Amid Prime Minister Narendra Modi’s visit to Russia, the focus is on India’s widening trade deficit with that nation along with the geopolitical situation.
Modi landed in Russia on July 8 for a two-day visit, a first since Moscow’s invasion of Ukraine in February 2022.
Modi and Russian President Vladimir Putin are expected to discuss an array of topics about current regional and global issues of mutual concern during the bilateral meeting.
The trade relations between the two nations that stood at $65.69 billion in FY24, registering a growth of 33.1 percent on-year.
Perhaps the biggest concern for India in the bilateral trade relations with Russia is the widening trade deficit.
From being India’s ninth largest import source nation in May 2022, Russia now occupies second place during the same month in the current year, thanks to increased oil imports. But when it comes to exports, Moscow ranks a distant 25th.
Though India’s exports to Russia saw a significant growth of 35.4 percent on-year in FY24, higher than imports from Moscow at 32.9 percent, the gap between outbound and inbound shipments narrates a different story.
The trade gap between the two nations widened by 33.8 percent to $57.5 billion in FY24 over the previous fiscal.
Reliance on oil
The key reason behind India’s widening trade gap with Moscow has been the increasing reliance on oil.
After the outbreak of the war in Ukraine, India stepped up crude oil imports from Moscow since they were offering heavy discounts. As a result, Russia now occupies the top spot as India’s energy supplier, leaving behind traditional providers like Iraq and Saudi Arabia.
However, the increase in imports of Russian oil has also led to a wider trade gap with the nation given that India has little to offer in terms of exports that could match up to crude in volumes as well as value terms.
While India’s major exports to Moscow include pharmaceutical products, organic chemicals and iron and steel, imports from Russia comprise crude oil, fertilisers, manufactures, pearls, and precious and semi-precious stones.
As a share of total imports, India’s oil purchases from Russia jumped 88.7 percent in FY24 from nearly 84 percent in 2022-23.
The jump on a year-on-year basis isn’t too stark, but between FY22-FY24, since the war broke out in Ukraine, the share of crude oil imports from Moscow in India’s total inbound shipments have been around 75 percent versus 40.1 percent during the preceding three years spanning 2018-19 to 2020-21.
A cheaper supply of oil from Russia helped India keep a lid on its import bill, but of late discounts have been fading and its impact has started showing up on the trade figures.
For instance, India’s goods trade deficit in May reached a seven-month high of $23.78 billion, largely attributed to a substantial increase in the oil import bill.
ICRA chief economist Aditi Nayar pointed out that in sequential terms 71 percent of the widening merchandise trade deficit was driven by the net oil balance, which saw a significant volume surge.
India’s oil imports in May rose 28 percent to $19.95 billion against $15.57 billion in the same month last year.
IDFC First Bank economist Gaura Sen Gupta explained that inbound shipments of discounted crude from Russia had kept India’s oil import bill contained in FY24.
She added that in FY25, based on April data, the imputed cost of crude oil from Russia has risen to $83 per barrel, a $7 rise versus the FY24 levels. Hence, the support from discounted crude oil from Moscow might be lower in the ongoing financial year.
Rising costs
In addition to the impact of the sanctions by the Group of Seven (G7) nations on ships and vessel operators carrying Russian oil priced above the $60 a barrel cap, the Red Sea crisis may have also led to an erosion in discounts on crude oil from Moscow.
The widening trade gap with Russia has also been a significant hurdle to settling trade in rupees as the system did not take off as hoped with Moscow accumulating a surplus to the tune of billions of rupees following the surge in New Delhi’s oil imports.
As Modi deliberates on a plethora of issues with Putin as part of the Annual Bilateral Summit held every year since 2000 — the ballooning trade deficit, fading discounts on Russian oil and the consequences of it all could surely feature in the discussions.
