August 2023 trade deficit widens to $24.16 billion on import surge

16 Sep 2023 , 08:35 AM

For August 2023, the merchandise trade deficit (physical goods) widened sharply from $20.67 billion to $24.16 billion, a near 16.9% widening MOM. On a sequential basis, the exports were marginally higher, but what really widened the trade deficit was the surge in imports in the month. In fact, merchandise imports surged from $52.92 billion in July to $58.64 billion in August 2023; a spike of 10.81% MOM. The Fed and other central banks have been persistently hawkish and that has once again raised fears of a global slowdown in the last quarter of 2023. That has kept global demand capped and that is showing in tepid exports growth for India. The breaching of Russian oil import cap and the higher crude prices has been one of the factors that spiked the import value in August. For the last few months, the export-oriented sectors like textiles, leather, apparel, and electronic products have been the most impacted as we shall see later in our analysis of product wise performance of the trade basket. 

Did services trade come to the rescue once again?

In the last few months, the general narrative has been the merchandise trade under stress but the services trade more favourable amidst growing exports. That trend repeated in the month of August also. Just look at the numbers. The merchandise trade deficit for August 2023 is still way below the last year peak of $30 billion, but well above the median trade deficit of around $20 billion in the last few months. In August, the services exports were flat on yoy basis, but imports fell, leading to a sharp rise in the services trade surplus. However, it must be noted that the services exports are also facing headwinds due to constraints on tech spending. However, the good news is that many forms of service exports like contract research, global capability centres (GCC), consultancy services etc are not impacted by an economic slowdown. In fact, many of these services take off during tough times. The overall deficit for August 2023 (merchandise trade deficit adjusted for services trade surplus) actually widened MOM from $8.35 billion in July to $11.63 billion in August 2023. 

How merchandise trade panned out over the last 1 year

The table below captures the monthly wise data of merchandise exports, imports, and trade deficit over the last year. In 9 out of the last 13 months, the merchandise trade deficit has been above $20 billion, after peaking at $30 billion in July 2022.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
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
May-23	34.98	57.10	-22.12
Jun-23	32.97	53.10	-20.13
Jul-23	32.25	52.92	-20.67
Aug-23	34.48	58.64	-24.16

Data Source: DGFT

August 2023 marks the widest merchandise trade deficit since October 2022. If you look at August 2023 on a sequential basis (over July 2023), the exports of goods have grown, but the imports of goods have grown much faster. For instance, the merchandise exports in August at $34.48 billion was 6.9% higher on a sequential basis and 1.65% higher on a yoy basis. On the other hand, merchandise imports in August at $58.64 billion was 10.81% higher on a sequential basis but -5.27% lower on a yoy basis.. This can be attributed to the fact that the oil prices are still below the peak levels of a year ago and the commodity basket is also a lot cheaper. But that advantage may be peaking out. Let us now turn to the export and import leaders and laggards for the month of August 2023.

Merchandise export leaders and laggards for August 2023

There were several star export performers in August 2023. Iron ore (+1,556%), Oil Meals (+57.26%), Ceramic & Glassware (+29.28%), Electronic Goods (+26.29%), Cotton Yarn (+26.00%), Tobacco (+20.03%) and Oil Seeds (+17.02%) were the key export growth drivers in the month of August 2023. In the month of August 2023, the export gainers and export losers were evenly distributed in the ratio of 15:15, which is a positive development compared to previous months. Iron ore has gained from a more positive policy environment and a low base, but some product heads like electronic goods, ceramics and engineering goods are also reaping the benefits of the PLI (product linked incentive) scheme. The government thrust on import substitution has also helped, although the visible impact is more on the imports front.

There were also several export laggards in August 2023. Cereals (-43.06%), Petroleum Products (-30.61%), June Products (-23.17%), Gems & Jewellery (-21.94%), Organic & inorganic chemicals (-17.83%), Spices (-11.20%) and Rice (-9.84%) lagged in terms of the exports. The exports laggards were typically concentrated in areas where India had traditional export advantages like gems & jewellery, jute, cotton yarn, garments, handicrafts etc. This is largely due to weak global demand amid slowdown fears. Petroleum products lagged due to the sharp fall in crude prices globally. Some of the agri products like rice and cereals also saw sharp fall in exports due to internal restrictions placed by the Indian government to defend supplies for the domestic market. Merchandise exports appear to be overall stuck in a very narrow range, and still appears to be missing the big narrative.

Leaders and laggards in merchandise imports for August 2023

The big merchandise import surge in August 2023 came from Project Goods (+517.83%), Dyeing / Tanning material (+209.14%), Chemical Products (+99.36%), Pulses (+76.31%), Gold (+38.75%), Newsprint (+30.72%) and Iron & Steel (+30.08%). Out of the 30 key items of imports, it was an evenly balanced narrative with 15 products showing rise in imports and 15 products showing lower imports in the month of August 2023.

