Silver imports could pose the next big challenge to trade deficit

Rising trading deficit and a bloated current account deficit have been common problems for the Indian economy. In the last few months, the trade deficit has shot up as imports have been driven by rising commodity prices but exports have been stagnant or have tapered. First it was oil driving up the import bill and then it was gold, coke, coal and fertilizers. Now, a new commodity is threatening to rise to alarming proportions and that is silver. Indians are looking at silver as an investment and also as an industrial metal.

The numbers are quite staggering. For example, in the calendar year 2022, the total imports of silver are slated to more than triple over 2021. In the current year, the price of silver has fallen sharply and that has also triggered more demand. By default, there is a great attraction towards precious metals in India. With gold at well above Rs53,000 per 10 grams, silver at around Rs57,000 per KG looks relatively more attractive. Also, silver prices have fallen sharply from a high of Rs74,000 per KG in the last year and half..

One of the standard barometers that investors use to decide whether to buy gold or silver is the popular gold/silver ratio. Normally, the gold silver ratio has maintained an equilibrium. During the recent global crisis, the price of gold had shot through the roof and that had tilted the gold silver ratio in favour of the silver metal. This led to a surge in demand for silver resulting in a sharp spike in the silver import demand. Most of Indian silver is imported since the production of silver is too small in India. In a way, India drives silver demand.

Interestingly, India remains the world's biggest silver consumer and has normally been the support for global silver prices. Many people in India look at silver as the poor man’s gold. It is largely investment demand that has been boosting the import of silver in the last few months. Just look at the numbers. In 2022 India’s total silver imports is expected to jump to a record 8,200 tonnes. India has already touched 5,100 tonnes between January and July 2022. Silver imports were 5,969 tonnes in 2019, around 2,218 tonnes in 2020 and 2,773 tonnes in year 2021. Silver is up more than 3 fold over 2021 and 37% higher than 2019.

Price has bene another key factor. For instance, domestic silver futures trade at around Rs57,900 per KG as compared to a peak of Rs77,949 in the year 2020. For instance, between 2009 and 2011, silver appreciated by a whopping 200% and looks well poised to repeat that performance now. Of course, only time will tell if that actually happens, but unlike gold, silver also has a very important component of industrial demand coming in.

It is not just investment and hoarding demand that you see in silver. Silver finds applications in a number of industries including the manufacture of electronics, solar panels in the EV industry and also in the auto industry overall. The production-linked incentives (PLI) offered to local and foreign manufacture of electronics and solar panels has boosted the demand for silver. India currently imports most of its silver from countries like Hong Kong, United Kingdom, China and Russia. The leader, Mexico, mines nearly 25% of the world silver.

The silver import bill on an annual basis even with the higher quantity will be only between $7 billion and $8 billion, so it would not be anywhere as significant as crude oil, gold, electronic goods or coal. But it is surely another case of rising demand putting pressure on the current account.