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Apr-23 Trade deficit: Narrows to a 20-month low

16 May 2023

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KEY TAKEAWAYS

  • India’s merchandise trade balance started FY24 on a comforting note, with the deficit narrowing to a 20-month low of USD 15.2 bn in Apr-23 from USD 18.6 bn in Mar-23.

  • While both exports and imports contracted sequentially in line with seasonality typically seen at the start of the fiscal year, a sharper sequential correction in imports vis-à-vis exports drove the improvement in the trade deficit print.

  • Core trade deficit (i.e., headline ex petroleum and gems & jewellery items) however, widened to USD 5.7 bn in Apr-23 from USD 4.3 bn in Mar-23, led by Machinery Items, Textiles and Chemicals.

  • Services trade surplus is estimated to have eased marginally in Apr-23, to USD 13.9 bn from USD 14.2 bn in Mar-23. Both, exports and imports were little changed on a sequential basis in the month.

  • We expect the comfort on the monthly trade deficit prints to continue, despite the persistence of adverse global geopolitics, given the normalization of supply chains, correction in global commodity prices including crude oil and slowdown in domestic growth weighing on core imports.

  • As such, we expect the current account deficit for FY24 to narrow further to USD 53 bn (i.e., 1.4% of GDP) – compared to a level of ~2.0% of GDP in FY23.


India’s merchandise trade deficit started FY24 on a comforting note, with the deficit narrowing to a 20-month low of USD 15.2 bn in Apr-23 from USD 18.6 bn in Mar-23 (revised lower from USD 19.7 earlier). While both exports and imports contracted sequentially in line with seasonality typically seen at the start of the fiscal year, a sharper sequential correction in imports vis-à-vis exports drove the improvement in the trade deficit print. 


Merchandise Exports

Merchandise exports eased to a 6-month low of USD 34.7 bn, clocking a sequential contraction of 16.2%MoM. On an annualised basis, contraction was sizeable at 12.7%YoY – marking the third consecutive contraction and fifth in the past 7 months.

  • On sequential basis, decrease in exports in value terms was led by Engineering Goods (-USD 1.2 bn), Electronic Goods (-USD 0.7 bn), Chemicals (-USD 0.5 bn) and Gems and Jewellery (-USD 0.3 bn). On the other hand, cushioning the downside was an increase in Petroleum exports by USD 1.0 bn sequentially in Apr-23.

  • On an annualised basis, out of 14 key subcategories of exports, 5 registered annualized expansion. Electronic goods continued to lead with 26.5%YoY growth in exports, with the Government’s PLI scheme yielding tangible results for the sector and reflecting in a pickup in exports of smartphones from India.  

  • The strongest drag came from Gems and Jewellery exports, which contracted by 30.0%YoY. The recent strength in price of precious metals notwithstanding, this points towards lower volumes weighing on the sub-category.


Merchandise Imports

Merchandise imports moderated to the lowest level recorded in past 20 months, i.e., of USD 40.9 bn in Apr-23 compared to USD 60.0 bn in Mar-23. This translated into a sequential contraction of 16.9% and an annualised contraction of 14.1%.

  • On sequential basis, moderation in imports in value terms was led by Gold (-USD 2.3 bn), Pearl, Precious, Semi Precious Stones (-USD 0.9 bn) and Petroleum products (-USD 0.9 bn). No import category recorded a sizeable sequential expansion.

  • On an annualised basis too, the weakness was broad based with just 2 out of 15 key subcategories registering an expansion. Machinery Items, with a growth of 13.9%YoY emerged as a strong performer. On the other hand, Project Goods imports fared the weakest, contracting by 73.1% YoY.


Trade deficit:  A granular perspective

  • Core trade deficit (i.e., headline ex petroleum and gems & jewellery items) widened to USD 5.7 bn in Apr-23 from USD 4.3 bn in Mar-23, led by Machinery Items, Textiles and Chemicals.

  • At a granular level, trade deficit for Petroleum products narrowed to a 7-month low of USD 8.7 bn in Apr-23 compared to USD 10.7 bn in Mar-23. In addition, Gems and jewellery trade deficit too waned to USD 0.8 bn in Apr-23 from USD 3.6 bn in Mar-23.


Services Trade[1]

Services trade surplus is estimated to have eased marginally in Apr-23, to USD 13.9 bn from USD 14.2 bn in Mar-23. Both, exports and imports were little changed on a sequential basis in the month. 

  • Services exports clocked at USD 30.4 bn in Apr-23, compared to USD 30.5 bn in Mar-23. On an annualised basis, this however, translated in a 26.1% growth.
  • Imports on the other hand ticked up to USD 16.5 bn in Apr-23 from USD 16.3 bn in Mar-23. On an annualised basis, this translated into a growth of 17.4%.

[1] * The latest data for services trade released by the RBI is for Mar-23. Data for Apr-23 is an estimation by the Ministry of Commerce, which will be revised based on RBI’s subsequent release.


Outlook

The comfort on India’s current account deficit (for FY23) that got established towards the end of 2022, has continued into FY24. The Apr-23 merchandise trade deficit print is a testimony to that. We expect this comfort on the monthly trade deficit prints to continue, despite the persistence of global geopolitics, owing to the following reasons

  • Supply disruptions have eased significantly to pre-Covid levels. The New York Fed’s Global Supply Chain Pressure Index as of Apr-23 has slipped into negative territory, at -1.32 in Apr-21 from a peak of 4.31 as of Dec-21 (Interpretation: A higher number indicates greater disruptions)

  • Accelerated pace of monetary tightening by key central banks has ushered in a slowdown in global demand. This has led to a moderation in commodity prices, with the CRB index down by 13.3%YoY in May-23, so far.
  • Russia’s share in India’s import basket has steadily climbed from 2.1% in Jan-22 to 9.2% in Mar-23. Since most of this is on account of crude oil, which is procured at a discount of USD 25-30 pb compared to Brent, this is increasingly becoming an important source of saving for India’s merchandise trade deficit.

  • Core imports reflect the slowdown in domestic growth as pent-up demand for goods wanes. Core imports contracted by 12.5%YoY in Apr-23 – to mark the first contraction in 30 months. With GDP expected to moderate to 6.0% in FY24 from an estimated 7.0% in FY23, core imports could remain somewhat on a slower track.

  • The upside in services exports, an outcome of digitization and Covid related behavioural/work-oriented changes, is proving to be a game changer for India. This is also a reflection of an increasing number of MNCs establishing their back office operations and R&D facilities in India.

Overall, the trade deficit for FY24 is poised for a cyclical correction with both prices and volumes driving the change. As such, we expect the current account deficit for FY24 to narrow further to USD 53 bn (i.e., 1.4% of GDP) – compared to a level of ~2.0% of GDP in FY23. 



Table 1: Highlights of merchandise trade balance


Note: Numbers may not add up due to rounding off and revision in headline exports and imports

Chart 1: Global supply chain pressures have largely normalized