Exports limp back in Aug-20 but trade deficit widens

In the last 2 months, the trade deficit has widened once again as exports failed to keep pace and the incremental benefits of low oil prices were waning.

Sep 17, 2020 08:09 IST India Infoline News Service

The momentum in exports could not be sustained as Aug-20 exports fell below July levels. A spurt in COVID cases has hit rural and semi-urban productivity in a big way. That widened the merchant trade deficit in Aug-20. Trade deficit touched a yearly high of (-$15.17) billion in Jan-20, but that transformed into a small trade surplus of $0.80 billion by Jun-20. In the last 2 months, the trade deficit has widened once again as exports failed to keep pace and the incremental benefits of low oil prices were waning.

Data Source: DGFT

Trade deficit widened to $6.77 billion in Aug-20, but there were some positive takeaways too. Firstly, trade surplus could not be sustained after the freak Jun-20 case, but trade deficit is less than half of what it was last year. Secondly, total trade volumes (exports + imports) for Aug-20 crossed the $52 billion mark;close to July levels. Thirdly, total exports are down -13% while total imports are down -25% on a YOY basis. One can argue that this could change if oil prices pick up, but for now the trade deficit looks a lot safer.

Exports taper further in Aug-20 as COVID cases rise

Exports doubled between April and June, but the figure has stabilized after that and exports have found it tough to breach and move higher. Rising COVID cases across India and the lag effect of the lockdown have also slowed down exports. Let us look at the actual trade numbers. Merchandise exports for Aug-20 stood $22.70 billion, a fall of (-12.66%) on a YOY basis over Aug-19, in dollar terms. There were some star export performers in the month of Aug-20. For example, exports of cereals (+316.04%), Rice(+59.40%), Iron Ore (+46.03%), Oil Meals (+28.89%), Oil Seeds (+27.96%), Drugs & Pharma (+17.22%), Carpets (+15.53%)and Dairy products (+10.73%) were some products that sustained the momentum in Aug-20.

On the exports front, there were some laggards too. Some of the product groups that saw a sharp fall in exports include Cashew (-47.61%), Gems & Jewelry(-43.28%), Petroleum products (-39.91%), man-made yarn (-24.23%), Marine Products (-23.05%), Leather products (-16.82%), Tea (-16.74%) and Electronic Goods at (-13.84%). For the Apr-Aug (5-month period), exports were down 26.65% at $97.66 billion.

Imports for Aug-20 pick-up, despite tepid crude oil prices

Merchandise imports for Aug-20 stood at $29.47 billion, a fall of (-26.04%) on a YOY basis in dollar terms. Import growth over July has been positive; versus negative exports growth. In Aug-20, Crude oil imports at $6.42 billion were lower by (-41.62%) as Brent Crude came under pressure due to global demand concerns. Gold imports continued to remain tepid on the back of high prices and a major shift in gold consumption patterns towards ETFs.

There were deep cuts in other import items too on a YOY basis. The fall was (-41.58%) for electrical and non-electrical machinery, (-37.83%) for coal, coke & briquettes, (-18.36%) for organic & inorganic chemicals and (-11.67%) for electronic goods.

Overall trade balance holds out a marginal surplus

For the first 5 months of FY21 (Apr-Aug), the combined trade surplus has increased marginally to $14.19 billion. However, it needs to be noted that services trade data is reported with a 1-month lag. Clearly, if the merchandise trade deficit widens further, then the services surplus may not be sufficient to leave an overall surplus.

Particulars Exports ($ bn) Imports ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $97.66 bn $118.38 bn $(-20.72) bn
Services Trade # $84.47 bn $49.56 bn $+34.91 bn
Overall Trade $182.13 bn $167.94 bn $+14.19 bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

For the month of August 2020, the merchandise trade deficit was at (-$6.77) billion while services trade surplus was at $6.90 billion resulting in an overall trade surplus of just $0.13 billion. This is likely to put limits on the expected current account surplus this fiscal.

Key trade risks to watch out for

While services trade is doing its bit, it is merchandise trade that needs to pick up from here. However, there are 5 key risks.

• COVID cases are rising and the spread is a lot more rapid in rural and semi-urban areas. This is the base for SMEs, which constitute the backbone of Indian exports.

• For trade and exports to pick up, GDP has to revive and India is bottom of the charts in GDP growth. China is already showing positive GDP growth.

• Oil has stayed below $40/bbl and that has helped the trade deficit. Even if Brent crude crosses $50/bbl, calculations could go awry.

• China remains the key to Indian exports, either as a buyer or as a supply chain facilitator. With the border situation escalating, the trade risk cannot be ignored.

• If exports do not pick up globally, more countries may choose to weaken currencies. For India, that could have larger macroeconomic repercussions.

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