Trade volumes in May 2020 recover and trade deficit narrows

The growth in trade volumes in May over April is the first signal that trade and economic activity are getting back to normal levels.

June 16, 2020 12:47 IST | India Infoline News Service
There were two slices of good news in May 2020 with respect to trade flows. Firstly, the overall merchandise trade (imports + exports) saw a sharp improvement in May compared to April. Total trade in May 2020 bounced back to $41.25 billion compared to just $27.48 billion in April 2020. Of course, the May 2020 numbers are still substantially lower than the level of $75.35 billion achieved in May 2019 but that is because we live in volatile times. The growth in trade volumes in May over April is the first signal that trade and economic activity are getting back to normal levels. Also, the trade deficit has narrowed to $3.15 billion, which is the lowest trade deficit in over 10 years.

Data Source: DGFT

What exactly explains the bounce in trade volumes and the narrowing of the merchandise trade deficit? Most transport and manufacturing functions started reopening by early May and that gave a boost to exports, despite social distancing requirements. There was also an overall recovery in markets across Asia and Europe as the stimulus resulted in a boost to demand. Also, more countries started unlocking in May compared to the virtual shutdown in April. These factors contributed to a bounce in overall trade in May 2020 over April.

Exports pick up in May 2020 over April

Merchandise exports for May-20 stoodat $19.05 billion, a fall of (-36.28%) on a YOY basis. But that may not be the real picture. The fact is that the merchandise exports are up 84% over April, giving an indication of MOM pick-up in economic activity. However, supply chain constraints still remained and that puts limits on the rapid expansion of exports. The good news was that some of the segments of exports saw good growth even on a YOY basis. For example, exports of iron ore (+103%), drugs & pharma (+17.3%), Spices (+10.6%) and rice (+7.6%) were the star performers in the month of May. Other than these four product groups above, all the other products saw fall in exports in May on a YOY basis. Some of the product groups that saw deep cuts include leather products (-75%), Handicrafts (-73%), Gems & jewelry (-69%), petroleum products (-68%), Jute (-66%), meat / dairy (-57%) etc. The dollar exports saw a sharper fall on a YOY basis compared to rupee exports due to weakness in the INR.

Imports pick up gradually, narrowing the trade deficit

Merchandise imports for May-20 stood at $22.20 billion, a fall of (-51.05%) on a YOY basis. Crude oil imports at $3.49 billion were lower by (-71.98%) after Brent and WTI prices crashed to multi-year lows towards the end of April. There was good news for the government with gold imports falling by 98%. Normally gold imports are frowned upon as they add to the trade deficit without adding to domestic productivity.There were deep cuts in other imports too. There was a (-44.93%) fall in coal / coke imports, (-40.32%) for electronic goods and(-34.37%)for electrical & non-electrical machinery. The imports for May 2020 grew by just 17% over April as compared to an 84% growth in exports. This led to the trade deficit narrowing to a 10-year low of $3.15 billion.

An overall surplus in May-20 betters April performance

The table below captures the May 2020 data for exports and imports of merchandise and services. The sharp contraction in the merchandise deficit has left the Indian economy with an overall surplus when the services trade is also considered.

Period Exports Imports Trade Deficit / Surplus
Merchandise (May-20) $19.05 bn $22.20 bn $(-3.15) bn
Services-May(Estimate) $15.70 bn $8.57 bn $+7.13 bn
Overall Surplus (May) $+3.98 bn

It needs to be noted that the overall surplus has improved from $0.16 billion in April to $3.98 billion in May 2020. This also promises to ensure a current account surplus in the first quarter as NRI remittances remain robust. Of course, services data comes with a lag of one month and hence DGFT estimates are used for this purpose, which is normally close enough.

A two-pronged trade approach needed

The positive development in May has been the sharp spike in overall trade. That is necessary to keep the income levels and job creation in the EXIM space up and running.  Now comes the bigger challenge! The government has identified specific sectors like pharmaceuticals, specialty chemicals and electronics as the big export thrust areas. It is time to action these plans when the iron is hot. On the imports front, it is time for a more perspective plan on oil security. More importantly, there is the need to hedge India’s oil price risk more effectively to keep the trade balance in check.

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