May-24 trade deficit widens to $23.78 Billion as imports surge

17 Jun 2024 , 12:28 PM

BIG STORY FROM THE TRADE NUMBERS

Elections are always a time of indecision. Not only are governments reluctant to take a call on trade numbers, but even the election moral code of conduct does not allow them too much leeway to talk about their aggressive trade narrative. Hence, the trade had been relatively tepid in the last few months. However, things appear to have changed in May with merchandise exports and imports picking up in the month; although the pace of the pick-up was much sharper in imports, which caused the deficit to spike in May 2024.

The net result was that the toral merchandise trade crossed the $100 Billion mark only for the second time in the last one year. However, this also meant that the merchandise trade deficit widened sharply to $23.78 Billion. However, the good news is that a lot of the imports today are productive imports, which will eventually result in enhanced exports. However, this also meant that the services surplus was not sufficient to close the trade deficit on the goods account and ended with a large overall deficit on the trade account.

MAY 2024 OVERALL DEFICIT SPIKES TO $16.11 BILLION

The merchandise trade deficit in May 2024 at $23.78 Billion is the highest level since life-time peak of October 2023. This is typically observed to happen in the first half of the fiscal year and then sobers in the second half. For example, in FY24, the merchandise trade deficit in the first half was sharply higher than the deficit in the second half. For the month of May 2024, the merchandise exports and the merchandise imports were higher on a yoy basis and also on an MOM basis. For example, exports was up 9.10% yoy and 8.97% MOM.

Similarly, goods imports were also up 7.71% yoy and a whopping 14.46% MOM. Even in the case of services exports and imports, the numbers were higher yoy as well as MOM. What does services exports comprise of? In the Indian context, services exports are predominantly IT services. However, other services like accounting services, legal services, auditing services, medical services, and global competency centres (GCCs) are also gathering steam. They have given the edge to India in bringing its CAD progressively under control.

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. May 2024 was the first time since November 2023, when the merchandise trade deficit again spiked above the $20 Billion mark.

Monthly Data	Exports ($ Billion)	Imports ($ Billion)	Total Trade	Trade Surplus / Deficit
May-23	34.98	57.10	92.08	-22.12
Jun-23	32.97	53.10	86.07	-20.13
Jul-23	32.25	52.92	85.17	-20.67
Aug-23	34.48	58.64	93.12	-24.16
Sep-23	34.47	53.84	88.31	-19.37
Oct-23	33.57	65.03	98.60	-31.46
Nov-23	33.90	54.48	88.38	-20.58
Dec-23	38.45	58.25	96.70	-19.80
Jan-24	36.92	54.41	91.33	-17.49
Feb-24	41.40	60.11	101.51	-18.71
Mar-24	41.68	57.28	98.96	-15.60
Apr-24	34.99	54.09	89.08	-19.10
May-24	38.13	61.91	100.04	-23.78

Data Source: DGFT

In the above table, the last 2 columns deserve attention. The total trade is the sum of exports and imports and is a reliable barometer of total economic activity, jobs created and the government revenues. The deficit is the excess of goods imports over exports and shows how much of the trade gap has to be filled by service surplus. In the last 13 months, the average monthly exports have been $36.01 Billion while the average monthly imports have been $57.01 Billion. As a result, the average monthly total trade has been $93.03 Billion while the average monthly trade deficit has been $21.00 Billion. However, it must be said here that the trade deficit has been under $20 Billion for the last 5 months in a row, before it again spiked above the $20 Billion mark in May 2024.

During the last 13 months, the highest total trade was achieved in February 2024 at $101.51 Billion while the lowest total trade was seen in July 2023 at $85.17 Billion. The highest trade deficit in the last 13 months was seen in October 2023 at $31.46 Billion. Incidentally, that was also the lifetime high trade deficit for the Indian economy. The lowest trade deficit was visible in the month of March 2024 at $15.60 Billion. While the Red Sea crisis continues to pose a headwind for the growth in exports, India has managed to control the imports of some items in the import basket like crude oil, fertilizers, gold etc.

WHAT BOOSTED MERCHANDISE EXPORTS IN MAY 2024

Obviously, one of the key strategies to reduce the trade deficit has been to boost exports. Here are the star export performers in May 2024, based on the yoy percentage increase in exports. Coffee (+64.23%), Tobacco (+58.38%), Electronic Goods (+22.97%), Meat, Dairy, Poultry (+22.95%), Fruits & Vegetables (+20.75%), Handicrafts (+20.63%), Tea (+19.57%), Carpets (+17.55%), and Plastic & Linoleum (+16.60%) were the key export growth drivers in the month of May 2024. Barring electronic goods, the top 5 items of export growth are dominated by crop related products; which is not too encouraging considering the efforts that the government is putting towards the PLI and Make in India export push.

The spike in electronics exports in recent months is from the big thrust to the manufacture and export of mobile phones in India. Top 5 export destinations, in terms of change in absolute value of exports, and also exhibiting positive growth in May 2024 over May 2023 include The US (+13.06%), the Netherlands (43.92%), United Arab Emirates (19.43%), Malaysia (86.95%), and the UK (33.54%).

WHAT PULLED DOWN MERCHANDISE IMPORTS IN MAY 2024

If boosting exports is one way to bring down the trade deficit, the other is import substitution. A classic example is the way India substituted the import of OPEC oil with Russian oil due to the wider discounts offered. But that is more short term in nature. A long-term approach is what is happening in defence, where Indian government is taking efforts to in-source defence manufacturing to the extent possible to reduce the deficit related forex outflows. However, Indian imports of goods were relatively higher in May 2024, which resulted in the spike in the trade deficit.

