The Narendra Modi government has initiated a number of structural reforms inrecent months. While these reforms are expected to benefit the economy in themedium to long run, they have created some short-term disruptions. Some of thesewere evident in India’s trade performance. India’s current account deficit (CAD)increased sharply to $14.3 billion, or 2.4% of GDP, in the first quarter of fiscal 2018.This is the highest deficit in four years. The culprit was merchandise trade deficit,which surged to $41.2 billion, compared with $23.8 billion in the first quarter offiscal 2017.

India’s exports put forth a modest growth of 4% in April-August 2017 in rupeeterms. While India’s exports have benefitted from stronger global trade growth inthe first half of 2017, growth has been much lower than other major Asianeconomies such as China, Vietnam and Indonesia. In addition, strengthening ofrupee and demonetization-led disruption appear to have contributed to the weakperformance of Indian exports. Higher value of rupee relative to other currenciesmakes Indian exports more expensive in the international market, therebydecreasing their demand. The Goods and Services Tax (GST), too, created transitoryheadwinds for exporters as the delay in refunds choked liquidity.

Imports, on the other hand, shot up by 23% in April-August 2017. While the highimport growth is partly a result of low-base effect, it is also the result of reversal ofkey trends, which had kept imports subdued in the past few years. Consumptioncontinues to be the key driver of domestic demand, leading to a rise inconsumption-related imports. Imports of industrial and investment-related goodshave also increased, though at a slower pace than consumption-related imports.Oil imports, not included in either of the above two categories, too saw a reversal intrend from April to August 2017 mainly because of rising Brent crude prices.Strengthening of rupee also contributed to the increase in the import bill. A part ofsurge in imports could also be due to the slowdown in domestic production onaccount of disruptions in local supply chain, first due to demonetization and thendue to the rollout of GST.

For India’s trade balance to improve, exports need to post a sustained growth in theremaining months of fiscal 2018. Additionally, improvement in trade balance iscontingent upon the pace of global economic recovery, valuation of rupee, andimport appetite.