Sep-21 Trade deficit widens to record $22.6 billion

The good news is that the exports have shown a distinct upward shift when compared with pre-COVID exports in the corresponding period in 2019. However, this does not mask the fact that trade deficit sharply widened in Sep-21 from $13.81 billion to $22.60 billion.

Oct 18, 2021 07:10 IST India Infoline News Service

The month of Sep-21 marked the seventh consecutive month in which merchandise exports remained above $30 billion. However, it looks like the total merchandise exports are now stuck in a narrow range of $30-35 billion over last 7 months. During the same period, imports have gone up sharply resulting in record merchandise trade deficit.

It is easy to get misled by the yoy export growth as 2020 was an exceptionally weak year. The good news is that the exports have shown a distinct upward shift when compared with pre-COVID exports in the corresponding period in 2019. However, this does not mask the fact that trade deficit sharply widened in Sep-21 from $13.81 billion to $22.60 billion.

The total trade (aggregate of exports and imports) is a good indicator of MSME orders, government revenues and job creation. For the first time, the total trade crossed $90 billion in the month, although steeply higher imports played an inordinately significant role in this jump. For the first 9 months of 2021, India reported record trade deficit with China, which drives 40% of India’s trade deficit.

Data Source: DGFT

On sequential basis, exports were up 1.53% while the imports were up by a whopping 19.75%. If you compare with pre-COVID levels of September 2019, merchandise exports are up by 29.86% while merchandise imports are up by 49.59%. The bias towards import intensity is the big shift in Sep-21.

Sep-21 exports were steady, but big push seems missing

Exports at $33.79 billion in Sep-21 were up 22.63% yoy. This growth can be considered to be optical as Sep-20 was still facing the lag effect of COVID-19 pandemic. However, sequential export growth was fairly subdued at 1.53%. The growth over 2019 indicates that exports are well above pre-COVID levels. Let us look at the star export performers.

There were several star export performers in Sep-21. Exports of Coffee (+62.55%), Cashew (+49.4%), Petroleum Products (+47.91%), Cotton Yarn (+40.5%), Engineering Goods (+36.83%), Chemicals (+29.65%), Man-made fabrics (+26.49%), Electronic Goods (+26.33%), Cereals (+21.18%) and Fruits & Vegetables (+21.13%) were the big growth stories.

There were some export laggards too like Iron Ore (-72.77%), Oil Meals (-39.05%), Oil Seeds (-26.77%), Tobacco Products (-16.31%) and Ceramic Products (-14.15%). Non petroleum and non-jewellery exports in Sep-21 stood at $25.34 billion against $21.33 billion in Sep-20. Cumulative value of exports for Apr-Sep period was up 57.53% at $197.89 bn.

Import surge in Sep-21 driven by crude prices and gold imports

Merchandise imports for Sep-21 stood at $56.39 billion, up 84.77% yoy. Imports were up 19.75% sequentially. Crude oil imports at $17.44 billion in Aug-21 were higher by 199.27% yoy. Crude oil bill is higher by $5.79 billion on sequential basis, indicating that rising price of Brent Crude was putting real pressure on trade numbers.

The major commodity that showed lower imports on a yoy basis for Sep-21 was (-47.30%) for Project Gods. Cumulative value of imports for Apr-Sep stood at $276.02 billion.

Overall deficit for FY22 widens sharply in Sep-21

For FY22 (Apr-Sep), combined deficit of merchandise and services trade was $(-28.63) billion. The sharply higher merchandise trade deficit, widened the overall deficit by $11.37 billion from $(-17.26) billion to $(-28.63) billion.
Particulars Exports FY22 ($ bn) Imports FY22 ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $197.89 bn $276.02 bn $(-78.13) bn
Services Trade # $114.58 bn $65.08 bn $+49.50 bn
Overall Trade $312.47 bn $341.10 bn $(-28.63) bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

India ended FY21 with net overall deficit of -$12.75 billion. For FY22 (Apr-Sep), India reported overall deficit of $(-28.63) billion. If you statistically extrapolate this trend for coming months, the overall deficit could widen to about 5 times the FY21 levels. That is likely to put a lot of pressure on the current account in FY22.

India must worry about gold imports and China trade deficit

Last month we had reported about the decisive growth in exports and imports over the 2019 pre-COVID period. That trend has sustained even in the current month. However, there are three areas to worry about.
  • Gold imports were the bane in Sep-21. Total gold imports stood at $5.1 billion in Sep-21, emerging as the third largest item of imports in value terms. That is a lot of precious forex spent on an unproductive asset like gold.
  • China is driving the overall trade deficit and driving it hard. Out of the total trade deficit of $119 billion for Jan-Sep 2021, China accounted for $47 billion or 40% of the entire trade deficit. That is hardly a comforting thought.
  • Lastly, services exports are providing stability but the gap between the services surplus and the merchandise trade deficit has been consistently widening.
Import bill is likely to remain elevated as capital exports are rising as is the price of crude. The big areas of focus must be boosting exports. That is the only answer to the trade puzzle!

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