India’s merchandise trade deficit moderated to a 13-month low in Feb-23, coming in at USD 17.4 bn compared to USD 17.7 bn in Jan-23. While both exports and imports expanded sequentially in the month, the relative outperformance of exports vis-à-vis imports drove the moderation in overall trade deficit. 

Exports

After contracting sequentially by 13.5% MoM in Jan-23, merchandise exports registered a growth of 2.9% MoM to USD 33.9 bn in Feb-23 from USD 32.9 bn in Jan-23. Nevertheless, on annualised basis, export growth remained in negative territory for the third consecutive month, contracting by 8.8% YoY in Feb-23 

• The sequential increase in exports was led by Gems & Jewellery, Agri & Allied Products, and Machinery Items.

• Despite sequential moderation in value terms, annualised growth in Electronics goods clocked the highest growth of 29.9%YoY in Feb-23 among all key sub-categories of exports. The sector has benefited from the PLI scheme with YTD (Apr-Jan) growth in electronics exports registering a growth of 49.5%YoY.

• Cumulative merchandise exports over Apr-Feb FY23 stood at USD 405.9 bn, an increase of 8.5%YoY compared to the corresponding period in FY22.

Imports

Sequentially, merchandise imports registered a modest growth of 1.3% MoM in Feb-23 from a contraction of 15.8% MoM in Jan-23. In annualized terms, import growth  remained in negative territory for the third consecutive month, contracting by 8.2% YoY in Feb-23.

• In value terms, the sequential expansion was led by Gems & Jewellery, Petroleum Products, Ores & Minerals, and Transport Equipments.

• The breadth of contraction was broad-based, with 7 of the 15 sub-sectors registering annualised contraction.

• Cumulative merchandise imports over Apr-Feb FY23 stood at USD 635.5 bn, an increase of 18.8%YoY compared to the corresponding period in FY22.

Services

On the services front, trade surplus in Feb-23 is estimated to have risen to USD 14.6 bn compared to USD 13.8 bn in Jan-23. The upside was led entirely by services exports.

• Services exports is estimated to have risen to USD 29.2 bn, clocking a growth of 36.8% YoY on annualised basis and 4.0% MoM on sequential basis.

• Amidst the buoyancy in services exports led by IT/ITeS sector, on net basis, India’s monthly trade balance (goods and services) was in a marginal deficit of USD 2.8 bn in Jan-23, with the cumulative trade deficit over Apr-Feb FY23 standing at USD 114.6 bn.

Outlook

The persistent moderation in merchandise trade deficit below USD 20 bn levels for two months in a row is comforting compared to the average monthly deficit of USD 24.3 bn in Q3 FY23. Gradual easing of global supply chain disruptions and range-bound global commodity prices in recent months has helped to lower the pressure on India’s merchandise trade deficit.

Having said so, the near-term outlook remains worrisome amidst weakening of global demand impulses, tight global financial conditions and lingering geopolitical uncertainties. From RBI perspective, concerns over impact of an adverse Southwest monsoon and any persistent instability in the US banking system could likely alter the monetary policy response - towards a pause in the Apr-23 MPC meeting, leaving the central bank to turn more data dependent to balance better growth-inflation dynamics.

Other factors that could keep trade deficit pressures somewhat intact in the coming months include -

• Bottoming out of global commodity prices, especially given the revision in expectations of global growth faring better in 2023 than envisaged earlier. The IMF in its Jan-23 World Economic Outlook (WEO) revised 2023 world GDP growth upwards by 20 bps to 2.9%.

• The continuing stickiness in global inflation is likely to compel central banks to keep rates higher for longer, the impact of which is bound to be felt on lower global demand and in turn India’s exports in FY24.

• Demand for gold could firm up ahead of the seasonal demand setting in.

Having said so, some cushion on trade deficit can be expected from a slowing domestic demand as delayed impact of monetary tightening catches up. In addition, the resilience in services and increased reliance on Russia for crude imports could further moderate imports somewhat.

On net basis, we continue to retain our FY23 current account deficit forecast of USD 106 bn i.e., 3.1% of GDP. However, we attach a downward bias to the full year estimate given the lower-than-expected Feb-23 trade deficit along with continued strength in services exports.

Table 1: Highlights of merchandise trade balance

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