September 2023 trade deficit narrows to $19.37 billion on lower imports

15 Oct 2023 , 10:27 AM

For September 2023, the merchandise trade deficit (physical goods) narrowed sharply from $24.16 billion to $19.37 billion, a near 19.83% narrowing of the deficit MOM. On a sequential basis, the exports were flat at $34.47 billion, but what really narrowed the trade deficit was the sharp fall in imports in the month. In fact, merchandise imports for September 2023 fell from $58.64 billion in July to $53.84 billion; a sharp fall of -8.19% MOM. 

The Fed and other central banks have been persistently hawkish and that has once again raised fears of a global slowdown in the fourth quarter of 2023, although the recent GDP numbers from the US do not appear to corroborate that view. That has kept global demand capped and that is showing up in the form of tepid exports and imports. For the month of September 2023, the imports of several commodities like silver, cotton, fertilizers, sulphur, coal, and coke fell sharply. This fall in imports helped the trade deficit to narrow.

Did services trade come to the rescue once again?

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 September also. The merchandise trade deficit for September 2023 is below the last year peak of $30 billion, and now also well below the median trade deficit of around $20 billion in the last few months. In September 2023, the services exports were flat yoy, but services imports fell sharply, leading to a sharp rise in services trade surplus by 11.66%. 

However, services exports are also facing headwinds due to constraints on tech spending. That has been, to an extent, substituted 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, many of these services take off during difficult times. The overall deficit for September 2023 (merchandise trade deficit adjusted for services trade surplus) narrowed from $11.63 billion in August 2023 to just $4.91 billion in September

Story of merchandise trade over the 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, after peaking at $30 billion in July 2022.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
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
Jul-23	32.25	52.92	-20.67
Aug-23	34.48	58.64	-24.16
Sep-23	34.47	53.84	-19.37

Data Source: DGFT

It may be recollected that the August 2023 had marked the widest merchandise trade deficit since October 2022. However, thanks to lower imports on a MOM basis, the merchandise trade deficit in September 2023 narrowed sharply to $19.37 billion. One reason could be that the crude oil prices could not sustain higher levels, but the fall in imports has been visible in other commodities too. Let us now turn to the export and import leaders and laggards for the month of September 2023.

Merchandise export leaders and laggards for September 2023

There were several star export performers in September 2023. Iron ore (+8,054%), Oil Meals (+72.66%), Ceramic & Glassware (+50.49%), Cotton Yarn (+27.39%), Meat / Dairy / Poultry (+19.40%), Cereals (+17.65%), Tobacco (+9.18%), and Drugs & Pharmaceuticals (+9.01%) were the key export growth drivers in the month of September2023. In the month of September 2023, the export losers outnumbered the export gainers in the ratio of 18:12, which is a signal that export momentum continues to be under pressure. 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 last month on the back of the benefits of the PLI (product linked incentive) scheme, did not figure in the top export growth list this month. 

There were also several export laggards in September 2023. Cereals (-50.86%), Rice (-25.09%), Leather Products (-21.18%), Spices (-19.52%), Handicrafts (-18.82%), Gems & Jewellery (-16.03%), Jute Products (-15.90%), and organic & inorganic chemicals (-15.25%) lagged in terms of the exports. The exports laggards were typically concentrated in areas where India had traditional export advantages like gems & jewellery, jute, leather products, handicrafts etc. This is largely due to weak global demand amid slowdown fears pulling down the export basket.. Some of the agri products like rice and cereals also saw a sharp fall in exports due to restrictions placed by the Indian government to ensure that shortages in India do not push up the prices here. Merchandise exports appear to be overall stuck in a very narrow range, and the overhang of global slowdown fears is quite strong.

Merchandise Imports: Leaders and Laggards for September 2023

The big merchandise import surge in September 2023 came from Pulses (+88.87%), Dyeing / Tanning material (+64.50%), Non-ferrous metals (+17.02%), Electronic Goods (+13.31%), Resins & Plastics (+10.79%), Fruits & Vegetables (+9.02%) and Gold (+6.90%). Out of the 30 key items of imports, September 2023 saw 10 products reporting higher imports while 20 products in the basket reported lower imports, explaining the sharp fall in imports in the month of September 2023.

Major items in the overall basket that showed lower imports yoy in September 2023 included Silver (-89.94%), Raw Cotton (-87.68%), Fertilizers (-61.89%), Sulphur & Iron Pyrites (-56.96%), Transport Equipment(-53.15%), Coal, Coke, Briquettes (-33.39%), Vegetable Oils (-24.11%), Project Goods (-23.53%) and Pearls & semi-precious stones (-22.49%). The lower imports were triggered by a lower import demand in select products in line with enhanced domestic output and import substitution strategies deliberately adopted by the Indian government to keep the trade deficit and the CAD in check. The fall in imports of project goods is not great news for the sustenance of the capital cycle revival in India.

