Record Gold Imports Inflate India's Trade Deficit

India's merchandise trade deficit widened to a record high in November, driven by a surge in gold imports and a decline in exports, reports Reuters. The deficit reached $37.84 billion, significantly exceeding economists' forecasts and more than doubling October's figure of $27.14 billion.

The widening trade gap is attributed primarily to a record $14.8 billion in gold imports, more than double October's figure. This surge is attributed to a confluence of factors, including falling global gold prices in November, which incentivized importers to build up inventories, and a sustained rise in domestic demand fueled by weddings and festivals.

"Gold imports have been a major culprit in the overshoot of trade deficit, having seen nearly 50% increase year-to-date vs last year," said Madhavi Arora, chief economist at Emkay Global Financial Services, to Reuters. "Both the consumption and investment demand for gold have increased, while the global price of gold has also risen materially this year versus 2023."

While the July reduction in the gold import tariff to 6% has contributed to increased demand, the government also points to the usual festival and wedding season, as well as the perception of gold as a sound investment in times of uncertainty.

Meanwhile, merchandise exports fell 4.9% year-on-year to $32.11 billion in November, primarily due to a decline in petroleum product exports, which fell nearly 50% to $3.7 billion. This is attributed to the fall in global crude oil prices. Despite this, the government remains optimistic about non-petroleum exports and services, with a projected $800 billion in total exports for the current fiscal year.

"The merchandise exports have taken a hit mainly due to a fall in global crude prices," said Sunil Barthwal, India's commerce secretary. "While crude oil imports in November rose 7.9% year-on-year to $16.1 billion, driven by domestic demand, export of petroleum products fell nearly 50% to $3.7 billion."

The widening trade deficit is expected to exert pressure on the rupee, which hit a record low on Monday.