From crude to coal, energy imports weigh on India’s trade balance

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India’s trade deficit hit its highest level on record in June, at $25.6 billion, as imports soared to $63.6 billion. The biggest challenge for India’s external account comes from energy imports, from crude oil to coal, trade data showed.

Petroleum and crude oil imports amounted to $20.7 billion, registering a growth of 94.2% year-on-year and 8% month-on-month. These imports accounted for 32.6% of all merchandise imports in June. Imports of coal, coke and briquettes also hit a record high of $6.4 billion, up 241.8% year-on-year and 18.3% month-on-month. This category now accounts for one-tenth of all merchandise imports.

Together, these items accounted for 42.7% of India’s merchandise imports, up from 29.8% at the same time last year.

The increase in the energy import bill is entirely due to an increase in prices, even though import volumes have fallen, said Ritabrata Ghosh, vice president of corporate ratings and industrial research at ICRA Ltd. average of the past 10 years, Ghosh said.

Imported coal-fired power plants had imported coal over 45 metric tons per year from 2016-17 to 2019-20. That figure fell to 18.89 metric tons in 2021-22, according to a press release from the Ministry of Coal in June. Also this year, the production of imported coal-fired power plants remains very low due to the high price of imported coal, he added.

With world prices still high, an alleviation of the coal import bill is not likely in the coming months.

The problem is expected to continue to persist in the July-September quarter, Ghosh said, adding that any relief will depend on how quickly Coal India Ltd. will be able to increase production.

Total national coal production in the April-June quarter was 205.6 metric tons, 31.9% higher than a year ago, according to monthly statistics from the Ministry of Coal.

“We don’t see a significant drop in prices and a return to pre-pandemic price levels seems unlikely,” Ghosh said. Sanctions on Russia, how the ongoing conflict in Ukraine unfolds and the time for readjustment that follows will determine the trajectory of coal prices around the world, he said.

The crude oil import bill also depends on world prices. Overnight prices fell sharply as fears of a US recession took hold. Still, prices remain close to $100 a barrel. Oil prices are expected to hold steady at higher levels, said Indranil Pan, chief economist at Yes Bank.

The high energy import bill will widen India’s current account deficit. A note from QuantEco Research forecast a current account deficit for FY23 at $105 billion, up sharply from $39 billion in FY22. Yes Bank pegs it at 2.6-3.2 % of GDP for FY23, with oil prices averaging between $100 and $120 a barrel.

The dichotomy on foreign trade continues to appear austere with a risk of global stagflation clouding the economic outlook, QuantEco Research said in its note. On the one hand, the signs of moderation in global economic activity are multiplying. On the other hand, international commodity prices remain high due to the Russian-Ukrainian conflict and persistent supply disruptions of some commodities.

Both of these factors are negatively impacting India’s trade deficit, which in the first three months of FY23 more than doubled to $70.3 billion from $31.4 billion in of the corresponding period of financial year 22.

“While some relief is likely with India gradually diversifying its oil imports with additional shipments from Russia, we nevertheless expect the risks of a worsening trade deficit to materialize,” QuantEco said. Research.

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