June 2022 trade deficit at all-time high raises CAD concerns

15 Jul 2022 , 11:59 AM

It is always enticing to begin with the good news, so we first savour the good news on the total trade front. June 2022 marks the fourth consecutive month that total trade (imports plus exports) stayed above the $100 billion mark. The total trade was $102.96 billion in March 2022, $100.49 billion in April 2022, $102.17 billion in May 2022 and $106.44 billion in June 2022.

However, not all is hunky dory on the trade front. June also marks fourth successive month, the merchandise imports stayed above $60 billion. Merchandise trade deficit at $26.18 billion is again an all-time record. At this run rate, India could end FY23 with total trade above $1.20 trillion and merchandise trade deficit of around $280 billion.

Data Source: DGFT

How the headline trade numbers panned out?

High levels of total trade is always positive as it is indicative of the extent of job creation and MSME order flows. Here is a quick take.

1. In the last 4 months between March and June 2022, exports have maintained an average run of $40 billion a month, despite global supply chain headwinds.
2. If you look at comparisons of June 2022 over June 2021, exports are up over 23.52% while imports are up over 57.55%. That explains the trade deficit pressure.
3. India’s overall trade deficit (merchandise plus services) for Apr-June is over $45 billion. At this rate, the overall deficit for FY23 could be well above $175 billion, putting intense pressure on the current account deficit (CAD).

One important metrics is the forex import cover. India could see total merchandise imports of $720-$750 billion for FY23. At the current forex reserve levels of $580 billion, that would cover just about 9 months of merchandise imports. That would limit the hands of the RBI in using its forex reserves to defend the rupee.

Exports hold up in June 2022 amidst headwinds

Exports at $40.13 billion in June 2022 are up 23.52% yoy. On a sequential basis, the exports were higher by 3.06% compared to May 2022. While the weak rupee has helped exports, what is laudable is that this comes amidst headwinds like shutdowns in China, Ukraine war, commodity inflation, weak corporate margins and monetary tightness. It is creditable that export performance has averaged above $40 billion in last 4 months.

There were several star export performers in June 2022. Exports of Petroleum Products (+119.03%), Cereals (+74.35%), Electronic Goods (+60.70%), Textiles (+49.82%), Rice (+42.91%), Leather Products (+38.59%), Oilseeds (+29.68%), Mica/coal/ores (+29.28%), Coffee (+26.47%) and Gems & Jewellery (+25.29%) were among the key export growth drivers in June 2022.

However, there were also some export laggards in June 2022. Iron ore (-97.81%), Handicrafts (-28.68%), Plastic & Linoleum (-20.01%), Cotton Yarn (-19.49%), Carpets (-8.97%) and Cashew (-5.87%) lagged. Non-petroleum and non-jewellery exports in June 2022 stood at $27.94 billion compared to $25.71 billion in June 2021.

Import surge triggered by crude oil and coking coal

Merchandise imports for June 2022 stood at a record $66.31 billion, up 57.55% yoy. Imports were up 9.97% sequentially. Crude oil imports at $21.30 billion in June 2022 was sequentially higher despite Russian oil imports. Crude oil imports were up 99.48% yoy. Crude still accounts for one-third of India’s import bill but there are other heads that are catching up quite rapidly.

The big import surge in June 2022 came from Silver (+6,540%), Coal, coke & briquettes (+261%), Gold (+183%), Petroleum & Crude (99.48%), Raw Cotton (82.67%), Textile Yarn (75.70%) and Sulphur (73.29%). Major items in the basket that showed lower imports yoy in June 2022 were Pulses (-47.69%), Medicinal and Pharma Products (-42.86%), Professional Instruments (-19.57%) and Machine Tools (-3.30%). Gold imports in June 2022 at $2.75 billion, was less than half of gold imports of $6.05 billion in May 2022.

CAD could be the real challenge for FY23

BOFA has already warned that India’s current account deficit (CAD) for FY23 could cross $100 billion or 3% of GDP. The overall trade deficit combining merchandise and services trade stood at $(27.30) billion in May 2022 but burgeoned to $(45.18) billion as of the close of June 2022. That is a sharp increase of $17.88 billion to the overall deficit in one month. At this run rate, the overall deficit could end up closer to $170-180 billion and could pose a real challenge to the current account deficit (CAD) levels.

Particulars	Exports FY23 ($ bn)	Imports FY23 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$118.96 bn	$189.76 bn	$(-70.80) bn
Services Trade #	$70.97 bn	$45.35 bn	$+25.62 bn
Overall Trade	$189.93 bn	$235.11 bn	$(-45.18) bn

Data Source: DGFT (# – DGFT estimates due to 1-month lag in RBI reporting)

Now for a quick recap. India closed FY21 with combined deficit of $-12.75 billion or $1.06 billion a month. The combined deficit in FY22 was $-87.79 billion, or $7.32 billion a month. At the current run rate, it looks like India could close FY23 with an overall deficit in the vicinity of $180 billion, substantially higher than FY22. If the CAD crosses 5% of GDP, it is likely to put a lot of pressure on the Indian rupee and on the sovereign ratings of India.

Addressing the trade deficit will be the challenge

FY22 saw overall trade cross $1 trillion for the first time ever and FY23 could see overall trade cross $1.20 trillion at the current run rate. However, it will come at the cost of sharply higher imports of crude, gold, fertilizers, coal, coke and edible oils. Here are 2 major event based challenges for Indian trade policy.

• China reported 0.4% GDP growth in the second quarter. That is not great news as it is likely to negatively impact the demand for a host of consumer and industrial goods. Also, the lockdowns would mean tepid production in China and that will have an impact on the supply chains across the world, India included.
• Fed has gone from being hawkish to Ultra-hawkish and the latest inflation number at 9.1% could result in a 100 bps rate hike in the July FOMC meet. That is only likely to add to the fears of recession and impact industrial demand, retail consumption and technology spending in a big way. That poses a big question mark for Indian exports.

India’s trade strategy will have to be crafted in between these two extreme situations. Ironically, China and the US happen to be India’s largest trading partners jointly accounting for more than 20% of the overall trade. That makes it tougher.