October 2023 trade deficit touches record $31.46 billion on gold import surge

16 Nov 2023 , 09:18 AM

October 2023 trade numbers were disappointing for 3 reasons. Firstly, the trade deficit touched an all-time high of $31.46 billion in October 2023, a level never seen before and higher than the $30 billion seen in mid-2022. The second disappointment was that the spike in trade deficit came from doubling of gold imports in October 2023, amidst the festive season. The third disappointment came from the fact that much of the trade deficit was driven by higher imports from China. That is surely, not a set of data points that government would like to savour.

Let us turn to the numbers. For October 2023, the merchandise trade deficit (physical goods) widened sharply to $31.46 billion, compared to just $19.37 billion in September 2023. That is a spike in the merchandise trade deficit by 62.42% in just one month. On a sequential basis, the exports were lower by -2.61% at $33.57 billion. In the same period i.e., between September 2023 and October 2023, the merchandise imports into India spiked by 20.78% to $65.03 billion. While oil import bill did go up in the month of October due to a fall in Russian oil imports, the real pressure came from the doubling of gold imports in October.

Services trade could only have a limited impact in October 2023

In last few months, the general narrative has been the merchandise trade under stress but the services trade more favourable amidst growing exports. That trend repeated in the month of October also. However, the challenge this time around was that the spike in merchandise trade deficit was so large that the service trade surplus fell short trying to cover it. Stand alone, if you look at October 2023 data, the services exports were up 13.44% yoy, while services imports were up by just 6.00% yoy. As a result, the trade surplus for the month of October 2023 spiked sharply by 21.97% yoy to $14.38 billion. The problem is that this was grossly insufficient to cover the merchandise trade deficit of $31.46 billion. This result in an overall combined deficit for the month at $17.08 billion (merchandise trade deficit adjusted for the services trade surplus).

However, services exports story is also not as simple as it appears. They are also facing headwinds due to constraints on tech spending. IT exports still constitute the bulk of the services exports and that is the pressure point. That has been, to an extent, offset by growth in service exports like contract research, global capability centres (GCC), consultancy services etc, which are not exactly impacted by an economic slowdown. In fact, some of these services actually take off during difficult times. The overall deficit was much higher this time around on a yoy basis and also on a MOM basis and that could have larger implications for the current account deficit (CAD). But we will come back to that later.

How merchandise trade panned out over last 1 year

The table below captures 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. While July 2022 was the peak deficit till date at $30 billion, that record has now been broken with $31.46 billion deficit in October 2023.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
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
Aug-23	34.48	58.64	-24.16
Sep-23	34.47	53.84	-19.37
Oct-23	33.57	65.03	-31.46

Data Source: DGFT

That is a very sharp spike in MOM growth in trade deficit in October, largely on account of a spike in merchandise imports. While crude imports have been higher, the real pressure came from the spike in gold imports, which almost doubled on a yoy basis in October 2023. Also, if you look at the imports on a country basis. For first seven months of FY24 (April to October), China accounted for imports to the tune of $60 billion while Russia accounted for $36 billion. Ironically, India has been a substantial importer of gold from China.

Merchandise export leaders and laggards for October 2023

There were several star export performers in October 2023. Iron ore (+2,596%), Ceramic & Glassware (+48.16%), Tobacco Products (+47.60%), Cereals (+40.95%), Meat / Dairy / Poultry (+38.57%), Cotton Yarn (+36.49%), Oil Seeds (+29.70%), Drugs & Pharmaceuticals (+29.31%), Electronic Goods (+28.23%), and Fruits & Vegetables (+24.48%) were the key export growth drivers in the month of October 2023. In the month of October 2023, the export gainers outnumbered the export losers in the ratio of 22:8, which is a signal that export momentum has started to build up all over again. Iron ore has gained from a more positive policy environment and a low base, but some product heads like electronic goods, ceramics and engineering goods which appeared in the top export list couple of months back, on the back of the benefits of the PLI (product linked incentive) scheme, are back among the export leaders in the current month.

There were also several export laggards in October 2023. Other Cereals (-44.03%), Rice (-19.63%), Mica/coal/ores (-12.84%), Gens & Jewellery (-9.82%), Readymade Garments of Textiles (-8.08%), Leather Products (-5.00%), and Petroleum Products (-4.65%) lagged in terms of the exports. The exports laggards were typically concentrated in areas where India had traditional export advantages like gems & jewellery, leather products, RMG etc. This is largely due to weak global demand pulling down the export basket.. Some of the agri products like rice and cereals also saw a sharp fall in exports, but that was on account of restrictions placed by the Indian government to prevent shortages in India. Merchandise exports appear to be overall stuck in a very narrow range. 

Merchandise Imports: Leaders and Laggards for October 2023

The big merchandise import surge in October 2023 came from Silver (+124.60%), Sulphur & unroasted Iron Pyrites (+112.56%), Pulses (+112.20%), Gold (+95.41%), Fruits & Vegetables (+53.41%), Electronic Goods (+26.25%) and Optical Goods (+25.14%). Out of the 30 key items of imports, October 2023 saw 20 products reporting higher imports while 10 products in the basket reported lower imports, explaining the sharp spike in imports in the month of October 2023.

