India’s merchandise trade deficit moderated to a 12-month low in Jan-23, coming in at USD 17.7 bn compared to USD 22.1 bn in Dec-22. While both exports and imports eased sequentially in the month, the sharper drop in imports vis-à-vis exports drove the significant moderation in the trade deficit.

Exports

For the month, merchandise exports slipped to a 3-month low of USD 32.9 bn from USD 38.0 bn in Dec-22 (revised up from USD 34.5 bn). On annualised basis, this marked the second consecutive month of contraction in exports, at a pace of 6.6% compared to 3.1% in Dec-22. 

• The sequential decline in exports (13.5%MoM) was led by Engineering goods, Chemicals, Agri & Allied Products, and Electronics.

• The sequential moderation notwithstanding, annualised growth in Electronics goods clocked the highest growth of 55.5%YoY among all key sub-categories of exports. The sector has clearly benefited from the PLI scheme, with YTD (Apr-Jan) growth in electronics exports registering a growth of 52.2%YoY

• Slowdown notwithstanding, the cumulative merchandise exports over Apr-Jan FY23 stood at USD 369.3 bn, an increase of 8.5%YoY compared to the corresponding period in FY22.

Imports

Merchandise imports moderated to a 17-month low of USD 50.7 bn in Jan-23 compared to USD 60.2 bn in Dec-22 (revised up from USD 58.2 bn).

• On sequential basis, imports eased by 15.8%MoM – to mark the second highest monthly decline on record. On annualised basis, this translated into a contraction of 3.6%YoY in Jan-23.

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

• In value terms, the sequential decline in imports was predominantly on account of Petroleum Products (USD 2.8 bn), Transport Equipment (USD 1.8 bn), Gems & Jewellery (USD 1.4 bn), Ores & Minerals (USD 0.7 bn) and Chemicals (USD 0.4 bn).

• Cumulative merchandise imports over Apr-Jan FY23 stood at USD 602.2 bn, an increase of 21.9%YoY compared to the corresponding period in FY22.

Services

On the services front, trade surplus in Jan-23 is estimated to have risen to the highest level on record, at USD 16.5 bn compared to USD 15.5 bn in Dec-22. The upside was led entirely by services exports, as imports remained largely unchanged vis-à-vis Dec-22 levels. 

• Services exports is estimated to have risen to USD 32.2 bn, clocking a growth of 49.1% on annualised basis and 3.0% 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 0.6 bn in Jan-23 compared to -USD 6.6 bn in Dec-22.

Outlook

The sharp moderation in trade deficit at the start of 2023 has come somewhat as a surprise, especially in the pace of moderation of the merchandise imports. We suspect the Chinese New Year holidays in Jan-23 to have played an outsized role, and thus Jan-23 trade deficit relief could prove to be transitory.

Other factors that could maintain 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 gems and jewellery could firm up post the Union Budget and ahead of the seasonal demand setting in.

• A mild impact owing to the suspension of one of the main container ports in Turkey, in the aftermath of the earthquake. As per Global Trade Research Initiative Yarns, Dyes, and Gems & Jewellery could see negative export growth in Feb-Mar 2023 (Turkey accounted for 2.2% share in India’s export basket in CY22).

Some cushion on trade deficit can be expected from –

• Slowing domestic demand as delayed impact of monetary tightening catches up

• Increased dependence on Russia for crude imports, and the re-exports of refined crude to advanced economies

• Steady improvement in services exports especially the IT/ITeS sector

On net basis, we continue 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 Jan-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