Surging gold imports drive up India's June trade deficit to 11-month high

[July 16, 2014]  By Rajesh Kumar Singh

NEW DELHI (Reuters) - A surge in gold imports in June widened India's trade deficit to an 11-month high, adding to the uncertainty from global oil prices that could pile more pressure on its current account balance.

The trade deficit jumped to $11.76 billion last month from $11.23 billion in May, government data showed on Wednesday, boosted by a 65 percent annual rise in gold imports.

The bullion is India's second-biggest import item after oil and was one of the principal factors in putting it on the brink of a full-scale balance of payments crisis last year.

In a desperate bid to trim a gaping current account deficit, India last year increased import duties on gold and imposed a rule that required a fifth of all bullion imports be re-exported.

Those measures had crimped supply and pushed up premiums in the domestic market, sparking a rise in smuggling. However, a strong rebound in gold imports will likely mean the curbs stay in place for some time.

"The industry has been demanding for removal of curbs on gold imports but a high trade deficit in the backdrop of geo-political tension could make the government a little more wary," said Radhika Rao, an economist at DBS Bank in Singapore.

Finance Minister Arun Jaitley surprised bullion markets by keeping the import duty on gold and silver unchanged at 10 percent in his maiden budget last week.

Merchandise exports grew for a third straight month in June, helped by a pick-up in external demand and a weak currency, bolstering the outlook for an economy that is battling the longest sub-par growth in more than a quarter of a century.

Exports in June rose 10.22 percent from a year earlier to $26.48 billion, a slower pace than May but underlining a turnaround since March on improving global growth.

The data comes on the heels of a sharp drop in inflation and a strong rebound in industrial production, offering some cheer to Prime Minister Narendra Modi who swept to power in May on a promise to revive Asia's third-largest economy.

"The (trade) data shows a slow recovery in business confidence," said Rao.

Economic growth has been stuck below 5 percent for the past two years, weighed down by weak investments, tepid domestic and external demand, and high inflation and interest rates.

Concerns about global crude oil prices from unrest in the Middle East, however, remain a risk. A spike in crude prices will push up India's import bill and swell the trade shortfall, since the country imports nearly 80 percent of its oil.

Oil imports picked up in June, rising 10.9 percent on year to $13.34 billion from an annual increase of 2.5 percent a month ago.

(Reporting by Rajesh Kumar Singh)

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