MUMBAI: Tariff woes and the resultant fall in exports, coupled with the sharp depreciation of the rupee, will push up the deficit in the current account balance—a measure of export earnings versus import bills—in the September quarter. The deficit may print in at 1% of GDP or $10 billion, which will be a three-quarter high, says a report.
During the first two months of the second quarter of the current fiscal, exports did not fall very badly primarily due to front-loading of shipments ahead of the August tariff deadline. While merchandise exports rose 7.3% to $37.24 billion in July, driven by engineering goods, electronics, and gems and jewelry, imports surged 8.6% to $64.59 billion, primarily due to increased crude and gold purchases, widening the trade deficit to an eight-month high of $27.35 billion.
However, come August, the trend reversed with merchandise exports growing 6.7% to $35.1 billion, while imports fell by a steeper 10.1% to $61.59 billion, narrowing the trade deficit to $26.49 billion. Key drivers for export growth included electronics, engineering goods, and pharma. Lower deficit was primarily because of a significant 56% fall in gold imports.
According to India Ratings, the current account balance will remain in a deficit of around $10 billion or 1% of GDP in Q2. In Q1, the deficit was only $2.4 billion or 0.2%.
The current account is in deficit when import payments exceed export earnings. The deficit was $8.7 billion or 0.9% in Q1FY25 but was in surplus of $13.5 billion in Q4FY25 (1.3%).
Because of the 50% US tariff, which was the single largest trading partner of India in FY25 with around $90 billion in two-way trade, the agency expects merchandise exports to moderate to a three-quarter low of around $110 billion in Q2 but merchandise imports on the other hand are expected to increase to around $189 billion.
“Overall, the goods trade deficit will decline 5.9% to around $78 billion in Q2FY26. While goods trade activity has fared relatively well, the impact of the unprecedented global uncertainty has been felt on the services activity even though they are outside the tariffs," it said. As a result, it expects the services trade surplus to increase to around $50 billion in Q2, up from $47.9 billion a year ago.
In Q1, merchandise exports were down 2%, due to a combination of a high base effect (Q1FY25 at 9.8%) and weak demand from key exporting partners such as the European Union, UK, Singapore, Bangladesh, Saudi Arabia and Australia. Goods exports stood at $111.8 billion in Q1, moderating from a four-quarter high of $115.3 billion in Q4FY25.
The top 10 items which pulled up goods exports in Q1FY26 were telecom instruments, gold and other precious metal jewelry, electric machinery & equipment, motor vehicles, marine products, electronics components, drug formulations, biologicals, ready-mades, electronic instruments, and iron & steel products.
Merchandise imports grew 4.8% in Q1, down from 7.6% a year ago, to $180.3 billion. The top 10 imports were residual chemicals and allied products, electronic components, telecom instruments, silver, industrial machinery, electric machinery & equipment, bulk minerals & ores, auto components, engineering items, and accumulators & batteries.