Gold imports trigger spike in trade deficit

India’s merchandise trade deficit nearly doubled in February compared to year-ago levels, following a sharp 50 per cent expansion in January, partly driven by a multi-fold rise in gold imports during these months.

Rising commodity prices, according to ICRA, are expected to increase the landed cost of imports in the ongoing month. However, import volumes of some items may be constrained due to disruptions arising from the West Asia conflict.

The strong growth in trade flows suggests that the usual seasonal improvement in the current account balance may not materialise in Q4.

The goods trade deficit narrowed to $27 billion in February, aided by a decline in precious metal imports. Total imports fell 11 per cent month-on-month, while exports remained flat. Increased exports to the US were supported by the interim India–US trade deal, though they remained 7 per cent lower during September–February. While the lower US tariff of 10 per cent is expected to support exports going forward, risks remain if the Iran crisis escalates. Despite easing to $27 billion, the deficit remained higher than estimates. Total goods exports currently stand at $403 billion, while imports have risen 9 per cent annually to $714 billion, even as oil imports declined to $162 billion. As a result, the cumulative goods trade deficit stands at $311 billion.

Core imports declined 5 per cent month-on-month to $42 billion, while core exports were flat at $30.5 billion, bringing the core deficit down to $11.1 billion. So far, core exports are at $326 billion, while core imports stand at $471 billion.

Sectoral trends remain mixed in tariff-affected segments. Gems and jewellery exports declined 3 per cent, while textile exports fell 1 per cent. In contrast, marine product exports continued to show strong growth. Among major categories, electronics remains a key growth driver, followed by drugs and pharmaceuticals and engineering goods.

Exports to the US rose 4 per cent to $79 billion, supported by the interim trade deal. However, an unfavourable base may weigh on growth in the coming fiscal, according to Emkay.

Export growth has also been driven by shipments to Spain, China, Hong Kong, Vietnam and the UAE following tariff changes. While such diversification is positive, lower US tariffs may shift export momentum back toward the American market.

Meanwhile, the services trade surplus rose to a record $21.5 billion in February. Overall services surplus stands at $201 billion, with gross exports growing 10 per cent.

While services exports have remained resilient, they may face headwinds next fiscal if global growth weakens due to a prolonged Iran crisis.