Apr-24 trade deficit widens to $19.10 Billion as exports fall sharply

23 May 2024 , 09:59 PM

RED SEA CRISIS TAKES ITS TOLL ON MERCHANDISE EXPORTS

The Red Sea crisis has gone through various iterations in the last 6 months since it first started. Just as the Indian economy had managed to extricate itself from the impact of a possible global hard landing, the Red Sea crisis came as a nasty blow. Here is what has happened in the Red Sea crisis in the last 6 months since it first started.

• It began with massive attacks engineered by the Hamas on Israel, resulting in Israel virtually declaring war on the Hamas. Over the last few months, Israel has not only dug deep into Palestine, but has also kept up the barrage of attacks on Hamas targets.
• To protest against the human rights violations by Israel in Palestine, the Houthi rebels of Yemen offered unofficial support to the cause. They started by firing rockets at Israeli ships that passed through the Red Sea, but gradually more ships were targeted.
• The Red Sea route connects Asia with the Suez Canal and is the gateway for Asian goods to reach Europe and the US in the most economical manner. Amidst the Red Sea route, Asia could not use the Suez Canal route and had to use the much longer African route.
• Most of the major shipping liners in the world, decide to switch from the Red Sea route to the Horn of Africa route. That going around the Cape of Good Hope in South Africa and then turning around the Indian Ocean to reach other Asian markets.
• While this circuitous route made the journey to Asia longer by 10-15 days, it had two other implications. The first implication was that price of crude oil shot up from $70/bbl to $90/bbl since most of the oil and gas typically travels through this route.
• The other impact of the longer route was that the freight and insurance costs went up. A combination of delayed deliveries and higher freight and insurance costs has had an inflationary impact on India and has hit the export volumes in April 2024.

In recent months, the situation has gotten a lot more complicated with Iran also joining in the fray after Israel allegedly attacked Iranian facilities in Syria. The involvement of Iran has larger implications as they control the gateway to the Straits of Hormuz, which moves most of the oil and gas through Asia. The export impact could continue for longer.

APRIL 2024 OVERALL DEFICIT MELLOWED BY SERVICES TRADE

The merchandise trade deficit in April 2024 at $19.10 Billion is the highest level since December 2023. That has clearly been an outcome of trade constraints created by the Red Sea crisis and the consequent impact on freight costs and insurance costs. However, the overall trade deficit is not just about merchandise trade, but also about services trade. In India the Ministry of Commerce reports the merchandise trade data on a monthly basis. However, the services trade data is reported by the RBI with a lag of one month. To permit a comparison of trade and services data, the Directorate General of Foreign Trade (DGFT) extrapolates the lag data to the current month, to make it comparable with goods data. Since the merchandise trade story has been well documented, let us look at services.

India has traditionally run a deficit on the merchandise trade account but a surplus on the services trade account. For the month of April 2024, the services exports were 14.7%  higher at $29.57 Billion, while the services imports were 21.56% higher yoy at $16.97 Billion. This translates into a services trade surplus of $12.60 Billion, which is 6.6% higher on a yoy basis. When the services trade surplus is combined with the merchandise trade deficit, the overall trade deficit for April comes down to just $6.50 Billion. This figure is the key input that goes into the current account deficit (CAD) calculation. What do these services comprise of? In the Indian context, the services exports are predominantly IT services. However, other services like accounting services, legal services, auditing services, medical services, and global competency centres (GCCs). They have given the edge to India in bringing its CAD progressively under control.

HOW MERCHANDISE TRADE PANNED IN LAST 1 YEAR

The table below captures the monthly data of merchandise exports, imports, and trade deficit over last one year. April 2024 marks the fifth successive month when the merchandise trade deficit has been under the $20 Billion mark.

Monthly Data	Exports ($ Billion)	Imports ($ Billion)	Total Trade	Trade Surplus / Deficit
Apr-23	34.66	49.90	84.56	-15.24
May-23	34.98	57.10	92.08	-22.12
Jun-23	32.97	53.10	86.07	-20.13
Jul-23	32.25	52.92	85.17	-20.67
Aug-23	34.48	58.64	93.12	-24.16
Sep-23	34.47	53.84	88.31	-19.37
Oct-23	33.57	65.03	98.60	-31.46
Nov-23	33.90	54.48	88.38	-20.58
Dec-23	38.45	58.25	96.70	-19.80
Jan-24	36.92	54.41	91.33	-17.49
Feb-24	41.40	60.11	101.51	-18.71
Mar-24	41.68	57.28	98.96	-15.60
Apr-24	34.99	54.09	89.08	-19.10

Data Source: DGFT

The last above table only captures the merchandise trade (trade in goods). The last 2 columns deserve attention. The total trade is the sum of exports and imports and is a good barometer of total economic activity, jobs created and the total government revenues. The deficit is the excess of imports over exports and shows how much of the deficit has to be financed; either with services surplus or through other means. In the last 13 months, the average monthly total trade has been $91.84 Billion while the average monthly trade deficit in the same period has been to the tune of $20.34 Billion. However, it must be said here that the trade deficit has been under $20 Billion for the last 5 months in a row, and a combination of export thrust and import substitution appears to be working.

During the last 13 months, the highest total trade was achieved in February 2024 at $101.51 Billion while the lowest total trade was seen in April 2023 at $84.56 Billion. The highest trade deficit in the last 13 months was seen in October 2023 at $31.46 Billion, which is also the highest trade deficit recorded by India in any month in its history. The lowest trade deficit was visible in the month of April 2023 at $15.24 Billion. Things have changed for the better in the last 2 years. While exports are robust, imports have been gradually controlled by better vendor terms (like Russian oil) and through import substitution. At the same time, the services surplus has grown substantially in last 2 years, such that in some months, the services surplus almost wipes out the merchandise trade deficit.

