Snow in Europe to Boost Oil Price, Widen India’s Trade Gap: Khullar.

India’s merchandise trade deficit the excess of imports over exports could be more than $135 billion in 2010-11, putting further strain on the current account, due to an expected oil price spiral caused by Europe’s extreme weather, commerce secretary Rahul Khullar told FE.

Khullar’s comment assumes significance since after the release of October data — which showed exports growing faster than imports for the first time in three years — the deficit for 2010-11 was re-estimated at a more comfortable $125 billion.

For every month between April and August this financial year, trade deficit stood between $10 billion and $13 billion, owing to the near flat month-on-month growth in exports. Export growth picked up in September and October.

Apart from goods trade, current account comprises remittances and invisibles (read the export income of IT firms). While the slow growth in global goods trade coupled with the rising import needs of India’s fast growing economy was leading to a widening of trade deficit, other credits to the current account net invisible earnings and remittances are also growing at a relatively slow pace this fiscal due to the fragile global economic recovery.

While this year’s current account deficit as a percentage of GDP is forecast by the Prime Minister’s Economic Advisory Council at “higher than 3%,” Goldman Sachs has predicted it to be 4.3%.

Oil imports account for 33% of India's import basket. According to Khullar, owing to the adverse climatic conditions in Europe, the worst since the early 20th century, oil prices could go through the roof. “Earlier, when we had predicted trade deficit to be at $125 billion (for the year) the caveat was oil prices. Look what has happened in just a week. Things have changed dramatically,” Khullar said. “Europe is freezing. The weather is very cold there and it is the driest patch they have had since early 20th century. This tells you that demand for oil will go though the roof which would hav9e an impact on oil prices,” Khullar said. Khullar warned that trade deficit numbers for the coming months could be much higher. “My guess is that trade deficit would be higher in November. I am more worried about how oil prices would behave two months from now because of the lag effect,” he added. Over the last one week, Europe has been subjected to one of the worst snow winter storms forcing flights and railways to a complete standstill. London's Gatwick airport the second busiest airport in UK after Heathrow was shut down for a day. Snowfall around UK has been 15-34 cm. In April-October, trade deficit has shot up 25% to $72.8 billion as against $58.31 billion in the same period last year. Oil imports during the period jumped 24.6% to $57.13 million from $45.87 billion in the corresponding period last year. In October, exports grew at an impressive 21.3% to $18 billion compared to far tardier growth for imports of 6.8% to $27.7 billion thereby narrowing the trade deficit to $9.7 billion during the month. Oil imports during the month was $8.4 billion up 0.3% from $8.3 in October 2009.

On Thursday, crude oil was trading around $87 per barrel. Director-general of industry chamber Ficci Rajiv Kumar said that though increased oil prices would have an impact on the trade deficit, he argued that alone would not be the only contributing factor. “Policy makers should start looking at non-oil imports. That will give a better a perspective,” Kumar said.

Source : indianexpress.com