Trade deficit widens in Oct-20 as export growth slackens

The merchandise exports for Oct-20 was 5.65% lower on a yoy basis but 9.75% lower on sequential basis.

Nov 18, 2020 10:11 IST India Infoline News Service

If Sep-20 was a positive exports story, then Oct-20 has been relatively disappointing for exports. The first indications of a fall in exports were given by the government in the first week of November itself. The merchandise exports for Oct-20 was 5.65% lower on a yoy basis but 9.75% lower on sequential basis. After showing some promise in the month of Sep-20, exports are now back to Jul-20 levels and that is a tad disappointing.

Overall trade, which is the aggregate of exports and imports,stayed above $58 billion levels. Interestingly, the bigger contribution in Oct-20 has come from imports. For Oct-20, the merchandise imports were down 10% on a yoy basis but were actually higher by 11.9% on a sequential basis. That is the gist of the Oct-20 trade story.

Data Source: DGFT (Directorate General of Foreign Trade)

Merchandise trade deficit for Oct-20 widened sharply to $8.72 billion, compared to a deficit of just $2.73 billion in Sep-20. India had briefly reported a trade surplus of $0.80 billion in the month of Jun-20;which looks more like an exception than a rule. An overall increase in trade volumes is positive but it must not be allowed to skew in favour of imports.

Exports drag in Oct-20 after a robust performance in September

Analysts had been inclined to believe that the jump in exports in Sep-20 would sustain, but that was not to be.Merchandise exports for Oct-20 stood lower at $24.89 billion,a fairly steep fall on a sequential and yoy basis.

There were some star export performers in Oct-20. Exports of cereals (+378.23%), Rice(+113.62%), Oil Meals(+78.57%), Iron Ore (+74.14%), Oil Seeds (+54.21%), Carpets(+37.67%), processed cereals (+36.18%), Ceramics (+34.92%), Spices (21.85%),pharmaceuticals (+21.83%), jute (+18.73%), Meat & Dairy (+16.66%) and Handicrafts (+11.38%) were some highlights.

Of course, there were export laggards too. Petroleum Products(-52.04%), Cashew(-21.57%), Gems & Jewellery (-21.27%), Leather Products (-16.67%), Man-made yarn (-12.8%), electronic goods (-9.36%), Coffee (-9.23%) and marine products (-8.09%) were a drag. For the first 7 months of FY21 (Apr-Oct), merchandise exports were down 19.02% in dollar terms at $150.14 billion.

Imports spurt over 10% on sequential basis inOct-20

Merchandise imports for Sep-20 stood at $33.61 billion, a fall of (-11.53%) on a yoy basis.However, imports were sharply higher by over 11.9% on a sequential basis. Crude oil imports at $5.98 billion were lower by 38.52% as Brent Crude stayedbelow $42/bbl despite hopes of a COVID vaccine.

Apart from oil, imports were lower for other items too. On a yoy basis, the fall was (-56.32%) for transport equipment, (-38.52%) for petroleum products, (-15.55%) for machinery, (-6.5%) for coal, coke & briquettesand (-2.87%) for organic &inorganic chemicals.

Overall trade surplus is positive but shrinking

In the first 7 months of FY21 (Apr-Oct), the combined surplus of merchandise and services trade shrank by $1.22 billion over Sep-20 to $16.52 billion. Clearly, the surplus on services has not been enough to offset the merchandise trade deficit in October 2020. Currently, services trade data is reported by RBI with a 1-month lag and hence it is only illustrative for comparison purpose.

Particulars Exports ($ bn) Imports ($ bn) Surplus / Deficit ($ bn)
Merchandise trade $150.14 bn $182.29 bn $(-32.15) bn
Services Trade # $114.96 bn $66.29 bn $+48.67 bn
Overall Trade $265.10 bn $248.58 bn $+16.52bn
Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

For the month of October 2020, the merchandise trade deficit was at (-$8.72) billion while services trade surplus was at $7.50 billion resulting in an overall trade deficit of $(-1.22) billion. That reduced the cumulative overall surplus for FY21.

What to focus in the coming months?

In the first 7 months of FY21 India had overall trade surplus of $16.52 billion. The overall trade deficit for Oct-20 is not great news for the current account surplus. Here are some triggers to keep a tab on.

• Large swathes of Europe are again shutting due to COVID relapse and that is not good for exports or overall trade. Many key exports segments will be impacted.

• India GDP contraction estimates have improved from -10.5% to -8.5%. That is still a huge challenge for export volumes.

• Biden’s election could have larger implications for US relations with China and markets are expecting trade normalization. That would only be visible post Jan-21.

• Biden has traditionally been opposed to fracking for crude on Federal lands and that could mean reduced supply and higher oil prices in the future.

• The surge in exports in metals and ore has been led by Chinese demand, wherethe geopolitical implications cannot be overlooked.

Oct-20 has been a disappointment in terms of the fall in exports and the rise in imports. That has pulled down the cumulative overall surplus. The quicker the Atma Nirbhar program delivers results on the trade front, the better it is!

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