18 Apr 2022
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.
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:
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.
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:
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