November trade deficit narrows to $23.89 on lower imports

16 Dec 2022 , 11:35 AM

Total trade was just $95.82 billion in August 2022, $96.61 billion in September 2022 and $86.47 billion in October 2022. For November 2022, the total trade is at $87.87 billion. The fall in total trade is not so much about volumes as it is about commodity prices.

The impact has been felt on exports and imports too. However, the merchandise exports in November 2022 bounced back above the $30 billion mark after briefly dipping below that mark in October 2022. Imports have been consistently falling, thanks to a slew of regulatory measures that have curbed imports. Weak oil prices have also helped, combined with imports of Russian oil. This has kept headline imports under check and given relief on trade deficit front. FIEO has been complaining that the global slowdown fears in the US, UK and EU are forcing corporates to go easy on spending and inventories. Total trade is relevant to the FIEO as it measures the volume of business and the jobs created by the trade sector.

Data Source: DGFT

How does the macro picture for the first 8 months of FY23 look? If you look at the total merchandise trade (imports plus exports) for FY23, it stands at $788.87 billion; 21.9% higher than the comparable figure last year. If India is able to maintain this growth ratio for the full year, we are looking at total trade in the vicinity of over $1.20 trillion to $1.25 trillion. If you look at overall trade in goods and services, it stands at $1.10 trillion for FY23; i.e. 23.9% higher than last year. So it would surely be record trade numbers in FY23; in terms of merchandise trade and overall trade.

Trade deficit tapers to manageable levels

The trade deficit had peaked at $30 billion in July 2022, but has progressively tapered in the next few months. Here are some key takeaways.

1. Both exports and imports have fallen from the peak levels of June and July. That is largely due to a fall in commodity prices and marginally due to volume impact.
2. Trade deficit for November 2022 at $23.89 billion is well below the peak trade deficit of $30 billion in July 2022. It must be noted that the sectors where output is most affected in the last few months are the export driven sectors, so there could be more pain.
3. Let us now turn to the cumulative trade deficit for FY23. As of the end of November 2022, the merchandise trade deficit stands at $198.35 billion, hinting at full year trade deficit in the vicinity of $300 billion. Already, a recent Reuters poll has hinted at current account deficit at 4.3% of GDP for the September 2022 quarter.

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 $560 billion, that would cover just about 8-9 months of merchandise imports. The forex reserves have spiked in the last few weeks due to reduced RBI intervention in currency markets.

Merchandise exports bounce back in November 2022

Exports at $31.99 billion in November 2022 are up 0.6% yoy. On a sequential basis, the exports were up 7.4% compared to October 2022 despite recession fears having an impact on export value. It may be recollected that, after staying above the $40 billion mark for 4 months, merchandise exports fell below that mark in July 2022. It is currently hovering around the $30 billion mark.

There were several star export performers in November 2022. Tobacco (+101.02%), Electronic Goods (+54.48%), Cereals (+53.78%), Oil Seeds (+38.83%), Tea (+27.03%) and Fruits & Vegetables (+25.01%) were the key export growth drivers. Contrary to October, when export depressants outnumbered the boosters, November 2022 is more balanced.

There were a number of export laggards in November 2022. Handicrafts (-38.45%), Cotton Yarn (-34.53%), Iron Ore (-32.25%), Jute (-23.40%), Carpets (-22.61%), Mica/Coal/Ores (-17.88%), man-made fibre (-17.74%), Meat & Dairy Products (-17.68%) and Cashew (-17.56%) lagged in terms of the exports. Restrictions imposed on select exports like iron ore and coal were a reason, but in most other cases it was about tepid global demand amidst slowdown fears. Non-petroleum and non-jewellery exports in November 2022 stood at $24.09 billion compared to $23.91 billion in November 2021.

Crude and Fertilizers put pressure on merchandise imports

Merchandise imports for November 2022 stood at $55.88 billion, up 5.37% yoy. Imports were -1.43% lower on a sequential basis but were lower by -15.73% compared to the June 2022 peak. Crude oil imports at $15.74 billion in November 2022 was higher on a yoy basis by 10.5% while it was flat on a MOM basis. Crude still accounts for about one-third of India’s import bill, so this only puts more pressure on the trade deficit.

The big import surge in November 2022 came from Raw Cotton (+84.66%), Newsprint (+82.02%), Pulp & Waster Paper (+49.05%), Iron & Steel (+47.95%), Wood & Wood Products (+36.36%), Optical goods (+34.01%), Fertilizers (+20.53%) and Transport Equipment (+17.90%). Major items in the basket that showed lower imports yoy in November 2022 were Project Goods (-43.13%), Ores & Minerals (-38.02%), Silver (-36.59%), Sulphur and Iron Pyrites (-33.99%) and Gold (-23.24%). The big news for the month of November 2022 was that the gold imports are sharply down at $3.2 billion with tepid demand in festive season.

Watch out for the Current Account Deficit impact

Economists have been predicting a CAD of around $100 billion for the full year. That is just about 3% of GDP and may be too optimistic. One can just use a simple extrapolation to fathom why these estimates are just too optimistic. The overall trade deficit combining merchandise and services trade has surged from $(87.16) billion in September 2022 to $(98.52) billion in October 2022 and further to $(111.03) billion in November 2022. At this run rate, the overall deficit could end up closer to $170 billion and does pose a challenge to the current account deficit (CAD) levels.

Particulars	Exports FY23 ($ bn)	Imports FY23 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$295.26 bn	$493.61 bn	$(-198.35) bn
Services Trade #	$204.41 bn	$117.09 bn	$+87.32 bn
Overall Trade	$499.67 bn	$610.70 bn	$(-111.03) bn

Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)

At the current run rate, it looks like India could close FY23 with overall deficit of $170 billion. That would approximately translate into current account deficit of over 4.5% of GDP. That nearly corresponds to what even the Reuters poll now confirms for the September quarter and it could extrapolated for the full year too. India looks set to end FY23 with merchandise trade deficit of around $310 billion. That would mean a lot of imported inflation and will worsen the CPI inflation levels. With the USDINR already in the range of 82-83/$, the pressure on the currency is really going to be relentless. Even sovereign rating outlook could face pressure. Clearly, India needs a pragmatic resolution to the trade deficit challenge!