India’s merchandise trade deficit narrowed to USD 18.5 bn in Mar-22 from USD 20.9 bn in Feb-22. While both exports and imports increased in Mar-22, the relatively larger jump in exports helped the trade deficit to narrow sequentially.

For the year as a whole, cumulative trade deficit stood at USD 192 bn in FY22, significantly higher than USD 161 bn deficit seen in the pre-pandemic year of FY20, highlighting the rapid pace of normalization since the second Covid wave, expedited by the rising commodity prices.

Exports: Scale a new peak

In value terms, merchandise exports clocked the highest monthly level of USD 42.2 bn in Mar-22 vis-à-vis USD 34.6 bn in Feb-22. This translates into a robust sequential increase of 22.2% MoM.

• Sequentially, the jump was led by exports of Petroleum Products (USD 3.1 bn), Machinery Tools (USD 1.6 bn), Chemicals (USD 0.8 bn) and Gems & Jewellery (USD 0.6 bn), Agri Products (USD 0.3 bn), Ores & Minerals (USD 0.3 bn), Electronics (USD 0.3 bn), and Textiles (USD 0.3 bn).
• Non-oil exports have ramped up from USD 474.2 bn in FY20 to USD 354.4 bn in FY22 i.e. a growth of 30.3% over the pre-pandemic period which reflects the higher export opportunities in some commodities as also manufactured goods and a structural uplift in India’s export sector.
• It is noteworthy that none of the key export items saw a sequential decline in value terms.

Cumulative exports in FY22 stood at USD 420 bn, an expansion of 33.9% compared to the pre pandemic year of FY20. Despite some adverse impact from the recent surge in Covid cases in some Asian countries along with the geopolitical concerns in the last three months, merchandise exports managed to surpass government’s FY22 export target of USD 400 bn.

Imports: Record a new high

Merchandise imports also clocked an all-time high monthly level of USD 60.7 bn in Mar-22 vis-à-vis USD 55.4 bn in Feb-22, translating into a sequential growth of 9.5% MoM. At a granular level:

• Bulk of the sequential expansion was driven by imports of Petroleum Crude & Products (USD 3.5 bn), Electronic Items (USD 2.3 bn), Ores & Minerals (USD 1.5 bn), Transport Equipments (USD 0.8 bn), Optical, Medical & Surgical Instruments (USD 0.6 bn), Agri Products (USD 0.3 bn), and Chemicals (USD 0.3 bn).
• Meanwhile, certain category of inbound shipments saw a sequential decline, led by Gems & Jewellery (USD -3.9 bn) and Project Goods (USD -0.2 bn).
• NONG (Non-oil-non-gold) imports, a key indicator of domestic demand, increased sequentially to a record high of USD 40.9 bn in Mar-22 vs. USD 35.4 bn in Feb-22.

Cumulative imports in FY22 stood at USD 612 bn, an expansion of 28.9% compared to the pre-pandemic year of FY20. As regards NONG imports, the growth figure stands at 28.4% for the same period, highlighting that the pickup in imports is also driven by higher industrial and consumer demand.

Outlook

While the lower merchandise trade deficit in Mar-22 vs. Jan-Feb 2022 is in line with year-end seasonality, the backdrop of sharply elevated commodity prices since the start of Russia-Ukraine conflict had raised the likelihood of a higher trade deficit in Mar-22. This expectation indeed played out in case of oil and non-oil-non-gold trade deficit, with both registering sequential widening in Mar-22 over Feb-22. In contrast, gold deficit corrected sharply in Mar-22, possibly as close to record high prices dampened domestic demand.

As such, our estimate for India’s FY22 current account deficit of USD 50 bn could face a minor downside with likelihood of CAD printing at USD 47 bn.

Looking at the broader picture on trade performance and as highlighted previously, India’s merchandise trade clocked USD 1032 bn in FY23 (vs. USD 788 bn in the pre pandemic year of FY20), exceeding the USD 1 tn mark for the first time. That’s a commendable feat for the Indian economy in a year marked by multiple Covid related headwinds.

For FY23, we assume Brent crude price to stay around USD 97 pb levels (which is imputed by taking the average of monthly futures for the next 12 benchmark contracts). We project FY23 current account deficit to widen to USD 85 bn. The expectation of widening of current account deficit is not just based upon the likelihood of elevated global commodity prices, but it also is contingent upon the following factors to play a role:

• Unlocking of the economy post the Omicron wave will once again revive pent-up demand.
• Improving vaccination cover (around 59% of the population has so far received two doses) will limit future Covid led disruptions and also aid organic recovery, which continues to find support from accommodative monetary policy and capex focused fiscal policy.
• While PLIs and other export promotion measures would start accreting to export buoyancy in a gradual manner from FY23 onwards, we also need to be cognizant of continued disruption due to Covid (of late there is a resurgence in infections in South Korea, Vietnam, Japan, China, Germany, etc.).

We acknowledge considerable uncertainty in projecting trade and current account deficit given the high volatility in commodity prices, which in the current environment is taking cues from unpredictable geopolitical events. This broadens the uncertainty bands around our forecast.

Table 1: Highlights of merchandise trade balance

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

Table 2: Granularity of performance favors exports