Feb-24 trade deficit stays under $20 Billion for third straight month

18 Mar 2024 , 07:37 AM

FORGET RED SEA CRISIS; TRADE IS IN CONTROL

Just about 2 months back, the EXIM Bank had projected that India’s exports would be hit by $30 Billion or more in fiscal FY24 due to the lag effect of the Red Sea crisis. To recap, the Houthi rebels were firing at vessels in the Red Sea forcing many of the large global shipping lines to shift to the much longer Horn of Africa route. Now this longer route means higher freight charges, higher insurance costs and greater time to delivery. Despite these constraints, India has sharply grown its merchandise exports for February 2024, even as imports have  stayed under pressure. The trade deficit for February 2024 at $18.71 Billion is higher than January 2024, but this is the third month in a row that the merchandise trade deficit has stayed under the $20 Billion mark. In 7 out of the last 13 months, the trade deficit has now been under $20 Billion, despite touching a lifetime high merchandise trade deficit of $31.46 Billion in February 2024.

GROSS AND NET MERCHANDISE TRADE PICTURE FOR FY24

Gross merchandise trade is the aggregate of imports and exports, but why is that relevant? It is this gross merchandise trade that shows the volume of trade handled and that has direct implications for the revenues of the government and for jobs created. Now, a clearer picture emerges if we compare the gross merchandise trade (exports + imports) and the net merchandise trade (exports – imports) for FY24 and compare it with the corresponding 11 months of FY23. In the first 11 months of FY23, total exports stood at $409.11 Billion while imports were $655.05 Billion.

For the 11 months of FY24, the total exports were lower at $394.99 Billion while total imports were also lower at $620.19 Billion. Hence, cumulative merchandise trade deficit for first 11 months of FY24 is lower by 8.43% at $225.20 Billion compared to FY23. This lower import intensity, amidst falling commodity and oil prices has been the key factor in keeping the merchandise trade deficit for FY24 in check. However, on an overall basis, the services surplus wiped out 67.92% of the trade deficit leaving overall the overall trade deficit (goods and services combined) at just $72.24 Billion for FY24. We will look at the overall deficit in greater detail in the next paragraph.

FEB-24 OVERALL DEFICIT INCHES UP, BUT FY24 IN CONTROL

India currently runs a deficit in the merchandise trade account (physical goods) and a surplus in the services account. if you combine these two figures, we still have a deficit, but it is substantially lower. In the first 11 months of FY24, the services surplus has wiped out 67.92% of the merchandise trade deficit. This overall deficit can be contained; either by boosting exports of goods and services or by cutting imports of goods and services. The low hanging fruit for the government is to boost export of services and cutting goods imports.

In recent months, the services surplus dwindled due to weakness in services exports amidst a slowdown in IT services demand. However, with the US economy avoiding a hard landing, IT spending is back to relatively robust levels. Meanwhile other opportunities like outsourced financial services and global capability centres (GCC) are also adding up. In February 2024, overall trade deficit (merchandise and services combined) came in sharply at $1.95 Billion higher than $0.74 Billion reported in January 2024. However, by containing the gap, the overall deficit for the first 11 months of FY24 stands at just $72.24 Billion. This is one of the most important components of current account deficit (CAD), so it also augurs well for a more restrained current account deficit for FY24 at around 1.50% of GDP.

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. February 2024 marks the third successive month when the merchandise trade deficit has been under the $20 Billion mark.

Month	Exports ($ Billion)	Imports ($ Billion)	Trade Surplus / Deficit
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
Jan-24	36.92	54.41	-17.49
Feb-24	41.40	60.11	-18.71

Data Source: DGFT

The good news is that the recent spike in the crude prices as well as the constraints to trade imposed by the Red Sea crisis have not had a serious impact on merchandise exports. In fact, for February 2024 (despite being a truncated month), the merchandise exports at $41.40 Billion are at the highest level in the last 13 months and is 12.13% higher over January 2024. The merchandise exports for February 2024 are also 11.86% higher on a yoy basis. India has already crossed $1 Trillionin total trade for third financial year in a row, repeating the feat of fiscal years FY22 and FY23.

WHAT BOOSTED MERCHANDISE EXPORTS IN FEBRUARY 2024

Obviously, one of the key strategies to reduce the trade deficit is to boost exports. Here are the star export performers in February 2024, based on the yoy percentage increase in exports. Handicrafts (+89.98%), Tobacco (+58.24%), Electronic Goods (+54.81%), Coffee (+45.92%), Tea (+38.21%), Meat/Dairy/Poultry (+37.83%), Oil Seeds (+37.71%), chemicals (+33.04%), Iron Ore (+32.87%), Drugs & Pharma (+22.24%), and Plastic & Linoleum (+22.14%) were the key export growth drivers in the month of February 2024.

In February 2024, the mix favoured the gainers over losers in the ratio of 22:8, which is a signal that export momentum picked up in February 2024 over the previous two months. Handicrafts gained from a big export push, while the sterling growth in electronic goods is largely reflective of the surge in export of mobile phones under the product linked incentive (PLI) schemes. In February, the quality of the export basket has also improved with value added products like electronic goods, pharmaceuticals and chemicals playing a key role.

WHAT PULLED DOWN EXPORTS IN FEBRUARY 2024

If boosting exports is one way to contain the trade deficit, the other way is to substitute with domestic manufacture. That was also visible in the month of February 2024. In fact, out of the 30 key items of imports, February 2024 saw 13 products reporting lower imports while 17 products in the basket reported higher imports. The mix shows that some of the erstwhile pressure points have been dealt with.