WHAT BOOSTED MERCHANDISE EXPORTS IN APRIL 2024

Obviously, one of the key strategies to reduce the trade deficit has been to boost exports. Here are the star export performers in April 2024, based on the yoy percentage increase in exports. Electronic Goods (+25.80%), Tea (+25.74%), Organic & Inorganic Chemicals (+16.75%), Coffee (+15.87%), Tobacco (+13.22%), Spices (+12.27%), Drugs & Pharma (+7.36%), Cotton Yarn (+6.65%), and Carpets (+5.64%) were the key export growth drivers in the month of April 2024. The spike in electronics exports in recent months is largely from the big thrust to the manufacture and export of mobile phones in India. The China Plus One policy has surely worked in favour of India in this particular case.

In April 2024, the mix favoured the losers over gainers in the ratio of 17:13, which is a signal that export momentum has been seriously impacted by the Red Sea crisis. Electronics has not just gained traction, but has become the single biggest driver of the export basket in April 2024. The surge in export of mobile phones under the product linked incentive (PLI) schemes has made the big difference. In April, the quality of the export basket improved with value added products like electronic goods, chemicals and pharma playing a key role.

WHAT PULLED DOWN MERCHANDISE IMPORTS IN APRIL 2024

If boosting exports is one way to bring down the trade deficit, the other is import substitution. In the last one year, India has substituted Indian imports of OPEC oil with Russian oil due to its lower price. That has help keep the oil driven deficit in control. The second is the boost to defence by reducing defence imports, in-sourcing substantial needs and also boosting defence exports. That was amply visible in the month of April 2024. In fact, out of the 30 key items of imports, April 2024 saw 14 products reporting lower imports showing relatively favourable traction for the trade deficit reading for April 2024.

Major items in the trade basket that showed lower imports yoy in April 2024 included Sulphur & Unroasted Iron Pyrites (-71.75%), Pearls & Precious Stones (-21.12%), Raw and Waste Cotton (-16.31%), Wood & Wood Products (-14.11%), Coal, Coke, Briquettes (-11.71%), Artificial Resins (-10.23%), and Fertilizers (-8.3%). The lower imports were triggered by lower import demand due to the global demand slowdown, combined with the enhanced domestic output and import substitution policy.

WHAT WE READ FROM SERVICES TRADE FOR MARCH 2024

In India, the Directorate General of Foreign Trade (DGFT) reports merchandise trade data, while the services trade data is reported with a one-month lag by RBI. The DGFT also provides indicative extrapolated figures of services trade for current month. Services trade surplus largely neutralizes merchandise trade deficit.

Macro Variables (Monthly)	Apr-24 ($ bn)	Mar-24 ($ bn)	Apr-23 ($ bn)	Change YOY
Merchandise Exports	34.99	41.68	34.62	1.07%
Merchandise Imports	54.09	57.28	49.06	10.25%
Total Merchandise Trade	89.08	98.96	83.68	6.45%
Merchandise Trade Deficit	-19.10	-15.60	-14.44	32.27%
Services Exports	29.57	28.54	25.78	14.70%
Services Imports	16.97	15.84	13.96	21.56%
Total Services Trade	46.54	44.38	39.74	17.11%
Services Trade Surplus	12.60	12.70	11.82	6.60%
Combined Exports	64.56	70.22	60.40	6.89%
Combined  Imports	71.06	73.12	63.02	12.76%
Overall Trade Volume	135.62	143.34	123.42	9.88%
Overall Trade Deficit	-6.50	-2.90	-2.62	148.09%

Data Source: DGFT and RBI

Here is what we read from the April 2024 analysis of India merchandise and services trade numbers. Our focus will be more on the services trade numbers here.

• Services exports in April 2024 were higher 14.70% compared to the year ago period and also higher by 3.61% compared to the previous month of March 2024. The services imports were higher by 21.56% yoy while it was also higher by 7.13% on MOM basis. As a result, the services trade surplus in April 2024 increased by 6.60% on a yoy basis to $12.60 Billion. On MOM basis, the services trade surplus was marginally lower.
• Services trade surplus arises from export of IT and other BPO services. In recent months, non-cyclical verticals like consultancy services to global clients, knowledge and innovation centres, global capability centres (GCC), outsourced legal / audit services etc, have assumed prominence. These have boosted services surplus in recent months.
• How did services trade impact the overall picture of trade for April 2024? The deficit on merchandise trade account in April 2024 was wider by 32.27% yoy at $19.10 Billion. It was also sharply higher on MOM basis. However, this was only partially offset by the services surplus, which improved 6.60% on yoy basis. As a result, the overall trade deficit stood at a level of $-6.50 Billion, which is sharply higher on a yoy basis and also MOM.

What does this array of data mean for the current account deficit (CAD)?

CAD OUTLOOK FOR FY25

It may be too early to put out extrapolation of CAD for FY25. The FY24 data itself is awaited and based on the final trade and services date for FY24, it looks like the current account deficit (CAD) would be around 1% or lower than that. For FY25, the economists are already pegging the CAD to be at around 1.25% of GDP, but these are early days still. For starters, there are several X-factors at this juncture. For example, the outlook for global trade and for oil prices remains uncertain. For now, it does look like the CAD for FY25 may be higher. But, the first thing we need to do is to await the CAD data for FY24, which will be released in the last week of June 2024.