Coal is the new pain point as India grapples with a massive import bill

Quite low in the pecking order of inbound consignments at one point, the fossil fuel today accounts for a third of the value of crude entering the country

It begins with oil, spreads to gold and then sweeps in coal and electronics item. This is how the tension in the Indian imports plays out whenever there is a surge in the past, or now. 

There are other commodities for sure whose imports spike, but their volumes are always far lower than the top grossers, crude and petroleum products, gold, coal and electronic items. These items have accounted for half the share of India’s total imports. So any spike by one of them has usually brought grief to India’s trade deficit, spilled over to the larger current account deficit and then threatened to destabilise the balance of payments.

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So in other episodes like the global financial crisis of FY08-09 or the taper tantrum of FY13 through FY15, even if the imports of other items have risen to the top spot, they have been dwarfed by the scale of these mega five items. In the crisis of FY09, the top spot in terms of growth rate was occupied by fertilisers and in the next one, edible oils. While those captured headlines, the damage came from this inflexible set. 

This time too, the top spot in terms of growth rate has been captured by crude, which isn't surprising. If one adds petroleum products, the rise is even more pronounced. Following them are vegetable oils or edible oils and then coal. Here again, the size of import basket of edible oil is half that of coal. Electronic items are also bigger than edible oils and gold imports dwarf all of them. 

Fossil fuel imports--Coal

The thing to note is that in just two months of the current financial year, this pecking order has changed massively but only to offer the lead to coal. Coal imports have moved to the top of the shelf with a jump of 159.03 per cent, far outstripping that of crude at 98.82 per cent. 

What does it say in terms of relative value? Coal imports have usually clocked a tenth of the value of crude in any year. They are now a third of the value of crude. Of course, there are two exceptional factors. The price of a tonne of coal in the international markets has shot up, and in this financial year, India has been importing Russian crude accounting for almost 20 per cent of its total import volume. 

Together they have brought down the distance between coal and crude in the Indian import basket. “We estimate that, at a contracted price of $70 per barrel, the annual fuel import bill for 2022 could be $8 billion lower than our baseline if Russia's share of Indian oil imports averages around 20 per cent in the coming months,” wrote Priyanka Kishore, Head of India and SEA Economics at Oxford Economics in a note this week.

For the government, therefore, this makes life a tad difficult. When non-oil imports rose earlier, there was scope to put punitive duties on them and reduce the gap in the trade deficit. For instance, following the old template, the same step was taken this time to cut down the import of gold. 

Yet, while gold was the second largest item entering India last year, its imports grew much more slowly than electronic items, vegetable oils, coal and organic chemicals. Gold imports took only the ninth rank, behind these items. It had hardly ceded the second to fourth position in the import pecking order in the last decade, in terms of growth rate. So the delta that will be captured by the government is extremely low on additional gold imports. In April and May of this financial year, the relative rank of gold in India’s basket of top-ten commodities has got pushed back to 10th spot. 

In FY15, for instance, the third fastest rise in imports was of telecom instruments, essentially mobiles. These were, almost like gold, of little use as value addition in the economy. They met the pent-up demand for imported mobiles. The government faced a choice of either banning them and promptly spurring the development of a huge market for the pirated products, or letting the imports continue and risk the worsening of the trade deficit. Telecom instruments import (as the table shows) was almost catching up with that of coal. It has now slipped to tenth position. 

The picture of imports as the economy swam through repeated current account problems in the wake of the global financial crisis or in the taper tantrum wasn’t pretty. The key imports to rise other than crude oil and coal were pearls and semi precious stones, manufactured fertilisers, gold and iron and steel. Their scale of imports were all evidences of an economy with significant gaps in its domestic production process. 

Imports of intermediates have risen

This time around the picture is far better. Other than coal, it is the import of electronic components and organic chemicals that are growing faster. This is a better news for the economy. Imports of both these items help to boost demand in the economy for value addition. So the imports indicate a sweet spot developing for the Indian economy. “Production of mobile phones in India has taken a leap after the government introduced the Phased Manufacturing Programme (PMP) and the Production Linked Incentive (PLI) scheme, reducing the country’s imports and dependency on China,” wrote the lead author of a Crisil report for the sector, Aniket Dani. His report adds that after logging a 33 per cent compounded annual growth rate between fiscals 2016 and 2021, domestic mobile production is estimated to have grown at an even healthier pace of 24-26 per cent in fiscal 2022.

So while there will be challenges, the foreign trade sector seems far more stable now, compared to the episodes of the past two crises. Kishore writes that assuming a monthly oil import volume of 20 million tonnes as growth returns to the economy, and India imports around 20 per cent of this from Russia at an average price of $70 per barrel, then the total fuel bill for 2022 will be “$8 billion lower than our current baseline and the current account deficit will be at 2.8 per cent of GDP, rather than our forecast of 3.1 per cent”.

As the current data shows more than oil, as demand for coal shoots up even further in the economy, these numbers could remain elevated, despite some clear improvements in the type of items imported.