January 2024 trade deficit narrows to $17.49 Billion as imports falter

16 Feb 2024 , 09:28 AM

Trade deficit lower in January 2024, despite Red Sea crisis

The trade deficit for January 2024 at $17.49 Billion was lower than the December 2023 merchandise trade deficit reading at $19.80 Billion. To be fair, exports did fall in January 2024 by 3.98% to $36.92 Billion. However, there were several product categories like petroleum products, engineering goods, electronic goods, and pharmaceutical products; that saw robust growth in exports in January 2024. The Red Sea crisis impacted the exports in two ways. Firstly, it led to longer delivery times as cargos were redirected through the Horn of Africa to avoid the dangerous Red Sea and Suez Canal route. Secondly, exports were hit due to geopolitical risk leading to a spike in freight and insurance costs. However, the imports fell sharper in January 2024, leading to narrowing of the merchandise trade deficit.

Gross and net merchandise trade picture for FY24

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 comparable 10 months of FY23. In the first 10 months of FY23, total exports stood at $639.59 Billion while imports were $751.58 Billion. For the 10 months of FY24, the total exports were flat at $638.37 Billion while total imports were 5.69% lower at $708.79 Billion. Hence, cumulative trade deficit for first 10 months of FY24 is lower by 37.11% at $70.43 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.

Overall deficit for January 2024 sharply lower than December

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 overall deficit can be constricted in two ways. One way is to control the merchandise trade deficit, which is generally tough, although it has been happening this year due to tepid imports. The other way is to boost services exports . 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 merchandise trade deficit via import substitution, by shifting to Russian oil. In January 2024, overall trade deficit (merchandise and services combined) came in sharply lower at $0.74 Billion compared to $5.17 Billion in December 2023, $5.29 Billion in November 2023 and $17.08 Billion in October 2023. Remember, in October 2023 merchandise trade deficit had scaled a lifetime peak of $31.46 Billion. Now it looks like the current account deficit (CAD) for FY24 can be managed in the range of $50-$60 Billion, which would be under 1.5% 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. In 8 out of the last 13 months, the merchandise trade deficit has been above $20 Billion, with October 2023 trade deficit being an all-time record.

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

Data Source: DGFT

Even as the Red Sea crisis continued to be an overhang, there were several product categories that made a significant contribution to the overall export performance in absolute terms (not just in terms of rate of growth). For instance, the main value drivers were Petroleum Products, Engineering Goods, Iron Ore, Electronic Goods, Pharmaceuticals etc. In terms of specific growth, Petroleum Products exports in January 2024 registered a growth of 6.57% at $8.21 Billion, while Engineering Goods exports in January 2024 were up by 4.20% at $8.77 Billion.

Among other major export drivers, Electronic Goods exports registered an increase of 9.31% at $2.30 Billion in January 2024 while the exports of Drugs and Pharmaceutical Products in January 2024 registered an increase of 6.84% at $2.13 Billion. In most of the cases like pharmaceuticals, electronic goods, and electrical goods; the thrust to exports came largely from the PLI scheme and the conscious decision to shift to an import substitution approach. 

Which products boosted merchandise exports in January 2024

Obviously, one of the key strategies to reduce the trade deficit is to boost exports. Here are the star export performers in January 2024, based on the yoy percentage increase in exports. Iron ore (+109.79%), Tobacco (+47.32%), Meat & Dairy Products (+26.12%), Spices (+20.50%), Cereal Preparations (+18.69%), Oil Meals (+14.66%), Oil Seeds (+11.34%), Fruits and Vegetables (+10.61%), Plastic & Linoleum (+9.55%), Carpets (+9.44%), and Electronic Goods (+9.31%) were the key export growth drivers in the month of January 2024 in terms of percentage accretion on yoy basis. 

In January 2024, the mix favoured the gainers over losers in the ratio of 18:12, which is a signal that export momentum picked up in January 2024 over the previous two months. Iron ore gained from positive policy environment and low base; but the PLI story is now starting to show its positive impact on exports. The pressure of the global slowdown on exports is waning, although there has been some impact on the Suez Canal trade in January 2024 on account of the ongoing Red Sea crisis.

Which products saw lower merchandise imports in January 2024

If boosting exports is one way to contain the trade deficit, the other way is to substitute or contain imports. That was also visible in the month of January 2024. In fact, out of the 30 key items of imports, January 2024 saw 13 products reporting higher imports while 17 products in the basket reported lower imports. The mix has been more favourable for reduction of trade deficit in January, compared to December. This is a conscious strategy to keep trade deficit and the CAD in check.

