December 2023 trade deficit at $19.80 billion as electronic exports get a boost

16 Jan 2024 , 09:23 AM

Exports pick up in December, despite Red Sea crisis

The trade deficit for December 2023 was slightly lower than November at $19.80 billion. Interestingly, the merchandise exports actually picked up in the month of December with electronic goods (predominantly mobile phones) and engineering goods contributing to bulk of the growth in exports. The exports of petroleum products fell sharply, but the imports of petroleum  products fell sharper. Hence the net effect was still positive. There were expectations that December 2023 may see the first signs of export slowdown on account of the Red Sea crisis. However, no such signals were visible in the export data for December 2023. First, a word on the Red Sea crisis and why it matters to Indian trade.

The Red Sea crisis was triggered by Houthi rebels in Yemen firing missiles and drones at ships passing through the Red Sea. Now, Red Sea is the sea between the Middle East and Africa and is the lifeline for Indian cargo moving towards Europe and the US. The ships typically take the route via the Arab Peninsula and then traverse through the Red sea towards the Suez Canal, from to get connected to the Mediterranean Sea. With the series of attacks on liners passing through the Red Sea, the biggest shipping companies like Maersk and Stena Lines are avoiding the route altogether. Taking the Horn of Africa route means a longer distance, more time, and greater costs. It is expected that Indian exports could get hit by $30-$35 billion in FY24 due to the Red Sea crisis. However, in December, exports of electronic goods and engineering goods kept the export counter ticking.

Overall deficit for December 2023 at par with November

What exactly does overall deficit mean? India currently runs a deficit in the merchandise trade account and a surplus in the services account. if you combine these two figures, the net amount is still a deficit, but it is substantially lower. This deficit can be narrowed in two ways. One way is to control the merchandise trade deficit, which is generally tough. The other way is to boost services surplus. That has been happening, but of late the slowdown in IT exports has hit services surplus. India has controlled the merchandise trade deficit by measures like import substitution, shifting to Russian oil etc. In December 2023, the overall trade deficit (merchandise and services combined) came in almost flat at $5.17 billion compared to $5.29 billion in November 2023 and $17.08 billion in October 2023. 

In October 2023 the merchandise trade deficit had scaled a lifetime peak of $31.46 billion. Since then, the trade deficit has narrowed sharply. If you consider the first 9 months of FY24, upto December 2023, then the cumulative overall deficit stands at $69.35 billion. That extrapolates into full year overall deficit of around $90-$95 billion. That should bring the current account deficit (CAD) to below 1.5% of GDP, which is comfortable. That is possible if overall deficit is kept at around current levels for the rest of fiscal year FY24. 

Merchandise trade story over last 1 year

Here is the monthly data of merchandise exports, imports, and trade deficit over the last year. In 8 out of the last 13 months, the merchandise trade deficit has been above $20 billion, with October 2023 recording the highest ever trade deficit in any month ever.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
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
Sep-23	34.47	53.84	-19.37
Oct-23	33.57	65.03	-31.46
Nov-23	33.90	54.48	-20.58
Dec-23	38.45	58.25	-19.80

Data Source: DGFT

In December 2023, gold imports surged by 156%, which is not a very comfortable situation, considering that it entails use of precious foreign exchange to pay for unproductive assets. However, the impact of the spike in gold imports was limited in December 2023 for two reasons. Firstly, the imports of petroleum and petroleum products were sharply lower in December 2023, compared to December 2022. Crude oil remains the single biggest item of imports in the Indian trade basket. Secondly, December 2023 saw a surge in exports of electronic goods and engineering goods and that made up for the higher import bill. However, we must bear in mind that the full impact of Red Sea crisis is yet to be factored in.

Merchandise export leaders and laggards for December 2023

There were several star export performers in December 2023. Iron ore (+269.26%), Tobacco (+40.31%), Meat & Dairy Products (+31.04%), Spices (+28.94%), Fruits & Vegetables (+26.60%), Electronic Goods (+15.54%), Cereals (+14.62%), Plastics & Linoleum ((+11.52%), Engineering Goods (+11.28%), Handicrafts (+10.44%), and Drugs & Pharmaceuticals (+10.38%) were the key export growth drivers in the month of December 2023. In December 2023, the mix favoured the gainers over losers in the ratio of 17:13, which is a signal that export momentum picked up in December 2023. Iron ore gained from positive policy environment and low base, but the big story was the surge in exports of electronic goods (largely mobile phones) and engineering goods, a direct outcome of the PLI policy impact.

There were also several export laggards in December 2023. Other Cereals (-84.95%), Jute Products (-34.64%), Petroleum Products (-16.80%), Rice (-13.61%), and RMG of all the textiles (-11.70%) lagged in terms of the exports. The exports laggards were typically concentrated in areas where India has put restrictions on exports to focus on domestic demand. The fall in exports of cereals, rice and oil seeds are all cases in point. Some of the export leaders like Jute and textiles faced the impact of the global demand slowdown.

Merchandise Imports: Leaders and Laggards for December 2023

The big merchandise import surge in December 2023 came from Gold (+156.47%), Cotton Raw & Waste (+67.82%), Electronic Goods (+48.51%), Pulses (+25.10%), Fruits & vegetables (+24.78%), Optical Goods (+23.73%) and Artificial Resins (+10.39%). Out of the 30 key items of imports, December 2023 saw 14 products reporting higher imports while 16 products in the basket reported lower imports. The near neutral mix was one of the reasons, the trade deficit could be maintained around the same levels in December 2023.

