December trade deficit flat at $23.76 billion as exports pick up

If you look back at calendar year 2022, between March 2022 and July 2022, the total trade (imports + exports) was consistently above $100 billion in each of the 5 months. However, that was amidst peak commodity prices. With commodity prices tapering, total trade tapered. Total trade fell to $95.82 billion in August 2022, $96.61 billion in September 2022, $86.47 billion in October 2022, $87.87 billion in November 2022 and $92.72 billion in December. The fall in total trade is not really about volumes, but commodity prices.

A slew of regulatory measures curbed imports. On the crude oil front, India shifted to Russian oil (which now accounts for 25% of import basket) and India is getting it at around $60/bbl. This kept headline imports under check and gave relief on trade deficit front. The global slowdown fears in the US, UK and EU resulted in lower spending and inventories. Total trade is a better barometer of volume of business and jobs created by trade sector.

How does the macro picture look for the first 9 months of FY23 look? If you look at the total merchandise trade (imports plus exports) for FY23, it stands at $884.46 billion; 18.5% higher than the comparable number last fiscal. If India is able to maintain this growth ratio for the full year, we are looking at total trade in the vicinity of over $1.20 trillion to $1.25 trillion. Overall trade in goods and services stands at $1.26 trillion for FY23; 19.9% higher yoy.

Trade deficit high but looks manageable

The trade deficit peaked at $30 billion in July 2022, but has progressively tapered in next few months. 

1. Both exports and imports have fallen from the peak levels of June and July. That is largely due to a fall in commodity prices and marginally due to volume impact. Some of the trade restrictions have also been responsible for lower trade, even as weak global demand over recession concerns have hit exports.

    

2. Trade deficit for December 2022 at $23.76 billion is flat MOM but well below the peak trade deficit of $30 billion in July 2022. The sectors where output is most affected in the last few months are the export driven sectors like textiles, leather, meat products etc.

    

3. Let us now turn to the cumulative trade deficit for FY23. As of the end of December 2022, the merchandise trade deficit stands at $218.94 billion, hinting at full year trade deficit in the vicinity of $290 billion. Current account deficit at 4.4% of GDP in September 2022 quarter marked an all-time high CAD in absolute terms at $36.4 billion.

One important metrics is the import cover of forex reserves. India could see total merchandise imports of $740 billion in FY23. At the current forex reserve levels of $565 billion, that would cover just about 9 months of merchandise imports. The forex reserves have spiked in the last few weeks due to reduced RBI intervention in currency markets.

Merchandise exports bounces for second month in a row

Exports at $34.48 billion in December 2022 are lower -12.2% yoy. On a sequential basis, the exports were up 7.8% compared to December 2022 despite recession fears having an impact on export value. This is the second consecutive month of over 7% sequential growth in merchandise exports. It may be recollected that, after staying above $40 billion for 4 months, merchandise exports fell below that mark in July 2022. It is currently hovering in the range of $30-$35 billion.

There were several star export performers in December 2022. Iron Ore (+185.76%), Oil Meals (+53.00%), Electronics Goods (+36.96%), Cereals (+16.87%), Tea (+15.97%) and Rice (+13.30%) were the key export growth drivers. In the month of December 2022, the export losers outnumbered the export gainers by a ratio of 19:11.

There were a number of export laggards in December 2022. Cotton Yarn (-40.43%), Handicrafts (-36.91%), Mica/coal/ores (-30.23%), Carpets (-28.64%), Petroleum Products (-26.90%), Plastic & Linoleum (-26.23%), Coffee (-26.06%), Manmade fibre (-24.97%) and Oilseeds (-19.54%) lagged in terms of the exports. Export laggards were in traditional export areas where global demand has been weak on recession concerns. Non-petroleum and non-jewellery exports in December 2022 stood lower at $27.00 billion compared to $29.52 billion in December 2021. 

Crude and electronic goods put pressure on imports

Merchandise imports for December 2022 stood at $58.24 billion, down -3.46% yoy. Imports were 4.22% higher on a sequential basis. Crude oil imports at $17.47 billion in December 2022 was higher on a yoy basis by 5.92% while it was marginally higher MOM. Crude accounts for one-third of India’s import bill, so it puts more pressure on the trade deficit.

The big import surge in December 2022 came from Pulses (+58.49%), Iron & Steel (+36.66%), Newsprint (+33.92%), Transport equipment (+27.14%), Coke/Coal/Briquettes (+17.37%), Optical goods (+17.12%), Leather products (+13.69%) and Fertilizers (+12.15%). Major items in the basket that showed lower imports yoy in December 2022 were Gold (-75.04%), Project Goods (-68.66%), Raw Cotton (-67.66%), Sulphur and Iron Pyrites (-56.48%) and Silver (-36.56%). The big news for the month of December 2022 was that the gold imports are sharply down at $1.90 billion with tepid demand post the festive season.

Act before the current account deficit worsens

Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)

The overall trade deficit, which is a combination of the merchandise trade deficit and services trade surplus, has surged from $(87.16) billion in September 2022 to $(98.52) billion in October 2022, to $(111.03) billion in November 2022 and now to $(118.12) billion in December 2022. At this run rate, the overall deficit could end up closer to $160 billion and does pose a challenge to the current account deficit (CAD) levels. 

That would approximately translate into current account deficit of over 4.4% of GDP. That nearly corresponds to what the September quarter has shown. India looks set to end FY23 with merchandise trade deficit of around $290 billion. That would mean a lot of imported inflation and will worsen the CPI inflation levels. The good news is that the extrapolated overall deficit is tapering due to bigger contribution from services trade surplus.

There are 3 things that India must focus on to keep current account deficit in check.

1. In the remaining months, the government must give a boost to the services side of the trade so that it can partially offset the rather sticky merchandise trade deficit. This would be only workable short term measure.

    

2. The second approach should be to sustain Russian oil imports at the current 25% to 30% levels. Also, India must focus on rupee trade as the default option for trading oil with Russia so that the CAD impact can, at least, avoid the dollar inflation pressure.

    

3. The pressure on the rupee may have reduced, but it has not gone away. RBI has to simultaneously work on encouraging FPI flows and NRI remittances so that the vulnerability of the rupee to the trade deficit and the CAD is relatively lower.