Major items in the overall basket that showed lower imports yoy in October 2023 included Cotton Raw & Waste (-78.69%), Vegetable Oil (-35.70%), Fertilizers (-34.58%), Transport Equipment (-33.99%), Pulp & Waste Paper (-33.38%), Newsprint (-33.08%), and Project Goods (-23.73%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategies adopted by the Indian government to keep the trade deficit and the CAD in check. Weak imports of project goods are not a good signal as it has strong growth ramifications for India.

How services trade and overall trade looked in October 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 the RBI. With the growing importance of services in the overall GDP and the rising global demand for a plethora of Indian services, this segment is becoming the nucleus of government efforts to boost services exports to cut the overall deficit. The table captures the gist of the overall trade story, including services, along with a yoy comparison with October 2022.

Macro Variables (Monthly)	Oct-23 ($ bn)	Oct-22 ($ bn)	Change YOY
Merchandise Exports	33.57	31.60	6.23%
Merchandise Imports	65.03	57.91	12.29%
Total Merchandise Trade	98.60	89.51	10.16%
Merchandise Trade Deficit	-31.46	-26.31	19.57%
Services Exports	28.70	25.30	13.44%
Services Imports	14.32	13.51	6.00%
Total Services Trade	43.02	38.81	10.85%
Services Trade Surplus	14.38	11.79	21.97%
Combined Exports	62.27	56.90	9.44%
Combined  Imports	79.35	71.42	11.10%
Overall Trade Volume	141.62	128.32	10.36%
Overall Trade Deficit	-17.08	-14.52	17.63%

Data Source: DGFT and RBI

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

• Services exports in October 2023 were sharply higher (up 13.44%) compared to last year, but the services imports were also higher by a subdued 6.00% yoy. As a result, the services trade surplus in October 2023 grew by a healthy 21.97% on a yoy basis. 

   

• How exactly is the services trade surplus generated in India? It comes from the export of IT (which is the predominant segment) and other BPO services, consultancy services offered to global clients, knowledge and innovation centres, global capability centres (GCC) etc. Even, the offshoring of audit, accounting and legal services are included.

   

• How did services trade impact the overall picture of trade for October 2023? The deficit on merchandise trade in October 2023 was sharply higher by 19.57% compared to the previous year. However, the 21.97% higher services trade surplus yoy was not sufficient as the overall combined trade deficit for October 2023 was still higher yoy by 17.63% yoy from $-14.52 billion in October 2022 to $-17.08 billion in October 2023. 

The disconcerting news is that, while the overall trade deficit (merchandise trade deficit plus services trade surplus) got to as low as $4.97 billion in September 2023, it has again widened sharply to $17.08 billion in October 2023. Ideally, the Commerce Ministry and the government would prefer a situation wherein the services surplus nearly wipes out the merchandise trade deficit, but that was not practical this month. The weak global demand is hitting the services trade; just as it is hitting the merchandise trade. 

FY24: How is the 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 the full fiscal year FY24. The most important component of the current account deficit (CAD) is the overall trade deficit; that is the combination of merchandise trade deficit adjusted for the services trade surplus. If we annualize the current run rate for the first 7 months of FY24, we are looking at a full year combined deficit of around $95-100 billion. That is sharply higher than the signals we were getting till September and could push the CAD back above the 2.5% mark in FY24. That could be an area of concern. 

Macro Variables (Year-to-Date)	FY24 ($ bn)	FY23 ($ bn)	Change YOY
Merchandise Exports	244.89	263.33	-7.00%
Merchandise Imports	391.96	430.47	-8.95%
Total Merchandise Trade	636.85	693.80	-8.21%
Merchandise Trade Deficit	-147.07	-167.14	-12.01%
Services Exports	192.65	181.37	6.22%
Services Imports	103.22	104.09	-0.84%
Total Services Trade	295.87	285.46	3.65%
Services Trade Surplus	89.43	77.28	15.72%
Combined Exports	437.54	444.70	-1.61%
Combined  Imports	495.18	534.56	-7.37%
Overall Trade Volume	932.72	979.26	-4.75%
Overall Trade Deficit	-57.64	-89.86	-35.86%

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

As of the close of October 2023, the overall deficit was $57.6 billion, but sharply lower by almost 35.86% compared to first seven 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 $100-110 billion, which would be tad over 3% of GDP; not a very comfortable situation to be in. 

There are a few ground realities to reconcile to. Firstly, exports are unlikely to show any remarkable pick-up in the rest of 2024. Any action has to be on controlling imports only. The risk could be a spike in oil prices, which is beyond control. What is in control is spending precious foreign exchange for gold imports, which is an unproductive investment. That is something the economic managers must be cautious about. Recent geopolitical developments in the Middle East and West Asia are also raisin worries that the CAD may prove to a pressure point. As long as India keeps the CAD at below 2% of GDP, it should be a manageable problem.