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May-23: Rise in trade deficit may be transient

16 Jun 2023

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KEY TAKEAWAYS

  • India’s merchandise trade deficit widened back to a 5-month high of USD 22.1 bn in May-23 from USD 15.1 bn in Apr-23, driven by a sharper increase in imports vis-à-vis exports sequentially.

  • Merchandise exports expanded by a subdued 0.7%MoM to USD 35.0 bn in May-23. On annualized basis, export growth remained in negative territory for the fourth consecutive month, contracting by a significant 10.3% in May-23.

  • Merchandise imports expanded sequentially by 14.5%MoM to USD 57.1 bn in May-23. On annualized basis, import growth contracted for fifth consecutive month by 6.6%..

  • Services trade surplus is estimated to have eased marginally in May-23, to USD 11.8 bn from USD 12.2 bn in Apr-23 due to a higher sequential downside in exports vs. imports.

  • Notwithstanding the wider merchandise trade deficit in May-23, we continue to expect the current account deficit for FY24 to narrow towards 1.4% of GDP from an estimated 2.0% in FY23, as both price and volumes are expected to remain benign.


India’s merchandise trade deficit widened to a 5-month high of USD 22.1 bn in May-23 from USD 15.1 bn (revised lower from USD 15.2 bn) in Apr-22. Both exports and imports expanded sequentially in the month, but a relative outperformance of imports vis-à-vis exports pushed the trade deficit print wider.


Merchandise Exports

Merchandise exports expanded sequentially by a subdued 0.7%MoM to USD 35.0 bn in May-23 from USD 34.7 bn in Apr-23. However, on annualised basis, export growth remained in negative territory for the fourth consecutive month, contracting by 10.3% in May-23, reflecting the impact of the global slowdown.

  • On annualised basis, of the 14 key export subcategories, only 5 registered an expansion. Electronic goods exports continued to lead with 74.0%YoY growth in May-23, an indication that Government’s PLI scheme has started to yield tangible results.

  • The biggest drag came from Petroleum products, which contracted by 29.9%YoY, on account of the softness in global crude oil prices. Brent crude is trading 11.4% lower on YTD basis and 43.2% since last year’s Jun-22 peak.

  • Cumulative merchandise exports over Apr-May FY24 stood at USD 69.7 bn, marking a decline of 11.4% over corresponding period in FY23 levels.


Merchandise Imports

Sequentially, merchandise imports expanded sequentially by 14.5%MoM to USD 57.1 bn in May-23. On annualized basis, import growth contracted for fifth consecutive month by 6.6%.

  • The breadth of weakness was broad based with just 5 out of 15 sub-categories registering annualised expansion. Machinery Items emerged as a strong outperformer with a growth of 25.1%YoY in May-23, which raises hopes of a pickup in private sector capital expenditure in the current year. .

  • NONG (non-oil-non-gold) imports, a key indicator of domestic demand, picked up to USD 35.9 bn in May-23 from USD 31.5 bn in Apr-23, clocking a positive annualised growth after a gap of 4 months of 1.7%.

  • Gold imports displayed buoyancy, climbing up to USD 5.6 bn in May-23 from USD 3.2 bn in Apr-23, supported by wedding season and record high global prices. Gold imports could remain supportive on account of withdrawal of Rs 2000 bank note, as some funds make their way into discretionary demand for gold.

  • Cumulative imports over Apr-May FY24 stood at USD 107.0 bn, a decrease of 10.2% compared to the corresponding period in FY23.


Services Trade

Services trade surplus is estimated to have eased marginally in May-23, to USD 11.8 bn from USD 12.2 bn in Apr-23 due to a higher sequential downside in exports vs. imports

  • Services exports and imports are estimated to have fallen to a 10-month and 7-month low USD 25.3 bn and USD 13.5 bn respectively in May-23.

Outlook

Notwithstanding the widening of the merchandise trade deficit seen in May-23, we continue to expect FY24 to witness a moderation in current account deficit with both price and volumes offering comfort, as -

  • Supply disruptions have normalised completely with the New York Fed’s Global Supply Chain Pressure Index falling for a fifth month in a row to -1.71 in May-23, its lowest level on record. 

  • Accelerated pace of monetary tightening by key central banks has ushered in a slowdown in global demand. This has led to a moderation in commodity prices, with the CRB index down by 13.7%YoY in Jun-23, so far.
  • The anticipated moderation in domestic economic activity could further drive imports to decline.

  • WTO has revised its forecast for world merchandise trade volume growth to 1.7% for 2023 from 1.0% earlier.

  • On services trade, there is a palpable improvement in domestic services exports amidst a post Covid thrust on digitization and cost optimization globally. 

 

On the back of subdued commodity prices (including oil), moderating GDP growth in FY24 and a strong support from services’ exports, we continue to expect the current account deficit for FY24 to narrow towards 1.4% of GDP from an 2.0% in FY23.

 

Says Suman Chowdhury, Chief Economist and Head- Research, Acuité Ratings & Research “The overall deficit in the trade of goods and services has risen back in May-23 to double digits at USD 10.4 bn with a faster sequential rise in merchandise imports vs exports and a lack of momentum in services exports in the current quarter after the buoyant growth last year. While the growth in export of electronics goods arising out of the PLI scheme is encouraging, it has been more than offset by the drop in exports of petroleum products. Higher imports of gold and machinery, the latter an encouraging sign for private sector investments, have also accounted for the increased trade deficit. Nevertheless, we believe that the average monthly deficit figures will remain moderate in the current fiscal with the softness in commodity prices and the better performance of services exports, leading to an improvement in the current account front.”



Table 1: Highlights of merchandise trade balance


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


Chart 1: Services exports will continue to pull up the overall trade deficit


Chart 2: Global supply chain pressures have normalized