October 2023 trade deficit eases to $20.58 billion as imports fall sharply

17 Dec 2023 , 01:01 PM

Sharply lower trade deficit flatters in November 2023

The November trade numbers must not be seen in isolation but with reference to the October 2023. Now, October 2023 trade numbers were disappointing for 3 reasons. Firstly, trade deficit had touched an all-time high of $31.46 billion in October 2023, only the second time in history that the merchandise trade deficit crossed the $30 billion mark. The second disappointment was the doubling of gold imports in October 2023, amidst the festive season. This was specifically disappointing considering that gold is an unproductive item of import and leads to wastage of precious foreign exchange. The third disappointment came from the fact that much of the trade deficit was driven by higher imports from China. This is at a time when India is reducing its dependence on China and also trying to position itself as a manufacturing alternative to China, leading to big names like Apple making India bets.

Fortunately, the numbers in November 2023 were sharply better. For starters, merchandise trade deficit mellowed sharply to $20.58 billion. This was on the back of lower gold imports in November as compared to October as the peak festive season demand had petered out. Also, the imports overall were sharply lower and that helped tone down the deficit despite the exports being almost at same levels as previous month. India has generally been touchy about its China deficit as it has larger economic, political, and geopolitical implications. That has also come down sharply in November 2023. Above all, November 2023 was also the month when the services surplus was higher on an MOM basis and on a YOY basis, leading to the overall deficit falling sharply by 69% compared to October 2023.

Why the lower overall deficit is so important for India?

What exactly do we understand here by the overall deficit? 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 the lower the deficit, the better it is. This deficit can be narrowed either by controlling the merchandise trade deficit or by boosting the services surplus. The latter is not going to happen at short notice so controlling the merchandise trade deficit is the low-hanging fruit for the Indian economy. In November 2023, the overall trade deficit (merchandise and services combined) came in sharply lower at $5.29 billion compared to $17.08 billion in October 2023. 

That is a near 70% fall in the overall deficit and it is positive as it has larger ramifications for the current account deficit. If you consider the first 8 months of FY24, upto November 2023, then the cumulative overall deficit stands at $61.44 billion. That extrapolates into full year overall deficit of around $92 billion. That should bring the current account deficit (CAD) to around 2% of GDP, which is still fairly high. The only option now is to control the overall deficit to around the November levels for the next 4 months. In that case, it would be possible to bring the CAD to below 2% of GDP. The overall deficit will hold the key.

How merchandise trade panned out over last 1 year

Here is the monthly data of merchandise exports, imports, and trade deficit over the last year. In 8 out of the last 13 months, the merchandise trade deficit has been above $20 billion, with October 2023 deficit being above $30 billion, and at an all-time record. 

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
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
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

Data Source: DGFT

Thankfully, there is no surge in gold imports like last month, so the merchandise trade deficit for November is down to $20.58 billion. This has happened amidst flat exports and a sharp fall in merchandise imports. For first 8 months of FY24 (April to November), the trade deficit is still 12% lower than the corresponding period last year. However, on a granular basis, the concern is that much of this trade deficit that India is running is originating either in China or in Russia. That is what needs to change in the coming months.

Merchandise export leaders and laggards for November 2023

There were several star export performers in November 2023. Iron ore (+2,207%), Fruits & Vegetables (+31.14%), Meat & Dairy Products (+19.94%), Oil Meals (+17.22%), Mica/coal/ores (+16.62%), Gems & Jewellery (+11.97%), Spices (+11.30%), Coffee (+11.00%), Drugs & Pharmaceuticals (+7.33%), and Cotton Yarn (+6.33%) were the key export growth drivers in the month of November 2023. In the month of November 2023, the export gainers and the export losers were evenly balanced in the ratio of 15:15, which is a signal that export momentum tapered in November compared to October 2023. Iron ore has gained from a more positive policy environment and a low base, but there has also been a spike in the export of agricultural and related products, which is not too positive. However, export drivers like gems & jewellery, cotton yarn and carpets recovered in November 2023.

There were also several export laggards in November 2023. Other Cereals (-80.78%), Oil Seeds (-39.40%), Rice (-26.83%), Jute Products (-24.06%), Leather products (-15.03%), RMG of all textiles (-14.92%), and Tea (-14.43%) lagged in terms of the exports. The exports laggards were typically concentrated in areas where India has put restrictions on exports to focus on domestic demand first. The fall in exports of cereals, rice and oil seeds are all cases in point. Merchandise exports appear to be overall stuck in a very narrow range. 

Merchandise Imports: Leaders and Laggards for November 2023

The big merchandise import surge in November 2023 came from Silver (+254.75%), Pulses (+53.59%), Fruits & Vegetables (+50.17%), Ores & Minerals (+41.82%), Leather Products (+29.62%), Dyeing Materials (+18.51%) and Optical goods (+18.15%). Out of the 30 key items of imports, November 2023 saw 15 products reporting higher imports while 15 products in the basket reported lower imports. The neutral mix indicates that the exports were sharply lower in November as compared to October 2023.

