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Aug-22 Trade Deficit: Some Reprieve

16 Sep 2022

KEY TAKEAWAYS

  • India’s merchandise trade deficit moderated to USD 28.0 bn in Aug-22 from its record high level of USD 30.0 bn in Jul-22.
  • While both exports and imports declined sequentially, the USD 2 bn shrinkage in trade deficit resulted from a marginally higher contraction in imports vis-à-vis exports.
  • Moderation in merchandise trade deficit is along expected lines with lagged impact of the correction in international commodity prices playing a key role along with minor impact coming from the rising share of Russia in India’s import basket.
  • Monthly trade deficit prints could moderate in the coming months as impact of the correction in commodity prices trickle down and the global supply chain pressures ease..
  • Increasing risks to exports and relatively robust demand for imports due to a domestic consumption recovery, would however continue to keep pressure elevated.
  • We have increased our FY23 current account deficit (CAD) projection to USD 130 bn (3.1-3.2% of GDP) from USD 105 bn.

India’s merchandise trade deficit moderated to USD 28.0 bn in Aug-22 from its record high level of USD 30.0 bn in Jul-22. While both exports and imports declined sequentially, the USD 2 bn shrinkage in trade deficit resulted from a marginally higher contraction in imports (-6.6% MoM) vis-à-vis exports (-6.5% MoM). 
Exports

In value terms, merchandise exports moderated to a 9-month low of USD 33.9 bn in Aug-22 from USD 36.3 bn in Jul-22. This translated into an annualized growth of 1.6% YoY, the weakest in last 18-months.

  • Barring Rice (USD +0.1 bn) and Gems & Jewellery (USD 0.1 bn), that registered a modest sequential increase, the remaining broad export categories were either broadly unchanged or saw a sequential decline.
  • Incidentally, Tobacco exports touched a new monthly high of USD 0.13 bn in Aug-22.
  • The sequential decline was led by Engineering Goods (USD -1.1 bn), Petroleum Products (USD -0.7 bn), Ready Made Garments (USD -0.1 bn), Organic & Inorganic Chemicals (USD -0.1 bn), Electronic Goods (USD -0.1 bn), etc.
  • Meanwhile, iron ore exports posted its third consecutive month of more than 90% annualized contraction amidst imposition of 50% export duty by the government on low grade iron ore in May-22 and a slowdown in demand from China.
  • Non-oil exports moderated to USD 28.2 bn, the lowest level in last 9-months.

Nevertheless, cumulative exports for the first five months of FY23 stand at USD 193.5 bn, an expansion of 17.7% compared to the corresponding period in FY22.

Imports

Merchandise imports moderated to a 4-month low of USD 61.9 bn in Aug-22 from USD 66.3 bn in Jul-22, translating into an annualized growth of 37.3% YoY. At a granular level:

  • The sequential decline in imports was led by Petroleum Products (USD -3.4 bn), Precious Stones (USD -0.8 bn), Coal (USD -0.6 bn), Silver (USD -0.4 bn), Fertilizers (USD -0.2 bn), Organic & Inorganic Chemicals (USD -0.2 bn), Plastic & Rubber Articles (USD -0.2 bn), etc.
  • Meanwhile, Gold (USD +1.2 bn), Electronic Goods (USD 0.5 bn), and Transport Equipment (USD 0.2 bn) were key sub-categories within imports that saw a sequential increase during the month.
  • While Leather Products and Paper Products saw a modest sequential increase, they nevertheless touched a record monthly high of USD 0.11 bn and USD 0.19 bn each in Aug-22.
  • NONG (Non-oil-non-gold) imports, a key indicator of domestic demand, moderated to USD 40.6 bn in Aug-22 from USD 42.8 bn in Jul-22.

Cumulative imports for the first five months of FY23 stand at USD 318.0 bn, marking an expansion of 45.7% compared to the corresponding period in FY22.

Outlook

As highlighted in our last month’s note, the moderation in India’s merchandise trade deficit in Aug-22 is along expected lines with lagged impact of the correction in international commodity prices playing a key role. A minor impact could also be coming from the sharp increase in Russia’s share in the import basket (to 6.4% in Jul-22 vis-à-vis 1.4% in Jul-21). Going forward, it is likely that the monthly trade deficit could moderate further as the full impact of lower commodity prices trickles through.

However, sequential pressures on trade deficit could remain elevated as:

  • The start of festive season in India could propel domestic demand, which is already facing tailwinds from complete unlocking of the economy and high inoculation coverage (with ~68% of the population having received double dose).

  • The Russia-Ukraine war has already dampened world trade volume (the IMF in its Jul-22 update of the World Economic Outlook report slashed its projection for growth in 2022 and 2023 world trade volume (goods and services) by 90 bps and 120 bps to 4.1% and 3.2% respectively. This has started to manifest via the moderation in India’s exports.
  • A marginal adverse impact on exports is also on account of the recently imposed export restrictions by the government in case of select commodities such as rice and wheat.
  • Individual cases of persistence of supply disruption (in case of import of Vegetable Oils, Coal, etc.) and sudden spurt in demand (in case of import of Silver on account of substitution effect vis-à-vis gold and its rising demand on for green infrastructure) is also seen to be playing a role.

We have therefore, raised our FY23 current account deficit (CAD) projection to USD 130 bn (3.1-3.2% of GDP) from USD 105 bn.

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: Complete unlocking of the economy is supporting demand for imports