Major items in the overall basket that showed lower imports yoy in August 2023 included Silver (-78.15%), Raw Cotton (-74.67%), Fertilizers (-55.69%), Coal, Coke, Briquettes (-43.47%), Leather Products (-33.17%), Organic & Inorganic Chemicals (-26.69%) and Petroleum & crude products (-23.76%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution. While gold getting back to the level of $5 billion in monthly imports is a worry, the good news is that the spike in imports of project goods points to a revival in the capital cycle.

August 2023 picture of services trade and overall trade

In India, the Directorate General of Foreign Trade (DGFT) reports the merchandise trade data, while the services trade is reported with a one-month lag by RBI. With the growing importance of services in the overall GDP and the rising global demand for services from India, this segment is becoming the nucleus of government policy to boost exports. That has been visible in the last few quarters. The table captures the gist of the overall trade story, including services, along with a comparison with August 2022, the year-ago period.

Macro Variables (Monthly)	Aug-23 ($ bn)	Aug-22 ($ bn)	Change YOY
Merchandise Exports	34.48	37.02	-6.86%
Merchandise Imports	58.64	61.88	-5.24%
Total Merchandise Trade	93.12	98.90	-5.84%
Merchandise Trade Deficit	-24.16	-24.86	-2.82%
Services Exports	26.39	26.50	-0.42%
Services Imports	13.86	15.22	-8.94%
Total Services Trade	40.25	41.72	-3.52%
Services Trade Surplus	12.53	11.28	11.08%
Combined Exports	60.87	63.52	-4.17%
Combined  Imports	72.50	77.10	-5.97%
Overall Trade Volume	133.37	140.62	-5.16%
Overall Trade Deficit	-11.63	-13.58	-14.36%

Data Source: DGFT and RBI

Here is what we read from the August 2023 analysis of India merchandise and services trade numbers. Here are some key takeaways.

• Services exports in August 2023 were relatively flat compared to last year, and the services imports fell sharply by -8.94% yoy. As a result, the services trade surplus in August 2023 grew by a healthy 11.08% on a yoy basis. 

   

• Where does the services trade surplus emanate from? It mainly comes from the export of IT and other BPO services, consultancy services offered to global clients, knowledge and innovation centres set up by global companies in India. It is the softer side of trade.

   

• How did services trade impact the overall picture of trade for August 2023? The deficit on merchandise trade in August 2023 was lower by -2.82% compared to the previous year. In addition, the 11.08% higher services trade surplus yoy ensured a strong overall performance. The overall combined trade deficit for August 2023 narrowed by almost 14.36% yoy from $-13.58 billion in August 2022 to $-11.63 billion in August 2023.

However, the services surplus in August 2023 is nowhere close to the impressive numbers of April 2023, when the services surplus had almost wiped out the merchandise trade deficit. The weak global demand is also hitting the services trade and its ability to offset merchandise trade deficit.

FY24: How is the picture of services and overall trade evolving

While the monthly picture of overall trade is a momentum picture, it does not provide guidance on how the current account deficit could pan out for the full year. The most important component of the current account deficit (CAD) is the overall trade deficit; that is the combination of the merchandise trade deficit and the services trade surplus. If we annualize the current run rate for the first 5 months of FY24, we are looking at a full year combined deficit of around $85-90 billion. That is relatively comfortable compared to FY23. 

Macro Variables (Year-to-Date)	FY24 ($ bn)	FY23 ($ bn)	Change YOY
Merchandise Exports	172.95	196.33	-11.91%
Merchandise Imports	271.83	309.19	-12.08%
Total Merchandise Trade	444.78	505.52	-12.02%
Merchandise Trade Deficit	-98.88	-112.86	-12.39%
Services Exports	133.38	126.85	5.15%
Services Imports	71.98	74.31	-3.14%
Total Services Trade	205.36	201.16	2.09%
Services Trade Surplus	61.40	52.54	16.86%
Combined Exports	306.33	323.18	-5.21%
Combined  Imports	343.81	383.50	-10.35%
Overall Trade Volume	650.14	706.68	-8.00%
Overall Trade Deficit	-37.48	-60.32	-37.86%

Data Source: DGFT and RBI (FY24 and FY23 refer to April-August)

As of the close of August 2023, the overall deficit was $37.48 billion, but sharply lower by almost 37.9% compared to last year. The above table is self-explicit on how lower merchandise trade deficit and higher services surplus contributed to this shift. What does this mean for the CAD?

Effectively, if this trend can be maintained, then it would translate into current account deficit (CAD) at around $75-80 billion, which would be less than 2% of GDP. The current account deficit is still high in absolute terms, but relatively comfortable as a percentage of GDP. Of course, the assumption is that crude oil does not throw up price shocks. One thing is certain that the policymakers have less to worry in FY24 on the CAD front compared to FY23. While tepid commodity prices helped, a concerted policy attempt at export expansion and import substitution is also providing ammunition to business in tough times.