July 2023 trade flat at $20.67 billion, hit by weak demand

16 Aug 2023 , 09:59 AM

There was an overall fall in exports and imports and the trade volumes overall were impacted by the fears of a global slowdown. The Fed and other central banks have been persistently hawkish and that has once again raised fears of a global slowdown later this year. For now, the GDP numbers in the US appear to be improving but the growth pangs are quite visible in the Euro Zone and in China. In terms of total trade performance, the fall in imports was triggered by lower input costs. On the other hand, the fall in exports was driven by tepid demand for several products amidst fears of a global economic slowdown. Export oriented sectors like textiles, 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. 

On a yoy basis, if you compare July 2023 trade performance with July 2022, the exports are down -11.08% while the merchandise imports are down -20.14%. That is the reason, over the last one year, the merchandise trade deficit has fallen from a peak of $30 billion to around the range of $20-21 billion. But there is also an interesting narrative getting built up on the services trade side. In the month of April 2023, the services trade surplus had almost wiped out the merchandise trade deficit. However, since May 2023, we have seen this overall deficit widening and that trend has continued in the months of June and July 2023 also. The reasons are quite straightforward. Services exports are facing headwinds due to constraints on tech spending, since it is putting pressure on IT exports. IT companies, which account for bulk of the services exports from India, have been facing pressure on the business volumes and on pricing. As a result, the overall deficit still remains quite elevated at $8.35 billion in July 2023. The services exports gains of last year are struggling to sustain.

How the merchandise trade panned out in last one year

The table below captures the monthly wise data of merchandise exports, imports, and trade deficit for the last 13 months. 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
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
May-23	34.98	57.10	-22.12
Jun-23	32.97	53.10	-20.13
Jul-23	32.25	52.92	-20.67

Data Source: DGFT

If you look at July 2023 on a sequential basis (over June 2023), the exports of goods have fallen, as have the imports of merchandise goods. However, this fall is very marginal. This has led to flat trade deficit over June. The merchandise trade deficit had touched the highest level in last 6 months during May 2023 but has tapered from that level more due to weak global demand and a strong import substitution policy adopted by India. The other positive feature is that the trade deficit of $20.67 billion in July 2023 is lower than May 2023, despite the price of crude going up from $73/bbl to $86/bbl on an average. This can be attributed to the fact that India imports 42% of its oil import basket from Russia, where the prices are not linked to the Brent Crude prices. Instead, these prices are internally set through a process of negotiations. But that advantage may be peaking out. Let us now turn to the export and import leaders and laggards for the month of July 2023.

Merchandise export leaders and laggards for July 2023

There were several star export performers in July 2023. Iron ore (+963%), Oil Meals (+34.24%), Oil Seeds (+32.83%), Ceramic Products (+20.82%), Fruits & Vegetables (+18.94%), Electronic Goods (+13.09%) and Coffee (+11.90%) were the key export growth drivers in the month of July 2023. In the month of July 2023, the export losers outnumbered the export gainers by a ratio of 19:11. While iron ore has gained from a more positive policy environment and a low base, there are also some genuine benefits visible from PLI (product linked incentive) scheme as well as the import substitution policy taken up.

There were also several export laggards in July 2023. Petroleum Products (-43.66%), Cereals (-35.87%), Gems & Jewellery (-29.72%), Jute (-25.07%), Mica / Coal / Ores (-24.63%), Handicrafts (-21.19%) and Readymade Garments (-17.37%) 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 also saw a sharp fall in exports due to internal restrictions placed by the Indian government on exports to maintain adequate domestic supplies. Merchandise exports appear to be overall stuck in a very narrow range.

 

Merchandise import leaders and laggards for July 2023

The big merchandise import surge in July 2023 came from Pulses (+211.25%), Dyeing / Tanning material (+49.91%), Gold (+47.73%), Sulphur / Iron Pyrites (+26.15%), Chemicals (+15.28%), Electronic Goods (+14.91%) and electrical & non-electrical machinery (+13.97%). Out of the 30 key items of imports, 14 products saw rise in imports and 16 products saw lower imports in the month of July 2023.

