Trade deficit widens to $23 bn in January amid rupee weakness, rising imports

By: Shantanu Bhattacharji

A sliding rupee, down 1.4% against the dollar this year, is adding to trade pressures. The depreciation is inflating import bill, particularly for crude oil, as India depends on overseas markets for 90% of its energy needs.

India’s trade deficit widened to $22.9 billion in January from $21.94 billion in December, as a weakening rupee drove up the import bill. For the April-January period of this fiscal, exports edged up 1.39 per cent to $358.91 billion, while imports rose 7.43 per cent to $601.9 billion.

Trade Secretary Sunil Barthwal remained upbeat, highlighting robust growth in merchandise and services exports. He noted that electronics are leading the surge, followed by strong demand for drugs, pharmaceuticals, and rice.

January’s merchandise exports totalled $36.43 billion, down from $38.01 billion in December. Imports stood at $59.42 billion, slightly lower than December’s $59.95 billion. Services exports surged to $38.55 billion from $32.66 billion in December, while services imports climbed to $18.22 billion from $17.50 billion.

Gold imports fell sharply to $2.68 billion from $4.7 billion a month earlier, while crude oil imports declined to $13.4 billion from December’s $15.2 billion, data showed.

S&P Global Ratings on February 18 affirmed India’s consistent track record of meeting revenue and fiscal deficit targets, stating that its fiscal outlook aligns with the Union Budget projections for FY26. Speaking at a webinar, the rating agency’s economists described India’s revenue targets, including the anticipated higher dividend from the Reserve Bank of India (RBI), as realistic.

Before unveiling the budget, the Centre has engaged in close talks with the central bank to determine the dividend payout for the year, aiming to bolster fiscal resources. The finance ministry is targeting a fiscal deficit reduction to 4.4 per cent of GDP in FY26, down from the revised estimate of 4.8 per cent for FY25.

Notably, January trade deficit of $22.9 billion came in slightly higher than economists’ expectations of $22.35 billion, as per a Reuters poll.

A weakening rupee has compounded trade pressures. The currency has depreciated 1.4 per cent against the dollar since the start of the year, inflating the import bill for a nation that depends on overseas markets for 90 per cent of its oil needs, Bloomberg reported.

Experts are of the view that a weakening rupee inflates import bill, as importers pay in dollars. This pushes up costs for essential imports such as edible oils, pulses, fertilisers, and, most significantly, crude oil and gas. However, a weaker currency can boost export competitiveness by making Indian goods cheaper abroad while shielding domestic manufacturers from cheap imports. Sectors heavily reliant on imports—such as energy, electronics, chemicals, and transportation—face rising costs, potentially squeezing margins and profitability.

The Centre is charting a path to fiscal consolidation, aiming to trim the deficit to 4.4 per cent of GDP by FY26. The strategy hinges on capping revenue expenditure at 11 per cent of GDP, sustaining capital outlays at 3.1 per cent, and pushing gross tax revenue to 12 per cent, the RBI’s latest report has mentioned.

Debt levels are expected to ease, with outstanding government debt projected to decline to 56 per cent of GDP in FY26 from 57.1 per cent in FY25. Over the long term, policymakers are eyeing a central government debt-to-GDP ratio of 50 ±1 per cent by March 2031.

The challenge lies in execution—balancing fiscal prudence without stifling growth. A stable tax base and disciplined spending will be key to ensuring that consolidation doesn’t come at the cost of investment and economic momentum.

Economists say that India remains highly vulnerable to US President Donald Trump’s push for reciprocal tariffs, a move that could disrupt its export-driven sectors.