Dec-20 trade deficit crosses $15 billion on import surge

An unprecedented surge in imports led to the trade deficit widening to $15.44 billion in Dec-20

January 18, 2021 7:29 IST | India Infoline News Service
In the month of Nov-20 when the merchandise trade deficit had touched $9.87 billion, we had expressed apprehensions that trade deficit could cross the psychological $10 billion mark in December. However, an unprecedented surge in imports led to the trade deficit widening to $15.44 billion in Dec-20. This is despite the fact that monthly exports in Dec-20 are very close to the highest levels seen in the last 1 year.

Data Source: DGFT

One important parameter to look at is the overall trade. It represents the aggregate of exports and imports. For the month of Dec-20, the overall trade climbed to a yearly record level of $69.74 billion. December was also the month when the divergence between the growth of exports and imports sharply widened. While exports were up 15.4% between Nov-20 and Dec-20, the merchandise imports were up sharply by 27.55%. This dichotomy explains why the trade deficit widened sharply to $15.44 billion mark.

Exports grew in Dec-20, but lagged imports in a big way

It is actually ironic that India has been getting back to pre-COVID levels of trade deficit at a time when China is reporting record trade surplus. Monthly exports are close to the upper band for the year but imports have surged sharply and are now higher than pre-COVID levels.

Exports at $27.15 billion in Dec-20 were marginally up 0.14% on a yoy basis. There were some star export performers in Dec-20. Exports of cereals (+278.23%), Oil Meals (+196.92%), Iron Ore (+69.26%), Processed Foods (+47.14%), Jute (+21.93%), Handicrafts (+21.78%), Carpets (+21.17%), Ceramic Products (+19.56%), Drugs & Pharma (17.47%), Spices (+17.30%) and Electronic Goods (+16.51%) were stand-out performers.

There were quite a few export laggards too. Petroleum Products (-35.35%), Oil Seeds (-31.62%), Leather (-17.73%), Coffee (-16.38%), Textiles (-15.05%), Yarn (-14.56%), Marine Products (-14.25%) and Cashew (-12.04%) were a drag on exports. For the first 9 months of FY21, merchandise exports were down -15.73% at $200.80 billion.

Imports surged to yearly record in Dec-20

Merchandise imports for Dec-20 stood at $42.59 billion, 7.56% higher on yoy basis. However, imports were sharply up 27.55% on sequential basis. Crude oil imports at $9.58 billion were lower by 10.61% yoy but higher by 50% sequentially. Higher crude prices are taking its toll. With Brent close to $57/bbl and oil demand picking up, crude is likely to widen the merchandise trade deficit in coming months.

Apart from oil, imports were lower for other items too in Dec-20. On a yoy basis, the fall was (-32.05%) for transport equipment, (-24.42%) for minerals, (-7.27%) for coal, coke & briquettes and (-1.54%) for optical goods. For the 9 months of FY21 total imports stood at $258.27 billion, down 29.08% yoy.

Overall trade surplus is positive but shrinking

In the first 9 months of FY21, combined surplus of merchandise and services trade shrank by $8.37 billion over Nov-20 to $5.22 billion. Clearly, the surplus on services has not kept pace with merchandise deficit in Dec-20.
Particulars Exports ($ bn) Imports ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $200.80 bn $258.27 bn $(-57.47) bn
Services Trade # $147.69 bn $85.00 bn $+62.69 bn
Overall Trade $348.49 bn $343.27 bn $+5.22 bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

For the month of Dec-20, the merchandise trade deficit was at (-$15.44) billion while services trade surplus was $7.07 billion resulting in an overall trade deficit of $(-8.37) billion. That reduced the cumulative overall surplus for FY21, which is just about in positive now.
Oil could be the risk and pharmaceuticals the opportunity

In the first 9 months of FY21, India reported overall trade surplus of $5.22 billion. The surplus in services trade is almost constant but merchandise trade deficit has been rapidly burgeoning in last few months. Here are some takeaways.
  • The vaccine-driven growth expectations combined with supply cuts by Saudi Arabia and falling US stockpiles are likely to put pressure and take crude closer to $60/bbl.
  • The big opportunity could be in the pharma space as India is likely to emerge as a hub for vaccines in the next few months as inoculation takes off globally.
  • The other segment that could see a positive growth is the auto sector where two wheelers have shown more traction in the export market than in Indian markets.
  • The good news is that the exports are getting back to pre-COVID levels but oil could be the question mark and could push imports sharply higher.
From the point of view of jobs and the health of SMEs, the good news is that overall trade volumes are now back to 2019 levels. That should help recovery in a big way. The real challenge is how India capitalizes on the drug export opportunity as well as the larger Atma Nirbhar campaign. For now, the Commerce Ministry would be surely worried that current account surplus could go for a toss!

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