Indians are buying less gold and electronics— and that's helping the economy

• India’s imports fell in December 2018, for the first time in over two years
  
• The fall in imports of gold and electronic items has been significant
  
• As a result, India’s trade deficit shrank, taking pressure off India’s currency and forex reserves.

In December 2018, India’s imports recorded a year-on-year decline for the first time since September 2016, according to official estimates released from the Ministry of Commerce and Industry. Overall imports in the month fell marginally to $41 billion from $41.9 billion in December 2017 and $43.1 billion in November 2018.

The reduction in the country’s import bill is good for a developing economy like India, which is dependent on imports for some necessary items like oil. The recent/steady weakening of the rupee had made these imports even costlier.

Despite falling on a monthly basis since November 2018, oil imports showed a year-on-year increase of 4% to $10.3 billion.



However, as the cost of essential imports like oil rose, Indians’ demand for discretionary items like gold, jewellery, and electronics fell.

India’s gold imports have been declining for a while now. They fell by 24% year-on-year to $2.6 billion in December 2018, capping an overall decline of 7% to $24.8 billion in the April-December period.

While this can be attributed to a number of factors, the most prominent one is high domestic prices (following the depreciation of the rupee) which has caused rural demand to plummet. As people in rural areas like smallholder farmers lack access to formal banking channels, they usually invest in gold.

Positive impact on trade deficit

This is good for the Indian economy, which has been currently struggling to boost its exports in the absence of global demand. Rising imports and falling exports erode the country’s foreign exchange reserves and weaken the local currency further.

Last month, India’s exports rose marginally to $27.9 billion on a year-on-year as a decline in exports of agricultural commodities like coffee and oilseeds as well as jewelry and engineering inputs were countered by a rise in outbound shipments of petroleum products and chemicals.

Despite the negligible growth in exports, India’s trade deficit declined to its lowest point since February 2018, thanks to falling demand for gold and electronics, both of which India imports in very high quantities, India’s trade deficit declined. The appreciation of the rupee also helped India’s trade balance.

The trade deficit, which measures the difference between imports and exports, had surged in the middle of 2018 owing to higher prices of oil, which in turn, battered the rupee. India imports 80% of its domestic oil requirements.

The shrinking deficit will make the country’s finances less vulnerable to global shocks as it heads into election season.

The downward trend the trade deficit is expected to continue amid election uncertainty, global trade tensions and declining export growth from one of India’s largest trade partners, China. India’s current account deficit was originally expected to increase to 2.8% of GDP by the end of 2019 from 1.9% at the end of March 2018.

However, final estimates will likely be lower than this. As a result of falling oil prices, at the end of November 2018 the State Bank of India, predicted that the current account deficit would come in at 2.6% of GDP instead.

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