How services trade and overall trade looked in September 2023

In India, the Directorate General of Foreign Trade (DGFT) reports the 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 services from India, this segment is becoming the nucleus of government efforts to boost exports. That has been visible in the last few quarters. The table captures the gist of the overall trade story, including services, along with a yoy comparison with September 2022.

Macro Variables (Monthly)	Sep-23 ($ bn)	Sep-22 ($ bn)	Change YOY
Merchandise Exports	34.47	35.39	-2.60%
Merchandise Imports	53.84	63.37	-15.04%
Total Merchandise Trade	88.31	98.76	-10.58%
Merchandise Trade Deficit	-19.37	-27.98	-30.77%
Services Exports	29.37	29.22	0.51%
Services Imports	14.91	16.27	-8.36%
Total Services Trade	44.28	45.49	-2.66%
Services Trade Surplus	14.46	12.95	11.66%
Combined Exports	63.84	64.61	-1.19%
Combined  Imports	68.75	79.64	-13.67%
Overall Trade Volume	132.59	144.25	-8.08%
Overall Trade Deficit	-4.91	-15.03	-67.33%

Data Source: DGFT and RBI

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

• Services exports in September 2023 were relatively flat (up just 0.51%) compared to last year, but the services imports fell sharply by -8.36% yoy. As a result, the services trade surplus in September 2023 grew by a healthy 11.66% on a yoy basis. 

   

• How exactly is the services trade surplus generated by the Indian economy? It mainly 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 has become item of services exports for India.

   

• How did services trade impact the overall picture of trade for September 2023? The deficit on merchandise trade in September 2023 was sharply lower by -30.77% compared to the previous year. In addition, the 11.66% higher services trade surplus yoy ensured a strong overall performance. The overall combined trade deficit for September 2023 narrowed by almost 67.33% yoy from $-15.03 billion in September 2022 to $-4.91 billion in September 2023. The overall deficit fell more than 50% on a MOM basis too.

The good news is that the overall trade deficit (merchandise trade deficit plus services trade surplus) is finally getting close to the April 2023 levels, when the net deficit was almost zero. Ideally, the Commerce Ministry and the government would prefer a situation wherein the services surplus nearly wipes out the merchandise trade deficit. The weak global demand is also hitting the services trade and its ability to offset merchandise trade deficit. In this context, the improvement in the overall deficit in September 2023 is truly commendable.

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 guidance on how the current account deficit (CAD) could pan out for the full year. The most important component of the current account deficit (CAD) is the overall trade deficit; that is the combination of the merchandise trade deficit and the services trade surplus. If we annualize the current run rate for the first 6 months of FY24, we are looking at a full year combined deficit of around $75-80 billion. That is relatively comfortable compared to FY23. 

Macro Variables (Year-to-Date)	FY24 ($ bn)	FY23 ($ bn)	Change YOY
Merchandise Exports	211.40	231.73	-8.77%
Merchandise Imports	326.98	372.56	-12.23%
Total Merchandise Trade	538.38	604.29	-10.91%
Merchandise Trade Deficit	-115.58	-140.83	-17.93%
Services Exports	164.89	156.07	5.65%
Services Imports	89.22	90.58	-1.50%
Total Services Trade	254.11	246.65	3.02%
Services Trade Surplus	75.67	65.49	15.54%
Combined Exports	376.29	387.80	-2.97%
Combined  Imports	416.20	463.14	-10.14%
Overall Trade Volume	792.49	850.94	-6.87%
Overall Trade Deficit	-39.91	-75.34	-47.03%

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

As of the close of September 2023, the overall deficit was $39.91 billion, but sharply lower by almost 47.03% compared to first half of the previous fiscal year FY23. The above table is self-explicit on how lower merchandise trade deficit and higher services surplus contributed to this shift. What does this mean for the current account deficit? 

Why is so much importance attached to the CAD? It has strong implications for the strength of the rupee and for the sovereign ratings assigned by global rating agencies. Effectively, if this trend can be maintained, then it would translate into current account deficit (CAD) at around $90-10 billion, which would be less than 1.5% of GDP. The current account deficit is still high in absolute terms, but relatively comfortable as a percentage of GDP. 

The assumption is that crude oil does not throw up price shocks. One cannot say that with any degree of assurance since the crude prices rallied 33% since the lows of June. In addition, the recent geopolitical scenario in the Middle East and West Asia also raises concerns that the CAD may prove to a pressure point. Global brokers like UBS are already pegging Indian CAD at close to 2% of GDP for FY24. The first quarter data on CAD has been encouraging and gives hope that things should improve from here on.