April 2023 trade deficit narrows to $15.24 billion, overall deficit vanishes

16 May 2023 , 09:36 AM

Merchandise trade deficit for the month of April 2023 stood at $15.24 billion. By merchandise trade deficit, we mean the deficit from the trade in physical goods. This is sharply lower compared to March 2023 deficit and almost half of the peak trade deficit of $30 billion reported in the month of July 2022. To an extent, the sharp fall in commodity prices and import substitution strategies have been instrumental in lower import. Export volumes have also fallen on account of weak global demand for Indian goods due to uncertainty created by the global banking crisis and fears of an economic slowdown.

For the month of April 2023, the gross merchandise trade (exports + imports) stood at $84.56 billion compared to $96.5 billion in March 2023. The gross merchandise trade is still well short of the $100 billion of gross trade scaled between March 2022 and July 2022. That is understandable considering the tapering of commodity prices. However, the big story, as we shall see later was the services exports. If you look at April 2023, the total services exports $30.36 billion while total services imports stood at $16.50 billion resulting in a services trade surplus of $13.86 billion. In short, the services exports in India in April are almost at the same level as merchandise exports and the services surplus has almost wiped out the merchandise trade deficit. But more about that later!

Capturing the merchandise trade story for April 2023

The table below captures the monthly wise data of merchandise exports, imports, and trade deficit for the last 13 months. 

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
Apr-22	40.19	60.30	-20.11
May-22	38.94	63.23	-24.29
Jun-22	40.13	66.31	-26.18
Jul-22	36.27	66.27	-30.00
Aug-22	33.92	61.90	-27.98
Sep-22	35.45	61.16	-25.71
Oct-22	29.78	56.69	-26.91
Nov-22	31.99	55.88	-23.89
Dec-22	34.48	58.24	-23.76
Jan-23	32.91	50.66	-17.75
Feb-23	33.88	51.31	-17.43
Mar-23	38.38	58.11	-19.73
Apr-23	34.66	49.90	-15.24

Data Source: DGFT

As can be seen from the above table, merchandise trade deficit peaked around July 2022 and has tapered since. The good news is that the trade deficit is sharply down and will put less pressure on the current account deficit. The bad news is that the overall trade comprising of exports and imports of physical goods has come down sharply and that is likely impact the job creation and the tax revenues on imports. 

Merchandise export leaders and laggards for April 2023

There were several star export performers in April 2023. Oil Meals (+95.14%), Electronic Goods (+26.49%), Rice (+24.01%), Oil Seeds (+18.01%), Ceramic Products (+17.21%) and Spices (+14.44%) were the key export growth drivers. In April 2023, the export losers outnumbered the export gainers by a ratio of 19:11.

There were several export laggards in April 2023. Gems & Jewellery (-30.04%), Other Cereals (-29.38%), Jute Products (-26.91%), Cotton Yarn (-23.42%), Readymade Garments (-23.10%), Handicrafts (-22.36%) and Mica & Coal (-21.09%) lagged in terms of the exports. The exports laggards were typically where India had traditional export advantages like gems & jewellery, jute, cotton yarn, garments, handicrafts etc.

Merchandise import leaders and laggards for April 2023

The big merchandise import surge in April 2023 came from Pulses (+52.26%), Pulp & Paper (+16.26%), Machinery (+15.23%), Iron & Steel (+14.51%), Optical goods (+5.92%) and Silver (+3.10%). Out of the 30 key items of imports, 7 products saw rise in imports and 23 products saw lower imports in the month of April 2023.

Major items in the basket that showed lower imports yoy in April 2023 were Project Goods (-73.05%), Sulphur & Iron Pyrites (-62.03%), Fertilizers (-45.86%) Gold (-41.48%) and vegetable oils (-37.74%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategy.

Watch out for the story on the services front

It normally happens that the focus of trade is always on merchandise goods and not on services trade. In the US, trade data is disclosed for goods and services combined. However, in India, the merchandise trade data is reported by the Ministry of Commerce each month while the services trade is reported by the RBI with a lag of one month. However, there will be an increasing need to integrated the data closely the way the US does. That is because services trade is growing in terms of export heft and also in terms of the extent to which it is able to neutralize the impact of rising merchandise trade deficits. But first let us get some numbers in place. Here are some highlights to know about services trade for April 2023.

• Services exports for April 2023 stood at $30.36 billion. This is 26.2% higher compared to the services exports reported in April 2022 at $24.05 billion.

   

• Services imports for April 2023 stood at $16.50 billion. This is 17.35% higher compared to the services exports reported in April 2022 at $14.06 billion.

   

• Total services trade (service imports plus service exports) for April 2023 stood at $46.86 billion. This is 22.96% higher compared to the services exports reported in April 2022 at $38.11 billion.

   

• Services trade surplus (service exports minus services imports) for April 2023 stood at $13.86 billion. This is 38.74% higher compared to the services exports reported in April 2022 at $9.99 billion.

Behind this smoke screen of numbers, there is a simple message that comes across. For April 2023, the merchandise trade deficit came in at $15.24 billion while the services trade surplus stands at $13.86 billion. If you combine these two the overall deficit of goods and services put together stands at a mere $1.38 billion, or you can say the overall deficit is almost neutral. That is the big story. Today services exports are not just 88% of merchandise exports, but the services surplus is almost neutralizing the merchandise trade deficit. 

Will the current account position be better in FY24?

FY24 has just begun and we only have one month data. However, the initial indications are good. It is not just positive from falling merchandise trade deficit but also from rising services trade surplus. In FY23, the CAD was expected to get close to 4.5% of GDP. However, lower merchandise trade deficit and higher service surplus rectified the situation. While the CAD data for FY23 will only be announced on the last day of June 2023, data suggests that the CAD would have been closer to 2.5% or lower for FY23. That is good news. Now for the overall cumulative trade picture for April 2023.

Particulars	Exports FY24 ($ bn)	Imports FY24 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$34.66 bn	$49.90 bn	$(-15.24) bn
Services Trade #	$30.36 bn	$16.50 bn	$+13.86 bn
Overall Trade	$65.02 bn	$66.40 bn	$(-1.38) bn

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

The overall trade deficit, which is a combination of the merchandise trade deficit and services trade surplus, stands at a meagre ($1.38) billion for April 2023. These are early days for any data evaluation as we have to await more data points and FY24 has just about started. 

Effectively, if this trend can be maintained, then it would translate into current account deficit (CAD) at well below 0.5% of GDP. That is extremely comfortable, but then economics has a nasty way of surprising when we least expect it to happen. Certainly, the CAD situation should be less of a problem than imagined earlier. Once again, it would be a combination of tepid commodity prices, import substitution as a strategy and boost to service exports will be the key. Indian trade is making up where it is best equipped and nobody is really complaining about it.