India’s merchandise trade deficit eased marginally in Jan-21 to USD 14.5 bn from USD 15.4 bn in Dec-20 and USD 15.3 bn a year ago. Looking at internals, there was little difference with respect to Dec-20 print, with exports a tad up (+0.3 bn) and imports a notch down (-0.6 bn) in Jan-21.

• On an annualized basis, both exports and imports clocked a positive growth rate for the second consecutive month. While exports grew at the fastest pace in nearly 2 years at 6.2%, import growth softened to 2.0% vs. 7.6% in Dec-20.

Internals

• Value of exports rose to a 4-month high in Jan-21, at USD 27.5 bn compared to USD 27.2 bn in Dec-20. Upside was led by non-oil exports, which rose to a 22-month high, as oil exports receded marginally in the month.
• At a granular level, annualized growth in non-oil exports was driven by sub-sectors of engineering goods (18.8%YoY), Drugs and Pharma (16.5%), Electronic goods (16.0%) and Organic and inorganic chemicals (2.6%).
• On the other hand, imports eased, albeit marginally from a 19-month high of USD 42.6 bn in Dec-20 to USD 42.0 bn in Jan-21. Among the internals, while NoNG (Non-oil Non-gold) imports remained largely unchanged from a month ago, oil and gold imports both registered trivial moderations (see table below).
• Oil imports continued to remain north of USD 9.0 bn for the second successive month, reflecting more of a price impact amidst India crude basket hardening by nearly 10% in Jan-21, even as domestic fuel demand had shown signs of a marginal easing in the month.
• Gold imports while edged lower from a 19-month high of USD 4.5 bn in Dec to USD 4.0 bn in Jan-21, nevertheless remain strong (versus long period average of USD 2.6 bn) amidst festive and wedding season driven demand.
• On an annualized basis, NoNG sub-sectors seeing a robust growth include, Electronic goods (17.4%), Organic and inorganic chemicals (16.0%) and commodity imports of Coal, coke etc. (9.7%), Iron & steel (26%) and Non-ferrous metals (17.6%) and Pearls, precious & Semiprecious stones (50.2%).

Conclusion

Jan-21 trade deficit largely depicts the same story as Dec-20, that is -

• Exports continue to remain healthy, underscoring the continued recovery in global growth and trade, despite a proliferation of a second wave of virus in several countries.
• Higher imports should be seen as yet another sign of economy and especially demand gradually limping back towards normalcy, having been "locked” for a good part of FY21.
• While exports are nearly at par with Feb-20 levels, imports have already caught up with the pre-COVID levels in Dec-Jan.

Looking ahead into FY22, a faster rollout of vaccine in DMs should allow a stronger recovery in India’s exports. On the other hand, imports could remain elevated amidst a demand revival and rising prices of global commodities, especially crude and industrial metals. As such, the return of monthly merchandise trade deficit run-rate to the average pre-pandemic range of USD 10-13 bn is almost a certainty. There could be a marginal upside if commodity prices firm up further and persist at elevated levels.

From a fiscal year perspective, taking into account the surplus on services account, we expect the current account balance to post a surplus of USD 32 bn in FY21. For FY22, we forecast a current account deficit of USD 30 bn.

Annexure

Table 1: Merchandise Trade Balance

Chart 1: Export growth near a 2-year high in Jan-21