The emerging stress in imports: Surprisingly, it's coal more than oil

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

There are other commodities whose imports spike, too, but their volumes soon fade away in the pecking order behind the top grossers. These top ones are crude and petroleum products, gold, coal and electronic items. They are like an In-Famous Five, which account for half the share of India’s total imports in any financial year. 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. In other words, even if the growth rate of imports of other items temporarily becomes the highest, their overall value is dwarfed by the volume of these mega five items (measured in US dollars).

This trend was similar in the earlier episodes of stress in the Indian current account. For instance, check out the global financial crisis of 2008-09 or the taper tantrum of FY13-15. In FY09 import of fertilisers rose the fastest in terms of growth rate. In FY14, that of edible oils grew the fastest. Naturally, those growth rates captured the news headlines. For instance, in FY15, the third fastest rise in the pace of imports was of telecom instruments, essentially mobiles. These were, almost like gold, of little use as value addition in the economy. Instead they met the pent-up demand for imported mobiles.

But the significant damage to India’s current account deficit in both the episodes came from these In-Famous Five. Again now, when pressures are again developing on the current account, an inspection of the relative growth rates shows the pace of growth of edible oils has been one of the fastest. And, in the first quarter of FY23, the rank of edible oil in the import list has slipped to sixth position. 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. In terms of volume, these five, including gold, coal and electronic items, are each far bigger than edible oils.

Within these five big items the relative values have begun to change. Coal imports in the last decade usually clocked a tenth of the value of crude, for any financial 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 cheaper Russian crude, accounting for almost 20 per cent of its total import volume.

Read 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.

Similarly, while gold was the second largest item entering India last year, its imports grew much more slowly than electronic items or coal. In terms of growth rate, gold imports took only the ninth rank behind these items. It used to occupy the second to fourth position in the import pecking order in the last decade. So the delta that will be captured by the government through additional customs duty on gold imports is low. Except gold for the government, the scope to levy punitive customs duty is low on these five items. Higher duty means even higher inflation.

However, looking away from them in the composition of imports, there are clearly some improvements. The import of electronic components and organic chemicals has been among the top 10 imports for the past five years and they are both growing fast. Imports of these items, which are intermediates, imply a boost to value addition in the 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,” said Aniket Dani, author of a CRISIL report for the sector. His report added that after logging a 33 per cent compounded annual growth rate between fiscal 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 composition of imports seems more varied. There are also more reasons for comfort. As Kishore pointed out, assuming a monthly oil import volume of 20 million tonnes as growth returns to the economy, and that India imports around 20 per cent of this from Russia at an average price of $70 per barrel, 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”.

Juxtaposed against these improvements, the sole worry line is now coal. In the new financial year, 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. More than oil, as the demand for coal shoots up even further in the economy, it has become the new pressure point in the import basket of India.