Dec-21 trade deficit at $21 billion raises questions on avoidable imports

17 Jan 2022 , 08:47 AM

The month of Dec-21 was the 10th successive month when merchandise exports stayed above $30 billion. The total merchandise export figure of $37.81 billion is not only the highest monthly export achieved this year, but also the highest ever in  history.

Exports showed a sharp sequential revival over Nov-21. After falling sharply in Nov-21, the exports have more than recouped losses in December. The deep weakness in the rupee in December also helped exports even as the container shortage got stabilized. To an extent the aggressive PLI schemes also provided the much needed boost.

In Dec-21, India reported record total trade (aggregate of exports and imports) of $97.29 billion. Total trade is a good barometer of MSME orders, customs revenues and job creation. Total trade of $100 billion a month looks imminent. However, trade deficit has averaged above $21 billion in the last 4 months of 2021.

Data Source: DGFT

A clearer picture emerges when you look at trade numbers on a sequential basis. Compared to Nov-21, exports were up 25.87% while the imports were up 12.35% in Dec-21. If you compare with pre-COVID levels of Dec-19, merchandise exports were up 39.47% while merchandise imports were up 50.24%. Even as trade infrastructure constraints persist, the growth over pre-COVID levels is a source of comfort for merchandise trade.

Dec-21 exports picked up momentum on sequential basis

Exports at $37.81 billion in Dec-21 were up 38.91% yoy and up 25.87% sequentially. This can be partially attributed to limited impact on output despite Omicron fears. Exports were up 39.47% over Dec-19, indicating that exports are driving growth over pre-COVID levels.
There were several star export performers in Dec-21. Exports of Petroleum Products (+151.97%), Coffee (+123.80%), Mica, coal & ores (+59.97%), Plastic & Linoleum (+57.73%), Cotton Yarn (+46.19%), Cereals (+45.65%), Engineering Goods (+38.41%), Electronic Goods (+33.99%), Rice (+31.10%) and Marine Products (+28.01%) were growth drivers in Dec-21.

However, there were some export laggards too, like Iron Ore (-85.76%), Oil Meals (-49.45%), Cashew (-25.24%), Spices (-8.85%) Tea (-7.82%) and Ceramic Products (-5.28%). Non-petroleum and non-jewellery exports in Dec-21 stood at $28.92 billion against $22.30 billion in Dec-20. Cumulative value of exports for Apr-Dec were up 49.66% yoy at $301.38 bn.

Imports in Dec-21 spurred by crude and gold

Merchandise imports for Dec-21 stood at $59.48 billion, up 38.55% yoy. Imports were up 12.35% sequentially. Crude oil imports at $16.16 billion in Dec-21 showed sequential growth on higher crude prices and up 67.9% yoy. With Brent at $84/bbl, the release of crude from the SPR had limited impact on crude prices.

The big import surge in Dec-21 came from Silver (+2133%), Sulphur (+255%), Fertilizers (171%), Newsprint (125%) and pulp (117%). The major items that showed lower imports on a yoy basis for Dec-21 were Pulses (-35.63%) and transport equipment (-6.87%). Gold imports at $4.73 billion in Dec-21 was higher compared to $4.22 billion in Nov-21. Cumulative value of imports for Apr-Dec 2021 stood at $443.82 billion.

Combined deficit for FY22 widens further in Dec-21

For FY22 (Apr-Dec), combined deficit of merchandise and services trade was $(-68.06) billion. The sharply higher merchandise trade deficit, widened the combined deficit by $13.85 billion from $(-54.21) billion to $(-68.06) billion on sequential basis.

Particulars	Exports FY22 ($ bn)	Imports FY22 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$301.38 bn	$443.82 bn	$(-142.44) bn
Services Trade #	$177.68 bn	$103.30 bn	$+74.38 bn
Overall Trade	$479.06 bn	$547.12 bn	$(-68.06) bn

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

India had closed FY21 with combined deficit of -$12.75 billion. For FY22 (Apr-Dec), combined deficit at -68.06 billion, is already 5.34 times the FY21 figure. It could widen substantially in FY22, if you extrapolate current levels. For Sep-21 quarter, the current account had dipped into a deficit of $-9.6 billion and if you consider the way the combined deficit is building up, there could be a deepening of CAD in Dec-21 quarter.

It is time to restrict import of avoidable products

On the positive side Trade is decisively above 2019 levels and largely driving GDP growth. However, there are 3 areas of concern.

• In 2021, total gold imports were $55.7 billion or nearly one-third the entire trade deficit. At around $5 billion a month, it remains too high to be sustainable. With Brent prices at $84/bbl, India must rethink imports of avoidable items like silver, gold, fertilizers, coal etc. That can ease trade deficit burden.
• Export growth has been curtailed by practical problems like the availability of containers, trade disruption in China, volatile currency equations etc. The situation was better in December, but any worsening of the Omicron situation remains a key risk factor.
• When the GDP data was released for Sep-21 quarter, more than half of the GDP growth was accounted for by overall trade. That is a good sign of revival. The only area of caution is the burgeoning trade deficit.

One outcome of this widening trade deficit is already visible in volatility of the rupee. Curtailing trade deficit should be top on the agenda for the Commerce Ministry and that cannot wait any longer, with forex import cover at just over 12 months.