Major items in the trade basket that showed lower imports yoy in February 2024 included Project Goods (-89.87%), Sulphur and unroasted Iron Pyrites (-55.98%), fertilizers (-33.72%), Vegetable Oil (-29.84%), Leather Products (-20.96%), Chemical Materials (-15.52%), and Pearls & Precious stones (-13.37%). The lower imports were triggered by lower import demand in line with enhanced domestic output and import substitution policy.

WHAT WE READ FROM SERVICES TRADE FOR FEBRUARY 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. However, DGFT also provides extrapolated figures of services trade for current month, albeit indicative. Services trade surplus largely neutralizes merchandise trade deficit.

Macro Variables (Monthly)	Feb-24 ($ bn)	Jan-24 ($ bn)	Feb-23 ($ bn)	Change YOY
Merchandise Exports	41.40	36.92	37.01	11.86%
Merchandise Imports	60.11	54.41	53.58	12.19%
Total Merchandise Trade	101.51	91.33	90.59	12.05%
Merchandise Trade Deficit	-18.71	-17.49	-16.57	12.91%
Services Exports	32.15	32.80	27.40	17.34%
Services Imports	15.39	16.05	14.97	2.81%
Total Services Trade	47.54	48.85	42.37	12.20%
Services Trade Surplus	16.76	16.75	12.43	34.84%
Combined Exports	73.55	69.72	64.41	14.19%
Combined  Imports	75.50	70.46	68.55	10.14%
Overall Trade Volume	149.05	140.18	132.96	12.10%
Overall Trade Deficit	-1.95	-0.74	-4.14	-52.90%

Data Source: DGFT and RBI

Here is what we read from the February 2024 analysis of India merchandise and services trade numbers.

• Services exports in February 2024 were higher 17.34% compared to the year ago period but marginally lower by -1.98% compared to the previous month of January 2024. The services imports were higher by 2.81% yoy while it was lower -4.11% on MOM basis. As a result, the services trade surplus in February 2024 increased by 34.84% on a yoy basis to $16.76 Billion. On MOM basis, the services trade surplus was absolutely flat.
• Services trade surplus emanates 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 become prominent. All these have boosted services surplus in recent months.
• How did services trade impact the overall picture of trade for February 2024? The deficit on merchandise trade account in February 2024 was higher by 12.91% yoy and was also higher by 6.89% on MOM basis. However, this was compensated by the services surplus, which was higher by 34.84% on yoy basis. As a result, the overall trade deficit was just $-1.95 Billion, which augurs well for the full year current account deficit (CAD) reading.

Just a couple of months back, the government of India had raised the import duties on gold from 10% to 15% to discourage gold imports and that appears to be working. The impact of the Red Sea crisis is limited for now, but things could get tougher if it lasts for much longer. The only big risk for India is if the Red Sea crisis also spreads to the Arab peninsula, in which case, the problem could be more serious for the Indian oil market.

WHAT WE READ FROM SERVICES TRADE FOR FY24

Having seen the monthly picture of services trade, we shift focus to the cumulative fiscal year picture for the first 11 months of FY24. The cumulative view gives a better idea of how the current account deficit (CAD) will pan out in FY24. The most important driver of the current account deficit (CAD) is the overall trade deficit; which is the combination of merchandise trade deficit adjusted for the services trade surplus. If we annualize the current run rate of the first 11 months of FY24, full year combined deficit can be around $75 Billion. That is relatively comfortable compared to last year and should keep the CAD for FY24 well under 1.5% of GDP.

Macro Variables (Year-to-Date)	FY24 ($ bn) (Apr-Feb)	FY24 ($ bn) (Apr-Jan)	FY23 ($ bn) (Apr-Feb)	Change YOY (%)
Merchandise Exports	394.99	317.12	409.11	-3.45%
Merchandise Imports	620.19	505.15	655.05	-5.32%
Total Merchandise Trade	1,015.18	822.27	1,064.16	-4.60%
Merchandise Trade Deficit	-225.20	-188.03	-245.94	-8.43%
Services Exports	314.82	247.92	294.89	6.76%
Services Imports	161.86	129.24	165.09	-1.96%
Total Services Trade	476.68	377.16	459.98	3.63%
Services Trade Surplus	152.96	118.68	129.80	17.84%
Combined Exports	709.81	565.04	704.00	0.83%
Combined  Imports	782.05	634.39	820.14	-4.64%
Overall Trade Volume	1,491.86	1,199.43	1,524.14	-2.12%
Overall Trade Deficit	-72.24	-69.35	-116.14	-37.80%

Data Source: DGFT and RBI (FY24 and FY23 refers to fiscal years)

As of the close of February 2024, the cumulative overall deficit has just about inched up to $72.24 Billion, lower by -37.80% compared to first 11 months of FY23. That is truly commendable and gives a lot of comfort to the policymakers and also does not put undue pressure on the rupee value or on the sovereign ratings. It now looks very likely that the full year CAD may be under 1.5% of GDP. However, we only have 2 data points till now and the Q3 and Q4 updates of CAD will come in the end of March and end of June respectively.

With the concerns over the US hard landing out of the way, there are clear green shoots of recovery in the Indian IT sector, even amidst flat tech spending. Red Sea crisis has impacted exports, but that has been offset by lowering of imports too. The other issue that India has to grapple with is what does the recession in UK and Japan mean for India; since both are key markets for India. For now, the news is good and the current account deficit (CAD) promises to stay under control for FY24.