No alarm over trade deficit surge; US tariff relief to offer support

India’s goods trade deficit widened sharply to about USD 35 billion in January, driven largely by another price-led spike in gold and silver imports. Total imports rose to USD 71 billion, while exports declined to USD 37 billion. Core imports also fell during the month.

January marked the final month impacted by the nearly 50 per cent US tariff on Indian exports, which is expected to be pared to 18 per cent this week.

Recent trade deals are likely to support US-bound exports in the near term. Several tariff-hit export sectors have already posted better-than-expected growth, aided by higher shipments to China and other Asian markets. Meanwhile, the services trade surplus rose to a record USD 24.3 billion in January.

Core imports declined, but core exports also softened, resulting in a modest increase in the core trade deficit to USD 13.3 billion.

Textile exports recorded near-flat growth, while marine product exports continued to perform strongly. Among major export categories, electronics remained the fastest-growing segment, followed by drugs and pharmaceuticals and engineering goods.

Exports to the US rose 6 per cent to USD 72 billion so far this fiscal. According to Emkay, the recent India–US trade deal is expected to provide a significant boost to exports once the headline tariff rate is reduced to 18 per cent.

However, volatility is likely to persist, particularly around precious metals prices and the final contours of the trade agreement.

The merchandise trade deficit widened materially to USD 34.7 billion in January, owing to a sharp expansion in goods imports and muted 0.6 per cent growth in exports. Nearly 83 per cent of the year-on-year increase in the deficit was attributable to higher gold imports.

Despite expectations of a healthy services surplus, the unusually large merchandise trade deficit in January could limit the size of the current account surplus in Q4, unless trade numbers for February and March moderate, according to ICRA.

Overall, the goods trade deficit climbed to a three-month high of USD 35 billion. Total goods exports stand at USD 366 billion, while imports have risen 7 per cent so far to USD 650 billion, even as oil imports remain subdued. Consequently, the cumulative trade deficit has reached USD 283 billion.

US President Donald Trump recently indicated that tariffs on Indian goods could be cut to 18 per cent from 50 per cent, a move that would provide substantial relief to exporters and policymakers. The proposed reduction follows India’s decision to curb Russian oil purchases and more than double its annual imports from the US.

A trade delegation is expected to travel to Washington shortly to finalise the agreement. An Indian delegation led by the chief negotiator will visit the US this week to advance discussions.

Work is underway to convert the joint understanding into legally binding language, the commerce secretary has said, adding that the proposed mini trade deal could be finalised by the end of the fiscal year.