Major items in the overall basket that showed lower imports yoy in July 2023 included Silver (-97.17%), Project Goods (-69.48%), Raw Cotton (-54.24%), Coal, Coke, Briquettes (-47.20%), Fertilizers (-41.48%), Pearls & semi-precious stones (-38.37%) and Petroleum & crude products (-36.65%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategy being aggressively followed by the Indian government.

July 2023 picture of services trade and overall trade

In India, the merchandise trade is reported by the Directorate General of Foreign Trade (DGFT), while the services trade is reported with a one-month lag by the 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. The table captures the gist of the overall trade story, including services, along with a comparison with July 2022, the year-ago period.

Macro Variables (Jul-23)	Jul-23 ($ bn)	Jul-22 ($ bn)	Change YOY
Merchandise Exports	32.25	38.34	-15.88%
Merchandise Imports	52.92	63.77	-17.01%
Total Merchandise Trade	85.17	102.11	-16.59%
Merchandise Trade Deficit	-20.67	-25.43	-18.72%
Services Exports	27.17	24.26	12.00%
Services Imports	14.85	14.06	5.62%
Total Services Trade	42.02	38.32	9.66%
Services Trade Surplus	12.32	10.20	20.78%
Combined Exports	59.42	62.60	-5.08%
Combined  Imports	67.77	77.83	-12.93%
Overall Trade Volume	127.19	140.43	-9.43%
Overall Trade Deficit	-8.35	-15.23	-45.17%

Data Source: DGFT

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

• Services exports in July 2023 were 12% higher compared to last year, and the services imports grew by a more moderate 5.6% yoy. As a result, the services trade surplus in June 2023 grew by a healthy 20.8% 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 etc. It is what they call the softer side of trade.

   

• How did services trade impact the overall picture of trade for July 2023? The deficit on merchandise trade in July 2023 was lower by 18.7% compared to the previous year. In addition, the 20.8% higher services trade surplus yoy ensured a strong overall performance. The overall combined trade deficit for July 2023 narrowed by almost 45% yoy from $-15.23 billion in July 2022 to a mere -8.35 billion in July 2023.

However, the services surplus in July 2023 is nowhere close to the impressive numbers of April 2023, when the services surplus had almost wiped out the merchandise trade deficit. Since then, weak IT spending had a visible impact on the services trade surplus.

FY24 picture of services trade and overall trade

While the monthly picture of overall trade is more of a momentum picture, it does not give any guidance on how the current account deficit would be for the full year. For instance, the most important component of the current account deficit is the overall trade deficit; that is the combination of the merchandise trade deficit with the services trade surplus. If we annualize the current run rate for the first 4 months of FY24, we are looking at a full year combined deficit of around $80-85 billion. That is relatively comfortable compared to FY23. 

Macro Variables (FY24)	FY24 ($ bn)	FY23 ($ bn)	Change YOY
Merchandise Exports	136.22	159.32	-14.50%
Merchandise Imports	213.20	247.31	-13.79%
Total Merchandise Trade	349.42	406.63	-14.07%
Merchandise Trade Deficit	-76.98	-87.99	-12.51%
Services Exports	107.93	100.35	7.55%
Services Imports	59.21	59.09	0.20%
Total Services Trade	167.14	159.44	4.83%
Services Trade Surplus	48.72	41.26	18.08%
Combined Exports	244.15	259.67	-5.98%
Combined  Imports	272.41	306.40	-11.09%
Overall Trade Volume	516.56	566.07	-8.75%
Overall Trade Deficit	-28.26	-46.73	-39.52%

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

As of the close of July 2023, the overall deficit was $28.26 billion, but sharply lower by almost 39.5% 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 it imply for the current account deficit?

Effectively, if this trend can be maintained, then it would translate into current account deficit (CAD) at around $75 billion, which would be less than 2% of GDP. The current account deficit is still higher in absolute terms, but it can be said to be comfortable as a percentage of GDP. One thing is certain that the policymakers have less to worry this year on the CAD front compared to FY23. A combination of tepid commodity prices, import substitution and a boost to service exports should help the CAD situation in FY24, turn out more benign compared to FY23.