules led to a 65 per cent annual rise in overseas purchases of the yellow metal.

A voracious appetite for gold among Indian consumers has made the bullion the country’s second-biggest import item after oil and was one of the principal factors in putting it on the brink of a full-scale balance of payments crisis last year.

In a desperate bid to trim a gaping current account deficit, India last year increased import duties on gold and imposed a rule that required a fifth of all bullion imports be re-exported.

While those measures had dramatically reduced gold imports and improved the current account balance, they also pushed up premiums in the domestic market, sparking a rise in smuggling.

But a strong rebound in gold imports could mean the curbs stay in place for some time as the country’s overall import bill is expected to rise on the back of an improvement in investment and consumption activity, adding to the trade shortfall.

“The industry has been demanding for removal of curbs on gold imports but a high trade deficit in the backdrop of geo-political tension and a recovering investment environment could make the government a little more wary,” said Radhika Rao, an economist at DBS Bank in Singapore.

Finance Minister Arun Jaitley surprised bullion markets by keeping the import duty on gold and silver unchanged at 10 per cent in his maiden budget last week. A jump in overseas purchases of gold along with a revival in demand for iron and steel helped imports post an annual growth of 8.33 per cent in June, their first rise in 13 months.

Analysts reckon a recovery in imports will likely worsen the current account deficit this fiscal year. Rao, for example, expects the deficit to hit 2.6 per cent of gross domestic product, sharply higher than 1.7 per cent last year. Merchandise exports, meanwhile, grew for a third straight month in June, helped by a pick-up in external demand and a weak currency, bolstering the outlook for an economy that is battling the longest sub-par growth in more than a quarter of a century.

Exports in June rose 10.22 per cent from a year earlier to $26.48 billion, a slower pace than May but underlining a turnaround since March on improving global growth.

Economic growth has been stuck below 5 percent for the past two years, weighed down by weak investments, tepid domestic and external demand, and high inflation and interest rates.

However, poor monsoon rains this summer could hit farm exports and slow down overall export growth. The waning of a favourable statistical base and a relatively stable currency are also expected to weigh on the sector.

“Export growth is expected to be moderate in the coming months,” said Aditi Nayar, senior economist at rating agency ICRA.