June trade deficit rises to 11-month high on gold imports

The recent spike in the import bill does not augur well for the Indian economy. Recent trade data released by the commerce ministry shows that India's import bill stood at $38.24 billion in June, up 8.33 per cent in dollar terms over the corresponding period last year. As a result, India's trade deficit expanded to $11.76 billion in June, the highest level since July last year.

The rise in imports is primarily led by gold purchases, which saw an annual increase of 65 per cent in June. Higher imports translate into wider trade deficit which, in turn, impacts the current account deficit.

A widening current account deficit forced the previous government of the United Progressive Alliance to raise import duty on the yellow metal.

The Reserve Bank of India also imposed curbs on gold imports. These curbs had prompted the gems and jewelry industry to raise its concern while gold smuggling also went up.

However, in May this year, the RBI eased gold import norms by allowing select trading houses to import the yellow metal.

Not just gold imports, India's oil bill also shot up by 10.9 per cent last month as compared to the same month last year - from $12.03 billion in June 2013 to $13.34 billion in June 2014.
 
After petroleum and crude products, gold is the second most imported item followed by electronic goods, machinery (electrical and non-electrical) and pearls and stones. In June last year, gold was the fifth most imported item.

The current account deficit, which dropped to $1.2 billion (or 0.2 per cent of GDP) in the January-to-March period from $18.1 billion in the corresponding period last year, will be a number to watch out for. A wide deficit can have multiple side-effects: high inflation, weak rupee, and a possible downgrade by global ratings firms.