Major items in the trade basket that showed lower imports yoy in January 2024 included Fertilizers (-69.08%), Newsprint (-57.23%), Sulphur & unroasted iron pyrites (-46.18%), Project Goods (-43.94%), Vegetable Oil (-38.18%), Pulp & Waste Paper (-37.96%), Raw & Waste Cotton (-32.32%), and Leather Products (-28.81%). The lower imports were triggered by lower import demand in line with enhanced domestic output and import substitution adopted by the Indian government. 

Services trade and overall trade in January 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. For simplicity, the DGFT also provides extrapolated figures of services trade for current month. Services trade surplus is growing in importance and acts 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)	Jan-24 ($ bn)	Dec-23 ($ bn)	Jan-23 ($ bn)	Change YOY
Merchandise Exports	36.92	38.45	35.80	3.13%
Merchandise Imports	54.41	58.25	52.83	2.99%
Total Merchandise Trade	91.33	96.70	88.63	3.05%
Merchandise Trade Deficit	-17.49	-19.80	-17.03	2.70%
Services Exports	32.80	27.88	28.00	17.14%
Services Imports	16.05	13.25	14.83	8.23%
Total Services Trade	48.85	41.13	42.83	14.06%
Services Trade Surplus	16.75	14.63	13.17	27.18%
Combined Exports	69.72	66.33	63.80	9.28%
Combined   Imports	70.46	71.50	67.66	4.14%
Overall Trade Volume	140.18	137.83	131.46	6.63%
Overall Trade Deficit	-0.74	-5.17	-3.86	-80.83%

Data Source: DGFT and RBI

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

• Services exports in January 2024 were higher 17.14% compared to the year ago period and also higher by 17.6% compared to the previous month of December 2023. The services imports were higher by 8.23% yoy while it was higher 21.13% on MOM basis. As a result, the services trade surplus in January 2024 increased by 27.18% on a yoy basis to $16.75 Billion.  Even on MOM basis, the services trade surplus was up 14.49%.

   

• 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 January 2024? The deficit on merchandise trade deficit in January 2024 was lower by -80.83% yoy and was also lower -85.69% on MOM basis. The merchandise trade deficit for January 2024 was sharply higher while the services surplus was sharply higher. As a result, the overall trade deficit was just $0.74 Billion, which means, the services surplus has almost offset the merchandise trade deficit.

In the previous month, the government has raised the import duties on gold 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 the situation lasts for longer. For now, the import substitution plan appears to be working fine. The only thing the government needs to be wary of is if the Red Sea crisis spreads to the Arab peninsula. In that case, it could have a serious impact on the crude oil prices with larger ramifications for India, since India still relies heavily on crude imports to meet over 80% of its daily oil needs.

Services trade and overall trade for FY24

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 driver of the current account deficit (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 10 months of FY24, full year combined deficit can be around $85-90 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-Jan)	FY24 ($ bn)  (Apr-Dec)	FY23 ($ bn) (Apr-Jan)	Change  YOY (%)
Merchandise Exports	353.92	317.12	372.10	-4.89%
Merchandise Imports	561.12	505.15	601.47	-6.71%
Total Merchandise Trade	915.04	822.27	973.57	-6.01%
Merchandise Trade Deficit	-207.20	-188.03	-229.37	-9.67%
Services Exports	284.45	247.92	267.50	6.34%
Services Imports	147.68	129.24	150.11	-1.62%
Total Services Trade	432.13	377.16	417.61	3.48%
Services Trade Surplus	136.77	118.68	117.39	16.51%
Combined Exports	638.37	565.04	639.60	-0.19%
Combined   Imports	708.80	634.39	751.58	-5.69%
Overall Trade Volume	1,347.17	1,199.43	1,391.18	-3.16%
Overall Trade Deficit	-70.43	-69.35	-111.98	-37.10%

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

As of the close of January 2024, the cumulative overall deficit has just about inched up to $70.43 Billion, lower by -37.10% compared to first 10 months of FY23. What does this mean for the current account deficit (CAD)? Needless to say, CAD has strong implications for the strength of the rupee and for the sovereign ratings assigned by global rating agencies. If the current trend is maintained, then we could end FY24 with current account deficit (CAD) of under $60 Billion, or under 1.5% of GDP. However, the Commerce Ministry will have to contend with some ground realities. 

Even as the services trade is seeing green shoots of recovery with recovery in IT sector growth and pick up in tech spending globally, there is the Red Sea crisis that could hit goods trade. This route accounts for half of India trade movement. Hence, the Red Sea crisis could be a sort of double whammy for India. It makes the passage to Europe and the US less economical and could hit our biggest export market volumes. More importantly, this crisis opens the doors to imported inflation in India if the higher insurance premiums and freight charges start to seep in. FY24 could certainly be more challenging for trade, compared to FY23 and FY22.