India’s trade deficit widened to a five-year high in June, due to high crude oil prices. But while the high price of oil is certainly the villain here, let’s not lose sight of the rise in other imports, especially imports of electronic goods. The accompanying chart shows the non-oil, non-gold deficit, or non-oil exports minus non-oil and non-gold imports, has been moving up in recent months.
Note that we had a surplus on this metric in early 2014, as the chart shows. With the economy improving and once investment demand revives, imports of project goods will increase this deficit.
That underscores the importance of increasing exports, but unfortunately, given the rise of protectionism, that’s easier said than done.Reserve Bank of India has recently drawn attention to the deterioration in state finances. The spectre of twin deficits is once again hovering on the horizon.