India swings back to trade deficit as exports falter in Jul-20

After exports more than doubled between April and June, the momentum was tough to sustain. Let us look at the actual trade numbers.

Aug 17, 2020 10:08 IST India Infoline News Service

The month of June 2020 had been a month for celebration as India posted merchandise trade surplus for the first time in 18 years, albeit marginal. However, that surplus could not be sustained in July as it was back to merchandise trade deficit of (-4.83) bn. Exports, which had doubled between April and June, managed to grow sequentially at less than 6% in July. However, imports picked up 25% on a sequential basis, to push the Indian economy back into a merchandise trade deficit in July 2020. The fluctuating fortunes of trade balance over the last one year have been captured in the chart below.

Data Source: DGFT

Despite the economy slipping into a trade deficit once again in July, there are 3 redeeming features in the data. Firstly, the trade deficit in July is less than half the average monthly trade deficit we saw in the last on year. Secondly, the total trade volumes (exports + imports) for July are back to pre-COVID levels of March hinting at post pandemic traction building up. Thirdly, while total exports are just about 10% short of the average monthly exports a year back, imports are still about 40% short of last year’s figures. That shows promise that the trade deficit on the merchandise account could still be under control.

Export growth petered in July, falls on YOY basis

After exports more than doubled between April and June, the momentum was tough to sustain. Let us look at the actual trade numbers. Merchandise exports for Jul-20 stood $23.64 billion, a fall of (-10.21%) on a YOY basis over Jul-19. There were some clear star performing export segments for Jul-20. For example, exports of cereals (+204.99%), Rice(+47.99%), Iron Ore (+39.61%), Oil Seeds (+32.61%), Oil Meals (+28.44%), Meat & Dairy products (+22.14%), Drugs & Pharma (+19.53%)and coffee(+14.27%) were some of the positive surprises in the month of July 2020.The other positive trend was that a larger array of products have reported a smart growth in July 2020 compared to the previous year.

On the exports front, there were some key laggards too. Some of the product groups that saw sharp fall in exports include petroleum products (-51.54%), Gems & Jewelry(-49.61%), Leather products (-26.96%), man-made yarn (-23.33%), Cashew (-21.25%), marine products (-20.14%), electronic goods (-17.42%) and spices at (-11.38%) etc. For the Apr-Julperiod, exports were 30.21% lower at $74.96 billion on a YOY basis.

Imports record faster sequential growth in Jul-20

Merchandise imports for Jul-20 stood at $28.47 billion, a fall of (-28.40%) on a YOY basis. Import growth over June has been much faster than export growth. In July 2020, Crude oil imports at $6.53 billion were lower by (-31.97%) after Brent struggled to break above the $40/bbl mark on the back of global slowdown fears. Gold imports continued to be very tepid on the back of historically peak prices and economic uncertainty among the consuming classes.

There were deep cuts in other import items too on a YOY basis. The fall was (-53.76%) for coal / coke imports, (-32.89%) for electrical & non-electrical machinery, (-31.97%) for petroleum and crude products, (-12.22% for organic and inorganic chemicals and (-4.31%) for electronic imports.

Trade surplus may be gone, but overall surplus still remains

For the first four months of FY21 (Apr-Jul), the combined trade surplus has increased to $14.06 billion. The merchandise trade surplus in June looks more like a flash in the pan as it has slipped into a deficit in July. However, services trade continued to be robust based on estimates for the month of July.

Particulars Exports ($ bn) Imports ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $74.96 bn $88.91 bn $(-13.95) bn
Services Trade # $66.86 bn $38.85 bn $+28.01 bn
Overall Trade $141.82 bn $127.76 bn $+14.06 bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

For the month of July 2020, the merchandise trade deficit was at (-4.83) billion while the services trade surplus was at $7.19 billion resulting in an overall trade surplus of $2.36 billion for the month of July. That was instrumental in enhancing the overall surplus for the first 4 months to $14.06 billion.

It may yet be too early to raise the toast

There are some positives in the form of pick up in overall trade and a sustained overall surplus. But the real picture will only emerge when the lag effect of the pandemic is done with. As the supply chains get re-energized, imports are likely to gain traction faster than exports. World trade is still in a state of flux and India also needs to realize that an overtly closed door policy on trade is not really going to be beneficial for Indian trade from a long term perspective. It is only when the post pandemic period sets in that the real impact on the trade numbers will actually be known.

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