It is marginally lower compared to the January 2023 merchandise trade deficit but sharply lower than the peak merchandise trade deficit of $30 billion recorded in July 2022. The total merchandise trade deficit in the first two months of 2023 has been just $35 billion. Clearly, we are seeing the reversal of the commodity boom that we saw last year. An amalgam of lower commodity prices and weak demand has pushed total trade volumes lower. There are two important observations here.

Firstly, we look at gross trade (exports + imports) of merchandise goods. Gross trade was above $100 billion for 4 months between March and July 2022, but has tapered since. For January 2023, gross trade was just $83.57 billion and in February 2023, gross trade was subdued at $85.19 billion. This is driven by tepid global demand, enhanced dependence on Russian oil and weak commodity prices. The second observation pertains to the total exports i.e., the exports of merchandise and services. The total services exports for February 2023 at $29.15 billion is inching close to the merchandise exports of $33.88 billion. Also, in January 2023 and February 2023, the overall deficit when  you combine the merchandise trade deficit and the services trade surplus, is almost neutral.

Data Source: DGFT

Several factors triggered lower trade deficit, apart from lower commodity prices and weak demand. One factor is the big shift to Russian oil. Despite higher Russian oil prices, it accounts for 30% of India’s oil import basket, compared to less than 1% a year back. This helped to reduce the impact of imported inflation to a large extent, even as weak demand made overall trade tepid. 

With 11 months gone, how does FY23 trade picture look?

For the first 11 months of FY23, the total merchandise exports are higher by 7.6% yoy at $405.94 billion while the total merchandise imports are higher by 18.8% at $653.47 billion. Cumulative gross merchandise trade (imports + exports) for FY23 is up 14.2% at $1,059.41 billion while the total trade deficit for the year is higher by 43.5% at $247.53 billion. While the merchandise trade deficit was expected to be $300 billion for FY23 fiscal, the estimates have now been toned down closer to $260 billion. Let us look at the top-10 contributors to exports and imports for first 11 months of FY23.

Data Source: Ministry of Commerce

On the exports side, the top 11 products account for 83.6% of the overall export basket for FY23. On the imports side, the top 11 products account for 80.7% of the import basket. Among the top exported products, the yoy growth in electronic goods, petroleum products and rice were extremely strong. The export growth was negative in several items with a sharp fall in the exports of iron ore, cotton yarn, carpets, and cashew.

Let us now turn to the import story for FY23. There was a big surge in the import of coal, coke, and briquettes, due to domestic shortages. Imports of fertilizers, transport equipment and petroleum also surged in FY23. Iron & Steel was another commodity where imports edged higher. Among the commodities that saw lower imports; there was a sharp fall in gold imports and in the import of sulphur, iron pyrites and pulses.

Agricultural exports push was the story of February 2023

Merchandise exports at $33.88 billion in February 2023 were lower -2.0% yoy. Sequentially, the exports were up by 2.95% compared to January 2023. While exports held above the psychological $30 billion for the month, there was pressure coming from fears of a global slowdown in the light of the sustained hawkishness of central banks.

There were several star export performers in February 2023. Oil Meals (+220.96%), Iron Ore (+51.37%), Spices (+30.85%), Electronic Goods (+29.85%), Fruits & vegetables (+17.42%) and Gems & Jewellery (+13.76%) were the key export growth drivers. In February 2023, the export losers outnumbered the export gainers by a ratio of 16:14.

There were several export laggards in February 2023. Jute manufacturing (-41.51%), Cotton Yarn (-30.41%), Petroleum Products (-28.77%), Handicrafts (-28.30%), Coffee (-26.22%), Plastic & Linoleum (-25.92%) and Carpets (-24.21%) lagged in terms of the exports. The exports laggards were typically where India had traditional advantages but due to weak demand in the global markets, the numbers have taken a hit.

Imports fell in February 2023, led by a sharp fall in gold imports

Merchandise imports for February 2023 stood at $51.31 billion, down -7.5% yoy. Imports were 1.28% higher on a sequential basis. The lower imports on a yoy basis can be partially attributed to the slowdown fears in the Western world as well as a greater focus on import substitution by the Indian government through its PLI scheme. Preferring Russia in the oil basket has made a big difference.

The big import surge in February 2023 came from Transport Equipment (+49.25%), Optical Goods (+29.68%), Project Goods (+22.51%), Iron & Steel (+16.46%), Pulp & waste paper (+14.64%), Newsprint (+13.62%), Machine Tools (+12.17%) and Coal/Coke (+8.90%). Major items in the basket that showed lower imports yoy in February 2023 were Silver (-97.31%), Fertilizers (-59.29%), Sulphur & Iron Pyrites (-54.27%), Gold (-44.92%) and metal Ores & minerals (-30.16%). The lower imports were triggered by the sharp fall in precious metal imports, which is a positive signal for the economy.

Positive signals for the current account

The trade deficit for FY23, originally pegged at $300 billion, may end up at $260 billion. That is substantially higher than last year, but manageable compared to the apprehensions about 4-5 months back. Here is a quick view of overall deficit combining services and merchandise trade as a proxy for current account deficit.

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, had fallen from $(118.12) billion in December 2022 to $(111.94) billion in January 2023 and has marginally widened to $(114.59) billion in February 2023. That raises hopes of overall deficit closer to $115 billion, with less of a challenge to CAD. 

Effectively, that will translate into CAD of under 3.3% of GDP. That is still high, but not as bad as the 4.5% CAD for FY23, that we had envisaged in September 2022. Last year, the government had given a special boost to exports in the last few months, but amid global headwinds that looks unlike this time. However, the good news is that the current account deficit should be largely in control in FY23.