May 2023 trade deficit widens to 6-month high of $22.12 billion

16 Jun 2023 , 01:56 PM

For the month of May 2023, the merchandise trade deficit (physical goods) widened sharply to $22.12 billion from $15.24 billion in April. The higher trade deficit was caused by exports falling sharply on the back of weak global demand amidst rising concerns of a slowdown. On a yoy basis, the trade deficit is almost at par with the May 2022 deficit. However, it must be remembered that the flat trade deficit is despite a sharp fall in the price of oil and other commodities which form a predominant part of the Indian import basket. It is not like the commodity prices have not helped or that the import substitution is not helping. Imports are down -6.6% in May but it is just that exports fell much sharper at -10.3% in May 2023.

In the previous month of April 2023, we had mentioned that the services trade surplus had almost wiped out the merchandise trade deficit to close April with an overall trade deficit of just about $1.38 billion. However, May 2023 has seen the overall deficit back into double figures as the merchandise trade deficit widened sharply over April. More importantly, the services exports are facing headwinds as constraints on tech spending is putting pressure on the IT exports which are flat to lower in the current year. That has hurt the overall deficit for the month of May 2023.

Capturing the merchandise trade story for May 2023

The table below captures the monthly wise data of merchandise exports, imports, and trade deficit for the last 13 months. 

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
May-22	38.94	63.23	-24.29
Jun-22	40.13	66.31	-26.18
Jul-22	36.27	66.27	-30.00
Aug-22	33.92	61.90	-27.98
Sep-22	35.45	61.16	-25.71
Oct-22	29.78	56.69	-26.91
Nov-22	31.99	55.88	-23.89
Dec-22	34.48	58.24	-23.76
Jan-23	32.91	50.66	-17.75
Feb-23	33.88	51.31	-17.43
Mar-23	38.38	58.11	-19.73
Apr-23	34.66	49.90	-15.24
May-23	34.98	57.10	-22.12

Data Source: DGFT

The exports of goods have remained flat sequentially over April 2023, but the imports have spiked, largely on the back of non-oil imports spiking over April. In fact, the merchandise trade deficit is at the highest level in the last 6 months and that does raise concerns over imported inflation and the value of the rupee. The other argument is that the trade deficit of $22.12 billion is inordinately high when crude is trading at $73/bbl. If the OPEC supply cuts gives a boost to the oil price then the trade deficit situation could rapidly deteriorate. 

Merchandise export leaders and laggards for May 2023

There were several star export performers in April 2023. Electronic Goods (+73.96%), Cereals (+67.96%), Oil Meals (+52.91%), Spices (+49.84%), Iron Ore (+48.24%), Oil Seeds (+25.02%) and Fruits & vegetables (+19.91%) were the key export growth drivers. In May 2023, the export losers outnumbered the export gainers by a ratio of 17:13. The big growth story was electronics, which has gained largely from the PLI scheme.

There were several export laggards in May 2023. Petroleum Products (-29.90%), Jute products (-29.30%), Handicrafts / carpets (-21.07%), Plastic & Linoleum (-15.17%), Chemicals (-12.72%), RMG Textiles (-12.67%) and Gems & Jewellery (-12.50%) lagged in terms of the exports. The exports laggards were typically where India had traditional export advantages like gems & jewellery, jute, cotton yarn, garments, handicrafts etc. Petroleum products lagged due to the sharp fall in crude prices globally.

Merchandise import leaders and laggards for May 2023

The big merchandise import surge in May 2023 came from Pulses (+150.65%), Newsprint (+40.74%), Fertilizers (+26.94%), Non Ferrous Metals (+25.71%), Machinery (+25.35%) and Machine Tools (+22.32%). Out of the 30 key items of imports, 14 products saw rise in imports and 16 products saw lower imports in the month of May 2023.

Major items in the basket that showed lower imports yoy in May 2023 were Silver (-93.92%), Sulphur & Iron Pyrites (-81.88%), Raw Cotton (-39.81%) Gold (-38.71%) and vegetable oils (-33.02%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategy.

How was the May 2023 story on services trade?

