June 2023 trade deficit narrows to $20.13 billion on lower trade volumes

15 Jul 2023 , 03:11 PM

The lower trade deficit was caused by an overall fall in exports and imports. While the fall in imports was triggered by lower input costs, the fall in exports was driven by tepid demand for several products amidst fears of a global economic slowdown. On a yoy basis, the trade deficit is lower compared to June 2022 deficit. However, this marginally lower trade deficit is despite a sharp fall in the price of oil and other commodities which form a predominant part of the Indian import basket. It is not like the commodity prices have not helped or that the import substitution is not helping. Imports are down -17.5% in June 2023 but it is just that exports fell much sharper at -22.02% in June 2023. Clearly, the pressure of a possible global recession is showing.

After the services trade surplus had almost wiped out the overall trade deficit in April 2023, May 2023 saw a widening of the overall deficit and that trend has continued in the month of June also. There is a reason for the same. The services exports are facing headwinds as constraints on tech spending is putting pressure on the IT exports which are flat to lower in the current year. The latest quarterly results have shown a lot of pressure on the frontline Indian IT companies as they face weak top line growth. Since the IT an ITES sector still accounts for bulk of the services export revenues, that has taken a hit too. As a result, the overall deficit still remains quite elevated at $8.80 billion for June 2023.

Gist of the merchandise trade story for June 2023

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 bene above $20 billion.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
Jun-22	40.13	66.31	-26.18
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

Data Source: DGFT

On a sequential basis (over May 2023), the exports of goods have fallen, as have the imports of merchandise goods. This has led to narrowing of trade deficit over May, albeit marginally. The merchandise trade deficit had touched the highest level in 6 months during the month of May 2023 and it has tapered from that level in June 2023. The other positive feature is that the trade deficit of $20.13 billion in June 2023 is lower than May despite the price of crude on an average going up from $73/bbl to $78/bbl on an average. However, this can largely be explained by the fact that today India imports 42% of its oil import basket from Russia, where the prices are not linked to the Brent Crude prices are internally set through a process of negotiations. Let us now turn to the export and import leaders and laggards for the month of June 2023.

Merchandise export leaders and laggards for June 2023

There were several star export performers in June 2023. Iron ore (+1,664%), Electronic Goods (+45.36%), Oil Seeds (+33.33%), Cashew (+19.60%), Tobacco (+17.80%), Fruits & Vegetables (+14.10%) and Coffee (+7.10%) were the key export growth drivers. In June 2023, the export losers outnumbered the export gainers by a ratio of 21:9. The big growth story was electronics, which has gained largely from the PLI scheme, while iron ore has gained from a more positive policy environment, albeit on a low base.

There were several export laggards too in June 2023. Petroleum Products (-47.51%), Cereals (-45.45%), Gems & Jewellery (-35.60%), Oil Meals (-28.35%), Jute (-26.72%), Organic & Inorganic Chemicals (-26.65%) and Mica, coal, ores (-22.05%) lagged in terms of the exports. The exports laggards were typically where India had traditional export advantages like gems & jewellery, jute, cotton yarn, garments, handicrafts etc. 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 government on exports to maintain adequate supply domestically.

Merchandise import leaders and laggards for June 2023

The big merchandise import surge in June 2023 came from Pulses (+201.94%), Gold (+82.38%), Project Goods (+32.81%), Electronic Goods (+8.52%), Chemicals (+6.56%) and Newsprint (+4.74%). Out of the 30 key items of imports, 9 products saw rise in imports and 21 products saw lower imports in the month of June 2023.

Major items in the overall basket that showed lower imports yoy in June 2023 included Silver (-94.36%), Coal, Coke, Briquettes (-47.61%), Sulphur, Iron Pyrites (-35.64%), Petroleum & Crude products (-33.77%) and Textile Yarn (-33.72%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategy.

The June 2023 story on services trade and overall trade?

In India, while the merchandise trade is reported by the DGFT, the services trade gets 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 assumes a lot more importance. The table captures the gist of the overall trade story, including services.

Macro Variables (Jun-23)	Jun-23 ($ bn)	Jun-22 ($ bn)	Change YOY
Merchandise Exports	32.97	42.28	-22.02%
Merchandise Imports	53.10	64.35	-17.48%
Total Merchandise Trade	86.07	106.63	-19.28%
Merchandise Trade Deficit	-20.13	-22.07	-8.79%
Services Exports	27.12	26.92	0.74%
Services Imports	15.88	15.77	0.70%
Total Services Trade	43.00	42.69	0.73%
Services Trade Surplus	11.24	11.15	0.81%
Combined Exports	60.09	69.20	-13.16%
Combined  Imports	68.98	80.12	-13.90%
Overall Trade Volume	129.07	149.32	-13.56%
Overall Trade Deficit	-8.89	-10.92	-18.59%

Data Source: DGFT

What do we read from the June 2023 analysis of India merchandise and services trade numbers. Here are some key takeaways.

• Services exports in June 2023 were almost flat compared to last year, and the services imports were also flat on yoy basis. As a result, the services trade surplus in June 2023 grew by a marginal 0.73% on a yoy basis. 

   

• Where does the services trade surplus come 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.

   

• How did services trade impact the overall picture of trade in June 2023? The deficit on merchandise trade in June 2023 was lower by 8.79% compared to the previous year. However, due to a flat services trade surplus, the overall combined trade deficit for June 2023 narrowing from -10.92 billion in June 2022 to -8.89 billion in June 2023.

However, the services surplus in June has been nowhere close to the impressive numbers of April 2023, when the services surplus had almost wiped out the merchandise trade deficit. In May, the services trade surplus was impacted by weak IT spending leading to double digit overall deficit and that trend has clearly continued in the month of June 2023 also.

How does cumulative trade story look for FY24

While the monthly picture of overall trade gives a momentum picture, it does not give any guidance on how much the current account deficit would be. 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 3 months of FY24, we are looking at a full year combined deficit of around $85-90 billion. That is relatively comfortable compared to FY23. 

Macro Variables (FY24)	FY24 ($ bn)	FY23 ($ bn)	Change YOY
Merchandise Exports	102.68	120.98	-15.13%
Merchandise Imports	160.28	183.54	-12.67%
Total Merchandise Trade	262.96	304.52	-13.65%
Merchandise Trade Deficit	-57.60	-62.56	-7.93%
Services Exports	80.03	76.09	5.18%
Services Imports	45.01	45.02	-0.02%
Total Services Trade	125.04	121.11	3.24%
Services Trade Surplus	35.02	31.07	12.71%
Combined Exports	182.71	197.07	-7.29%
Combined  Imports	205.29	228.56	-10.18%
Overall Trade Volume	388.00	425.63	-8.84%
Overall Trade Deficit	-22.58	-31.49	-28.29%

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

As of the close of June 2023, the overall deficit was $22.58 billion. The entire widening happened in May and June 2023. However, if you compare FY24 year to date with FY23, then the overall deficit has narrowed by 28.3%,thanks largely due to a 12.7% expansion in the services trade surplus. 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 below 2% of GDP. That is comfortable, but then economics has a nasty way of surprising when we least expect it to happen, so there has to be a back-up plan. One thing is certain that the policymakers have less to worry this year on the CAD front compared to FY23. India is likely to reap the benefits of tepid commodity prices, import substitution and a boost to service exports for an improved CAD situation in FY24.