·      India’s merchandise trade deficit widened to a 4-month high of USD 13.8 bn in Aug-21 from USD 11.0 bn in Jul-21, highlighting the gradual move towards normalization vis-à-vis the compression seen in major part of FY21. The expansion of the trade deficit in Aug-21 came about primarily on the back of a strong sequential 2.4% uptick in imports along with a slight seasonal contraction in exports which otherwise, has remained fairly buoyant in the current fiscal.

Looking at the drivers of trade deficit in Aug-21, we find that:

Exports: Healthy growth in the current fiscal despite slight moderation in Aug-21

In value terms, merchandise exports moderated somewhat to USD 33.3 bn in Aug-21 from a record high level of USD 35.4 bn in Jul-21 but still translating into an annualized growth of 45.8% YoY to mark the sixth consecutive month of strong annualised growth.

• Sequentially, the moderation from record high levels was led by exports of Petroleum Products (-USD 1.2 bn), Chemical Products (-USD 0.3 bn), Ores & Minerals (-USD 0.2 bn), and Textiles (-USD 0.2 bn). On the other hand, Engineering Goods was the only category that was able to register a mild increase of USD 0.1 bn in Aug-21 over Jul-21, taking the monthly shipments under this category to a record high level. All other categories of exports remained unchanged in Aug-21 vis-à-vis Jul-21.
• Non oil and non gems and jewellery exports stood at USD 25.2 bn in Aug-21, slightly down from USD 26.1 bn in Jul-21. Nonetheless, it recorded a healthy annualized growth of 31.9% and further, we note that the growth also looks rather robust at 28.8% even when compared to 2-year ago (Aug-19) levels.
• The gradual unlock by states since the beginning of Jun-21 have helped exports to maintain strong momentum amidst a V-shaped global recovery and limited disruption in global supply chains compared to 2020, besides support from accommodative policies and elevated commodity prices.
• Looking beyond the sequential momentum, if we compare cumulative FYTD 22 (Apr-Aug’ 21) deficit to the pre-pandemic period (Apr-Aug’19), the overall trade deficit stands lower at USD 55.9 bn since exports have grown at a faster pace than imports. Robust external demand along with support from accommodative policies and elevated commodity prices has led exports over a two-year period (Apr-Aug’ 21 over Apr-Aug’ 19) to grow by 23.4%. Going ahead, V-shaped recovery in global growth along with swift progress in PLI scheme will continue to support export growth momentum. Further, the new Foreign Trade Policy 2021-26 (likely to be announced in the second half of FY22) is expected to correct a few imbalances on the export front and provide enough incentives to exporters for scaling up their businesses.

Imports: At a 5-month high

Merchandise imports rose to a 5-month high of USD 47.1 bn in Aug-21 from USD 46.4 bn in Jul-21, translating into an annualized growth of 51.7% YoY. At a granular level:

• Bulk of the sequential increase was driven by imports of Gems & Jewellery (+USD 2.2 bn), Electronic Items (+USD 0.6 bn), and Ores & Minerals (+USD 0.2 bn). On a monthly basis, electronic imports stood at the record high level. On the other hand, there was a sequential drop seen in case of imports of Petroleum Products (-USD 1.2 bn), Chemical Products (-USD 0.8 bn), and Optical & Medical Instruments (-USD 0.2 bn).
• Non oil and non gems and jewellery imports slightly moderated to USD 26.4 bn in Aug-21 from USD 26.7 bn in Jul-21. But it appears to have held up well (34.3% YoY) despite the adverse impact on domestic demand from resurgence in Covid during Apr-May, earlier this year. Further, it has climbed up by 2.8% over the pre-pandemic levels seen in Aug-19, reflecting a gradual pickup in domestic demand after a protracted period of economic disruption triggered by the Covid pandemic.
• Interestingly, gold imports in Aug-21 surged to a 5-month high amidst demand recovery and recent price correction, leading to a build-up in inventories ahead of the festive season. Incorporating this month’s print, cumulative gold imports in Apr-Aug’21 stands at a record high level of USD 18.8 bn.

Outlook

The increase in the merchandise trade deficit in Aug-21 is predominantly led by higher imports of Gold and Electronic Goods. Despite lower price of precious metals in last two months, rise in import demand could be reflective of the seasonality aspect and pent-up demand, besides a pickup in inflation perception of households. In case of electronics, the increase could be reflective of gradually improving demand conditions post the second wave of Covid along with restocking efforts before the onset of the festive season in India.

From the core trade perspective, the momentum in exports in the current year is comforting. While overall core imports are yet to witness a material uptick from the pre-pandemic levels, there is a likelihood of demand side factors gaining momentum in H2 FY22 as pace of domestic vaccination has accelerated in recent weeks (as of Sep 16, 43% of the population had received one dose of vaccine, while 14% stood fully vaccinated). This will be well supported by monetary and fiscal policies that are expected to maintain their accommodative stance, at least in the near term.

Notwithstanding the temporary spurt in international crude oil prices from weather related disruptions in the US, we note that international commodity prices have started to plateau on the back of supply adjustments, administrative actions, and renewed threat of Covid infections (from the Delta variant) in few countries. This could potentially temper the commodity price impact in the coming months and slow down the speed of expansion and normalization in the trade deficit.

Overall, we continue to stick to our FY22 current account estimate of USD 30 bn deficit vis-à-vis a surplus of USD 24 bn in FY21.

Annexure

Table 1: Key items within merchandise trade balance

Chart 1: Excluding the base effect, core exports appear healthy vis-à-vis core imports

Chart 2: Exports have recovered faster in FYTD 22 as compared to imports