Major items in the overall basket that showed lower imports yoy in November 2023 included Pearls & semi-precious stones (-56.71%), Fertilizers (-38.91%), Raw Cotton (-37.40%), Vegetable Oils (-37.24%), Newsprint (-31.92%), Pulp & Waste Paper (-24.41%), and Transport equipment (-18.58%). The lower imports were triggered by a lower import demand in line with enhanced domestic output and import substitution adopted by the Indian government. This is a conscious strategy to keep trade deficit and CAD in check. 

How services trade and overall trade looked in November 2023

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. With the growing importance of services in the overall GDP, this segment becomes the nucleus of government efforts to boost exports. The table captures the gist of the overall trade story, including services, along with a yoy comparison with November 2022 and an MOM comparison.

Macro Variables (Monthly)	Nov-23 ($ bn)	Oct-23 ($ bn)	Nov-22 ($ bn)	Change YOY
Merchandise Exports	33.90	33.57	34.89	-2.84%
Merchandise Imports	54.48	65.03	56.95	-4.34%
Total Merchandise Trade	88.38	98.60	91.84	-3.77%
Merchandise Trade Deficit	-20.58	-31.46	-22.06	-6.71%
Services Exports	28.69	28.70	26.93	6.54%
Services Imports	13.40	14.32	15.39	-12.93%
Total Services Trade	42.09	43.02	42.32	-0.54%
Services Trade Surplus	15.29	14.38	11.54	32.50%
Combined Exports	62.59	62.27	61.82	1.25%
Combined  Imports	67.88	79.35	72.34	-6.17%
Overall Trade Volume	130.47	141.62	134.16	-2.75%
Overall Trade Deficit	-5.29	-17.08	-10.52	-49.71%

Data Source: DGFT and RBI

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

• Services exports in November 2023 were higher (+6.54%) compared to last year and flat on MOM basis. The services imports were lower by -12.93% yoy while there were also lower on a MOM basis. As a result, the services trade surplus in November 2023 grew by a healthy 32.5% on a yoy basis. 

   

• How exactly is the services trade surplus generated? This is predominantly from the export of IT and other BPO services. However, of late, non-cyclical segments like consultancy services offered to global clients, knowledge and innovation centres, global capability centres (GCC), outsourced legal / audit services etc, have also become prominent. All these have added up to give a boost to services surplus in recent months.

   

• How did services trade impact the overall picture of trade for November 2023? The deficit on merchandise trade deficit in November 2023 was lower by 6.71% you and was also lower 34.58% on MOM basis. However, the 32.5% higher services trade surplus yoy managed to bring down the overall combined trade deficit for November 2023 by 49.7% yoy to $5.29 billion. On a mom basis, the overall deficit was lower by 70%.

The commerce ministry has a choice about where to focus on to bring down this overall deficit. Merchandise trade deficit can only come down if imports are sharply down and that party can be spoilt by higher oil prices or a surge in gold imports. Services are more of an item that grows on its own momentum. The best the Commerce Ministry can hope for is that imports taper and exports grow gradually. 

How is the FY24 picture of services and overall trade evolving

While the monthly picture of overall trade is a momentum picture, it does not provide any indications on how the current account deficit (CAD) could pan out for fiscal year FY24. The most important component of the current account deficit (CAD) is the overall trade deficit; which is the combination of merchandise trade deficit adjusted for the services trade surplus. If we annualize the current run rate for the first 8 months of FY24, we are looking at a full year combined deficit of around $90-100 billion. That is sharply higher than the signals we were getting till September and could push the CAD back to around 2% of nominal GDP. 

Macro Variables  (Year-to-Date)	FY24 ($ bn) (Apr-Nov)	FY24 ($ bn)  (Apr-Oct)	FY23 ($ bn) (Apr-Nov)	Change  YOY (%)
Merchandise Exports	278.80	244.89	298.21	-6.51%
Merchandise Imports	445.15	391.96	487.42	-8.67%
Total Merchandise Trade	723.95	636.85	785.63	-7.85%
Merchandise Trade Deficit	-166.35	-147.07	-189.21	-12.08%
Services Exports	220.66	192.65	208.30	5.93%
Services Imports	115.75	103.22	119.48	-3.12%
Total Services Trade	336.41	295.87	327.78	2.63%
Services Trade Surplus	104.91	89.43	88.82	18.12%
Combined Exports	499.46	437.54	506.51	-1.39%
Combined  Imports	560.90	495.18	606.90	-7.58%
Overall Trade Volume	1,060.36	932.72	1,113.41	-4.76%
Overall Trade Deficit	-61.44	-57.64	-100.39	-38.80%

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

As of the close of November 2023, the overall deficit was $61.44 billion, sharply lower by almost 38.8% compared to first 8 months of previous fiscal year FY23. What does this mean for the current account deficit (CAD)? Remember, CAD has strong implications for the strength of the rupee and for the sovereign ratings assigned by global rating agencies. If the enhanced trend is maintained, we could end FY24 with current account deficit (CAD) at around $90-100 billion, which would be tad over 2% of GDP. 

Here, the Commerce Ministry needs to contend with some ground realities. Firstly, exports are unlikely to show any remarkable pick-up in FY24 as the global demand will take time to pick up in the Western world. Any action has to be on controlling imports. The risk could be a spike in oil prices or a surge in gold imports during the festive season. These are real risks to contend with. The target for the RBI and the Commerce Ministry would be to rein in the CAD in the range of 1.5% to 1.75% of nominal GDP. That will be a comfortable scenario.