In India, while the merchandise trade is reported by the DGFT, the services trade is reported with a lag of one month by the RBI. With the growing importance of services in the overall GDP and the rising demand global for services from India, this segment assumes a lot more importance. The table captures the gist of the overall trade story, including services/

Macro Variables  (May-23)	May-23  ($ bn)	May-22  ($ bn)	Change  YOY (%)
Merchandise Exports	34.98	39.00	-10.31%
Merchandise Imports	57.10	61.13	-6.59%
Total Merchandise Trade	92.08	100.13	-8.04%
Merchandise Trade Deficit	-22.12	-22.13	-0.05%
Services Exports	25.30	25.13	0.68%
Services Imports	13.53	15.20	-10.99%
Total Services Trade	38.83	40.33	-3.72%
Services Trade Surplus	11.77	9.93	18.53%
Combined Exports	60.28	64.13	-6.00%
Combined  Imports	70.63	76.33	-7.47%
Overall Trade Volume	130.91	140.46	-6.80%
Overall Trade Deficit	-10.35	-12.20	-15.16%

Data Source: DGFT

What do we read from the May 2023 analysis of India merchandise and services trade numbers. Here are some key takeaways.

• Services exports in May 2023 were flat compared to last year, but the services imports were lower by -3.7% on yoy basis. As a result, the services trade surplus in May 2023 improved by 18.5% over the previous year.

   

• Where does the services trade surplus come from? It mainly comes from the export of IT and other BPO services, consultancy services offered to global clients, knowledge and innovation centres set up by global companies in India etc.

   

• How did services trade impact the overall picture of trade in May 2023? The deficit on merchandise trade in May 2023 was flat compared to the previous year. However, there was a spike in the services trade surplus which led to the overall combined trad deficit narrowing by nearly 15.2%.

However, the services surplus in May has not been as impressive as in April, when the services surplus had almost wiped out the merchandise trade deficit. In May, the services trade surplus was impacted by weak IT spending leading to double digit overall deficit.

How to the overall trade equations look for FY24

While the monthly picture of overall trade gives a momentum picture, it does not give an idea of how much the current account deficit would be. For instance, the most important component of the current account deficit is the overall trade deficit; combining the merchandise trade deficit with the services trade surplus. If we annualize the current run rate for the first 2 months of FY24, we are looking at a full year combined deficit of around $75 billion. That is a comfortable scenario compared to FY23. Check out the table below.

Macro Variables  (FY24)	FY24  ($ bn)	FY23  ($ bn)	Change  YOY (%)
Merchandise Exports	69.72	78.70	-11.41%
Merchandise Imports	106.99	119.18	-10.23%
Total Merchandise Trade	176.71	197.88	-10.70%
Merchandise Trade Deficit	-37.27	-40.48	-7.93%
Services Exports	51.14	49.17	4.01%
Services Imports	27.16	29.25	-7.15%
Total Services Trade	78.30	78.42	-0.15%
Services Trade Surplus	23.98	19.92	20.38%
Combined Exports	120.86	127.87	-5.48%
Combined  Imports	134.15	148.43	-9.62%
Overall Trade Volume	255.01	276.30	-7.71%
Overall Trade Deficit	-13.29	-20.56	-35.36%

Data Source: DGFT (FY24 and FY23 refer to April-May)

As of the close of April 2023, the overall deficit was just $1.38 billion. In just one month it has widened to $13.29 billion. However, if you compare FY24 year to date with FY23, then the overall deficit has narrowed by 35.4%,thanks largely due to a 20.4% expansion in the services trade surplus. What does that mean for the current account deficit?

Effectively, if this trend can be maintained, then it would translate into current account deficit (CAD) at below 2% of GDP. That is extremely comfortable, but then economics has a nasty way of surprising when we least expect it to happen. Once thing is certain that the policymakers have less to worry this year on the CAD front. Once again, would could see the benefits of a combination of tepid commodity prices, import substitution as a strategy and boost to service exports for an improved CAD situation in FY24. The early portents are positive for the CAD. The hope is that there are no negative surprises on the macro front.