India reports merchandise trade surplus after 18 years

For the Jun-20 quarter, the Indian economy has reported an overall surplus of $11.70 billion. This should be positive for the external value of the rupee and should also change the way rating agencies look at India in the context of sovereign risk.

July 17, 2020 8:42 IST | India Infoline News Service
India had to wait a full 18 years to again report a merchandise trade surplus in the month of Jun-20. In May-20, India had had an overall surplus after considering the services trade too. The reason, Jun-20 is special is that India reported a surplus in the merchandise trade account itself. That can be attributed to exports showing a better pick-up; even as imports have lagged due to supply chain constraints. Check the monthly trend in the chart below.

Data Source: DGFT

Three important things emerge from the trade data chart. Firstly, the net position on the merchandise account has moved from a deficit of $15.36 billion last year to a surplus of $0.80 billion in Jun-20. Secondly, the export volumes have more than doubled since April but imports have picked up by just about 25%. Thirdly, there are concerns on overall trade, which is the sum of exports and imports. At $43 billion, the overall trade has picked up since April but it is still more than 40% lower compared to the year-ago period. This has larger implications for employment and revenue generation of the exports sector.

Exports more than double over last 2 months

It can be argued that April was an abnormally low base and hence the comparison may be odious. However, it still goes to highlight that exports have shown better traction than imports. Merchandise exports for Jun-20 stood $21.91 billion, a fall of (-12.41%) on a YOY basis. The SME sector, which contributes to bulk of the exports, is struggling and that has constrained exports. Many of India’s exports are powered by imports of supplies as in electronics and pharmaceuticals and theyhave supply chain issues. There were some clear export outperformers for Jun-20. For example, exports of iron ore (+63.10%), oilseeds (+50.48%), Rice (+32.72%), Oil meals (+27.36%), spices (+22.92%) and cereals (+19.35%) were the star performers. Unlike in May, there is a much broader array of products where there have been green shoots of turnaround in growth.

However, a good number of products also remained under pressure. Some of the product groups that saw deep cuts in exports include Gems & Jewellery (-50.06%), Leather products (-40.47%), textiles (-34.84%), petroleum products (-31.65%), Cashew (-27.02%), meat / dairy (-25.88%), electronic goods (-22.52%) etc. For the Apr-Jun quarter, exports were 37% lower at $51.32 billion on a YOY basis. The hit came from non-petroleum and non-G&J exports.

Imports remain tepid as gold and oil imports falter

Merchandise imports for Jun-20 stood at $21.11 billion, a fall of (-47.59%) on a YOY basis. Crude oil imports at $4.93 billion were lower by (-55.29%) after Brent and WTI prices were subdued around $40/bbl. There was good news for the government with gold imports falling 78% on a YOY basis. There were deep cuts in other imports too. The fall was a (-55.72%) for coal / coke imports, (-34.05%) for electronic imports and (-42.02%) for electrical & non-electrical machinery. Compared to May 2020, the June imports were down by 15% even as merchandise exports got a 5% boost. This resulted in a merchandise trade surplus of $0.80 billion; the first surplus reported by India since 2002.

India closes COVID quarter with overall trade surplus

The table below captures the Jun-20 quarterly data for exports and imports of merchandise and services. While the merchandise deficit has transformed into a surplus in Jun-20, the surplus in the services account expanded. For Jun-20 quarter, India managed a trade surplus of $11.70 billion.

Particulars Exports ($ bn) Imports ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $51.32 bn $60.44 bn $(-9.12) bn
Services Trade # $49.70 bn $28.88 bn $+20.82 bn
Overall Trade $101.02 bn $89.32 bn $+11.70 bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

For the Jun-20 quarter, the Indian economy has reported an overall surplus of $11.70 billion. This should be positive for the external value of the rupee and should also change the way rating agencies look at India in the context of sovereign risk. In fact, Morgan Stanley has estimated that due to the overall trade surplus in the first quarter and the strong flow of remittances from abroad, India may close the Jun-20 quarter with a Current Account Surplus of $20 billion. That will surely be icing on the cake.

Bigger challenges on the trade front

There are three key challenges that emerge on the trade front. Firstly, the overall trade volumes must get closer to the $70 billion levels to avoid the pressure on EOUs and SMEs. Secondly, since exports are showing traction, India must focus on how it can boost exports in a bunch of selected sectors. Lastly, the surplus may be hard to sustain once oil prices pick up and the Commerce Ministry must have a Plan-B for that. For now, it is a good feeling to look at a merchandise trade surplus after 18 years.

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