Key Takeaways:
- Record surge in India's trade deficit driven by gold imports.
- Declining exports add pressure on the trade balance.
- Gold imports expected to cool, but trade deficit may remain elevated.
Details:
Data from India's Commerce Ministry indicates that the country's trade deficit widened to a record $41.68 billion in October, propelled by a staggering 199.2% year-on-year surge in gold imports, reaching $14.72 billion. This figure significantly surpasses market expectations of a $28.8 billion deficit and represents a 60% increase compared to the $26.22 billion deficit in the same period last year, and a substantial 29.6% climb from September's $32.15 billion.
As the world's second-largest gold consumer, India witnessed a surge in gold imports in October, with import value skyrocketing from $4.92 billion in the prior year to a record $14.72 billion. This accounts for 19.35% of the total merchandise imports of $76.06 billion, making it the primary driver behind the all-time high import figure.
The import sources are highly concentrated, with Switzerland being the largest supplier, contributing 40% of total gold imports. Swiss gold exports to India soared by 403.67% year-on-year to $5.08 billion in October. The United Arab Emirates (UAE) (over 16% share) and South Africa (approximately 10%) followed. Simultaneously, silver imports also jumped by 528.71% year-on-year to $2.71 billion.
Domestic gold prices in India are currently hovering around 129,000 rupees per 10 grams (approximately $1,540 USD). However, this high price has not dampened demand; rather, it has fueled import volumes due to the festive season. In the first seven months of the current fiscal year (April-October), India's gold imports totaled $41.23 billion, a 21.44% increase compared to the $34 billion in the same period last year.
India observed a five-day traditional festive season in October, during which consumer demand for gold purchases was strong. It is estimated that gold purchases during the festive season amounted to $11 billion, directly driving the surge in imports. Gold holds significant symbolic importance in Indian culture, with gold purchases during the festive season being a traditional custom used for decoration, gifting, and preserving asset value.
Indian Commerce Secretary Rajesh Agrawal explained that high gold prices in the first half of the year resulted in the market demand not being fully met. Gold imports decreased by 25% year-on-year in the first six months. After the arrival of the festive season in October, accumulated demand was released intensively, driving a substantial rebound in imports.
International gold prices have increased by over 50% this year, and although there has been a slight recent correction, they remain at historical highs. Indian investors view gold as an important tool to hedge against inflation and currency depreciation, and increased allocation of gold has also driven import growth.
Export Decline Exacerbates Trade Deficit Pressure
The explosive growth in gold imports, coupled with the most severe contraction in exports in 14 months, has amplified India's trade deficit. India's merchandise exports decreased by 11.8% year-on-year to $34.38 billion in October, the lowest level in 11 months, mainly due to US tariffs and the high base effect.
After the United States imposed high tariffs of 50% on various Indian products, Indian exports to the United States declined for the second consecutive month. Export value in October decreased to $6.3 billion, a decrease of 8.6% compared to the previous year. Exports to other major trading partners such as the United Arab Emirates (-10.2%), the Netherlands (-22.75%), and the United Kingdom (-27.16%) also declined. In particular, exports of gems and jewelry decreased significantly by 29.5%, a sharp contrast to the surge in gold imports.
ICRA Chief Economist Aditi Nayar pointed out that both oil and non-oil exports experienced double-digit contraction. The decline in non-oil exports is mainly due to the high base effect and the holiday, while the decline in exports to the United States directly reflects the impact of tariffs.
Gold Imports May Cool, but Trade Deficit Could Remain Under Pressure
Although gold imports hit a record high in October, institutions predict that import volumes will gradually decline in the future. Nayar said that as the festive season ends, gold imports are expected to decline month-on-month in November and December, and the trade deficit will decrease slightly from its peak in October. However, the ratio of the current account deficit to GDP in the third quarter of the current fiscal year will expand from 1.8% in the second quarter to 2.4%-2.5%.
Federation of Indian Export Organisations (FIEO) President S C Ralhan added that the global economic slowdown, geopolitical uncertainties, and commodity price volatility will continue to suppress export recovery. Although exporters have shown some resilience, high logistics costs and input price volatility still constrain competitiveness.
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