Major items in the trade basket that showed lower imports yoy in December 2023 included Sulphur & Iron Pyrites (-67.97%), Transport Equipment (-55.11%), Vegetable Oil (-39.21%), Fertilizers (-36.37%), Project Goods (-30.80%), Pulp & Waste Paper (-28.86%), Newsprint (-23.65%), and Petroleum & Crude (-22.77%). The lower imports were triggered by a lower import demand in line with enhanced domestic output and import substitution adopted by the Indian government. This is a conscious strategy to keep trade deficit and CAD in check. 

How services trade and overall trade appeared in December 2023

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. For simplicity, the DGFT also provides extrapolated figures of services trade for current month. Services trade is growing in importance and acting as an antidote to merchandise trade deficit. The table captures the gist of the overall trade story, with yoy and MOM comparisons.

Macro Variables (Monthly)	Dec-23 ($ bn)	Nov-23 ($ bn)	Dec-22 ($ bn)	Change YOY
Merchandise Exports	38.45	33.90	38.08	0.97%
Merchandise Imports	58.25	54.48	61.22	-4.85%
Total Merchandise Trade	96.70	88.38	99.30	-2.62%
Merchandise Trade Deficit	-19.80	-20.58	-23.14	-14.43%
Services Exports	27.88	28.69	31.19	-10.61%
Services Imports	13.25	13.40	15.81	-16.19%
Total Services Trade	41.13	42.09	47.00	-12.49%
Services Trade Surplus	14.63	15.29	15.38	-4.88%
Combined Exports	66.33	62.59	69.27	-4.24%
Combined  Imports	71.50	67.88	77.03	-7.18%
Overall Trade Volume	137.83	130.47	146.30	-5.79%
Overall Trade Deficit	-5.17	-5.29	-7.76	-33.38%

Data Source: DGFT and RBI

Here is what we read from the December 2023 analysis of India merchandise and services trade numbers. 

• Services exports in December 2023 were lower -10.61% compared to the year ago period and also lower compared to the previous month. The services imports were lower by -16.19% yoy while it was flat on a MOM basis. As a result, the services trade surplus in December 2023 fell by -4.88% on a yoy basis to $14.63 billion. 

   

• Services trade surplus emanates from export of IT and other BPO services. Of late, non-cyclical segments like consultancy services to global clients, knowledge and innovation centres, global capability centres (GCC), outsourced legal / audit services etc, have become prominent. All these have given a boost to services surplus in recent months.

   

• How did services trade impact the overall picture of trade for December 2023? The deficit on merchandise trade deficit in December 2023 was lower by -14.43% yoy and was also lower -3.79% on MOM basis. The sharp fall in merchandise trade deficit, more than offset the lower surplus on the services account. The net impact was that the overall trade deficit for December 2023 was still -33.38% lower on yoy basis.

The commerce ministry has a choice about where to focus on to bring down this overall deficit. Merchandise trade deficit can only come down if imports are sharply down and that party can be spoilt by higher oil prices or a surge in gold imports. Also, the Red Sea crisis is likely to hit the merchandise trade deficit more than the services trade. Services are more of an item that grows on its own momentum. There is an all-important meeting called by the Ministry of Commerce to devise Plan-B amidst the Red Sea crisis. That should set the tone for how the Commerce Ministry works its trade plan.

How the FY24 picture of services and overall trade is evolving

While the monthly picture of overall trade is a momentum picture, it does not indicate how the current account deficit (CAD) will pan out in FY24. The most important component of the CAD is the overall trade deficit; which is the combination of merchandise trade deficit adjusted for services trade surplus. If we annualize the current run rate for the first 9 months of FY24, full year combined deficit can be around $90-$95 billion. That is relatively comfortable compared to last year and should keep the CAD for FY24 under 1.5% of GDP.

Macro Variables  (Year-to-Date)	FY24 ($ bn) (Apr-Dec)	FY24 ($ bn)  (Apr-Nov)	FY23 ($ bn) (Apr-Dec)	Change  YOY (%)
Merchandise Exports	317.12	278.80	336.30	-5.70%
Merchandise Imports	505.15	445.15	548.64	-7.93%
Total Merchandise Trade	822.27	723.95	884.94	-7.08%
Merchandise Trade Deficit	-188.03	-166.35	-212.34	-11.45%
Services Exports	247.92	220.66	239.50	3.52%
Services Imports	129.24	115.75	135.29	-4.47%
Total Services Trade	377.16	336.41	374.79	0.63%
Services Trade Surplus	118.68	104.91	104.21	13.89%
Combined Exports	565.04	499.46	575.80	-1.87%
Combined  Imports	634.39	560.90	683.93	-7.24%
Overall Trade Volume	1,199.43	1,060.36	1,259.73	-4.79%
Overall Trade Deficit	-69.35	-61.44	-108.13	-35.86%

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

As of the close of December 2023, the overall deficit was $69.35 billion, lower by -35.86% compared to first 9 months of FY23. What does this mean for the current account deficit (CAD)? Remember, CAD has strong implications for the strength of the rupee and for the sovereign ratings assigned by global rating agencies. If the enhanced trend is maintained, we could end FY24 with current account deficit (CAD) of under $50 billion, or 1.5% of GDP. Here, the Commerce Ministry needs to contend with some ground realities. 

Even as the services trade is struggling with challenges like a slowdown in IT sector growth and weak tech spending globally, there is the Red Sea crisis that is likely to hit goods trade. For India, the Red Sea crisis could be a double whammy. It makes the passage to Europe and the US less economical. Additionally, it opens the doors to imported inflation in India if the higher insurance premiums and freight charges get added up. Either ways, the Commerce Ministry is likely to have a thankless job navigating the trade numbers for the rest of FY24.