Major items in the trade basket that showed lower imports yoy in May 2024 included Project Goods (-44.31%), Coal, Coke, Briquettes (-26.55%), Raw and Waste Cotton (-24.46%), Sulphur & unroasted pyrites (-20.92%), Fertilizers (-20.42%), leather products (-20.05%), and Chemical Products (-9.81%). Interestingly, even gold imports were down -9.76% in May, which is good news. The top 5 import sources, in terms of change in absolute value of imports in May 2024 over May 2023 included United Arab Emirates (49.93%), Iraq (58.68%), Russia (18.02%), Angola (1274.95%) and Indonesia (23.36%). Clearly, with the narrowing discount on Ural crude, India appears to be going back to its old OPEC friends.

WHAT WE READ FROM TRADE DATA FOR MAY 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. The DGFT also provides indicative extrapolated figures of services trade for current month. Services trade surplus largely neutralizes merchandise trade deficit.

Macro Variables (Monthly)	May-24 ($ bn)	Apr-24 ($ bn)	May-23 ($ bn)	Change YOY
Merchandise Exports	38.13	34.99	34.95	9.10%
Merchandise Imports	61.91	54.09	57.48	7.71%
Total Merchandise Trade	100.04	89.08	92.43	8.23%
Merchandise Trade Deficit	-23.78	-19.10	-22.53	5.55%
Services Exports	30.16	29.57	26.99	11.75%
Services Imports	17.28	16.97	15.88	8.82%
Total Services Trade	47.44	46.54	42.87	10.66%
Services Trade Surplus	12.88	12.60	11.11	15.93%
Combined Exports	68.29	64.56	61.94	10.25%
Combined  Imports	79.19	71.06	73.36	7.95%
Overall Trade Volume	147.48	135.62	135.30	9.00%
Overall Trade Deficit	-10.90	-6.50	-11.42	-4.55%

Data Source: DGFT and RBI

Here is what we read from the May 2024 analysis of India merchandise and services trade numbers. We shall focus more on the services trade numbers here.

• Services exports in May 2024 were higher 11.75% compared to the year ago period in May 2024. The services imports were higher by 8.82% yoy. As a result, the services trade surplus in May 2024 increased by 15.93% on a yoy basis to $12.88 Billion. On MOM basis, the services trade surplus was marginally higher.
• Services trade surplus arises 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 assumed prominence. These have boosted services surplus in recent months.
• How did services trade impact the overall picture of trade for May 2024? The deficit on merchandise trade account in May 2024 was wider by 5.55% yoy at $23.78 Billion. It was also sharply higher on MOM basis. However, this was partially offset by services surplus, which improved 15.93% on yoy basis. As a result, the overall trade deficit stood at a level of $-10.90 Billion, which is lower yoy, but sharply higher on a MOM basis.

Let us now turn our attention to the trade data for FY25, although we only have 2 months of data available right now.

WHAT WE READ FROM TRADE DATA FOR FY25

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. The DGFT also provides indicative extrapolated figures of services trade for current month. While these are estimates for the latest month, they are fairly reflective of the bigger picture.

Macro Trade Variables (FY Cumulative)	FY25 ($ bn) (Apr-May)	FY25 ($ bn) (April)	FY24 ($ bn) (Apr-May)	Change (%) YOY
Merchandise Exports	73.12	34.99	69.57	5.10%
Merchandise Imports	116.01	54.09	106.54	8.89%
Total Merchandise Trade	189.13	89.08	176.11	7.39%
Merchandise Trade Deficit	-42.89	-19.10	-36.97	16.01%
Services Exports	60.49	29.57	52.77	14.63%
Services Imports	33.91	16.97	29.84	13.64%
Total Services Trade	94.40	46.54	82.61	14.27%
Services Trade Surplus	26.58	12.60	22.93	15.92%
Combined Exports	133.61	64.56	122.34	9.21%
Combined  Imports	149.92	71.06	136.38	9.93%
Overall Trade Volume	283.53	135.62	258.72	9.59%
Overall Trade Deficit	-16.31	-6.50	-14.04	16.17%

Data Source: DGFT and RBI

Here is what we read from the FY25 analysis of India merchandise and services trade numbers. Here FY25 refers to the first two months of the fiscal year (Apr-May). Our focus will be more on the services trade numbers here.

• Services exports in FY25 were higher 14.63% compared to the year ago period of the same comparable period. The services imports were higher by 13.64% yoy and the services imports have also been picking up of late. As a result, the services trade surplus in FY25 increased by 15.92% on a yoy basis to $26.58 Billion. The key question is; whether this is good enough to cover the deficit on the merchandise trade account?
• How did services trade impact the overall picture of trade for May 2024? The deficit on merchandise trade account in FY25 was wider by 16.01% yoy at $42.89 Billion. However, this was only partially offset by the services surplus, which improved 15.92% on yoy basis. As a result, the overall trade deficit stood at a level of $-16.31 Billion, which is sharply higher on a yoy basis and also compared to the previous month.

What does this array of data mean for the current account deficit (CAD)? That is the Million dollar question.

CURRENT ACCOUNT DEFICIT OUTLOOK FOR FY25

It may be too early to put out extrapolation of CAD for FY25. The FY24 data itself is awaited and based on the final trade and services date for FY24, it looks like the current account deficit (CAD) would be around 1% or lower than that. The actual CAD data for FY24 will only be out by end of July 2024. For FY25, the economists are already pegging the CAD to be at around 1.25%-1.50% of GDP, but these are early days still. If the current run is maintained, then the overall deficit could be closer to $100 Billion; which means CAD of 1.25% to 1.50% of GDP is not entirely out of place. Hence, a lot will depend on how the government is able to reduce the specific gap on an overall basis. The Red Sea crisis remains a major X-factor for trade, although WTO is optimistic. We have to wait and watch!