The total trade was $102.96 billion in March 2022, $100.49 billion in April 2022, $102.17 billion in May 2022, $106.44 billion in June 2022 and $102.54 in July 2022.
However, July 2022 also marked the fifth month that the merchandise imports stayed above $60 billion, even as exports tapered below the $40 billion mark. Merchandise trade deficit at $30 billion is an all-time record and sharply higher. In the first 4 months of FY23, India has achieved $414 billion of total trade, so total trade should get past $1.20 trillion. Of course, with 4 month merchandise trade deficit at $99 billion, we could touch $300 billion in FY23.
Data Source: DGFT
Consistent widening of the merchandise trade deficit
High levels of total trade is always positive as it is a better barometer of job creation and MSME order flows.
a) July 2022 marked the fifth consecutive month that the merchandise imports stayed above $60 billion on the back of steady commodity inflation.
b) What stands out is the steady widening of the trade deficit which has gone from $18.52 billion in March 2022 to $30 billion in July 2022.
c) India’s overall trade deficit (merchandise plus services) for Apr-July is $63.55 billion. At this rate, the overall deficit for FY23 could be well above $200 billion, putting intense pressure on the current account deficit (CAD) and pushing it closer to 5% of GDP.
One important metrics is the import cover of forex reserves. India could see total merchandise imports of $750 billion in FY23. At the current forex reserve levels of $573 billion, that would cover just about 9 months of merchandise imports. One can expect the RBI to be more calibrated in its intervention in the currency markets.
Exports taper sharply in July 2022 on sequential basis
Exports at $36.27 billion in July 2022 has grown just 2.14% yoy. On a sequential basis, the exports were lower by -9.62% compared to June 2022 as the supply chain constraints are hitting the smooth flow of exports. Also, the fears of recession have been hitting global demand and that is evident in lower exports in July. In fact, after staying above the $40 billion mark for 4 months, merchandise exports fell below the $40 billion mark in July 2022.
There were several star export performers in July 2022. Exports of Tobacco Products (+74.16%), Electronic Goods (+46.09%), Coffee (+31.18%), Rice (+30.88%), Cereals (+24.52%), oil meals (+23.21%), Oilseeds (+21.02%), Dairy / Poultry products (+20.45%), Leather products (+19.77%) and Ceramic Products (+12.27%) were among the key export growth drivers in July 2022.
However, there were also some export laggards in July 2022. Iron ore (-94.33%), Handicrafts (-35.87%), Cotton Yarn (-28.17%), Cashew (-26.61%), Carpets (-25.58%) and Man-made Yarn (-10.13%) lagged in double digits. Restrictions imposed on select exports like agri products and iron ore also played a part. Non-petroleum and non-jewellery exports in July 2022 stood at $26.62 billion compared to $26.21 billion in July 2021.
Import surge triggered by higher commodity prices
Merchandise imports for July 2022 stood at a record $66.27 billion, up 43.61% yoy. Imports were absolutely flat sequentially. Crude oil imports at $21.13 billion in July 2022 was sequentially flat as Russian oil imports offset volumes. Crude oil imports were up 70.40% yoy. Crude still accounts for about one-third of India’s import bill but there are other heads like coal and electronic goods that are fast catching up.
The big import surge in June 2022 came from Silver (+9,329%), Project goods (+373%), Raw Cotton (+236%), Coal, coke & briquettes (164%), Textiles Fabric (88.83%), Newsprint (85.68%) and Petroleum / crude (70.40%). Major items in the basket that showed lower imports yoy in July 2022 were Pulses (-59.24%), Sulphur and Iron Pyrites (-51.99%), Gold (-43.60%) and Medicinal and Pharma Products (-10.71%). Gold imports in July 2022 at $2.37 billion, was nearly half of gold imports in July last year but festive season could change that.
Current account deficit could go as steep as 5% of GDP
As of now most economists are playing the CAD story cautiously. BOFA expects current account deficit to cross $100 billion in FY23 or 3% of GDP. However, that is quite conservative. The overall trade deficit combining merchandise and services trade stood at $(45.18) billion in June 2022 and has surged to $(63.55) billion in July 2022. That is a sharp increase of $18.37 billion to the overall deficit in one month. At this run rate, the overall deficit could end up closer to $180-190 billion and pose a real challenge to the CAD levels.
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)
Exports FY23 ($ bn)
Imports FY23 ($ bn)
Surplus / Deficit ($ bn)
Services Trade #
It may be recollected that Indian economy closed FY21 with combined deficit of $-12.75 billion or $1.06 billion a month. The combined deficit in FY22 was $-87.79 billion, or $7.32 billion a month. At the current run rate, it looks like India could close FY23 with overall deficit of $180 billion. That would translate into current account deficit of over 4.5% to 5% of GDP, a level that normally puts pressure on currency and sovereign ratings.
There are no quick solutions to the trade deficit
FY23 could see overall trade cross $1.20 trillion but it will come at a cost. The growth will be driven by imports and so the trade deficit would widen. India has been hit by the sharp spike in price of crude, coal, fertilizers, combined with a domestic shortage. Now, there is likely to be a surge in the import of microchips as auto companies play production catch-up.
· The trade story is still largely a function of how the global recession pans out and how bad it gets. For now, the central banks remain hawkish, although the intensity of hawkishness is reducing. Fed has hiked rates by 225 bps while India has raised by 140 bps in this round. Once recession fears are out, exports should see a pick-up.
· The bigger worry will be on the import front. Domestic production of crude, coal, coke, minerals and fertilizers are likely to be under pressure, so imports are the only option. Also, as auto demand picks, expect a much larger import bill from microchips and other electronic imports. Any prospects of slowdown in China and the US can worsen matters.
It is like a Catch 22 situation. Imports are sticky and exports are ambivalent. A combination of high inflation and weak global growth could only worsen the trade story for India. The sooner the recession fears are done away with, the better it would be.