India’s merchandise trade deficit narrowed to the lowest level since May-22, printing at USD 23.9 bn in Nov-22 compared to USD 27.6 bn in Oct-22. Merchandise exports exhibited an impressive performance to expand sequentially by 1.9% MoM in Nov-22, while imports retreated by 5.3% MoM. This helped narrow the trade deficit.

Exports

After an annualized contraction of 12.1% in Oct-22, merchandise exports registered a modest growth of 0.6% YoY to USD 32.0 bn in Nov-22 from USD 31.4 bn in Oct-22. This marks the first sequential expansion (1.9% MoM) in 5-months.

• The sequential growth in exports was led by Machinery Items (USD 0.7 bn), Petroleum Products (USD 0.6 bn), Agri & Allied Products (USD 0.4 bn), Electronic Items (USD 0.4 bn), Chemicals (USD 0.3 bn), and Textiles (USD 0.3 bn).
• In a reflection of policy support from the PLI scheme, export of Electronic Goods touched a fresh monthly high of USD 2.2 bn.
• Cumulative exports over Apr-Nov 2022 stood at USD 295.3 bn, an increase of 11.1% compared to the corresponding period in 2021.

Imports

Merchandise imports continued to witness a downward trend, easing to a 10-month low of USD 55.9 bn due to softening global commodity prices. On annualized basis, imports clocked an expansion of 5.4% - the third month of single-digit growth. 

• At a granular level, the sequential decline was led by Gems & Jewelry (USD -0.8 bn), Fertilizers (USD -0.4 bn), Transport Equipment (USD -0.3 bn), Electronic Goods (USD -0.3 bn), Cotton (USD -0.1 bn), etc.
• Paper Products and Iron & Steel scaled a new monthly peak respectively.
• Cumulative imports over Apr-Nov 2022 stand at USD 493.6 bn, an increase of 29.5% compared to the corresponding period in 2021.

Outlook

Gradual easing of global supply chain disruptions and softening of international commodity prices in recent months has helped to lower the pressure on India’s merchandise trade deficit.

Headline exports fared better on the back of post festive ramp-up in activity (run up to Dussehra and Diwali is typically associated with lower activity due to lesser number of working days) and on account of bright spots like electronics. However, the near-term outlook remains worrisome amidst weakness in global demand impulses, tightening of global financial conditions and lingering geopolitical uncertainties. The IMF in its Oct-22 update to the World Economic Outlook report, slashed its growth forecast for 2023 world GDP and world trade by 20 bps and 70 bps to 2.7% and 2.5% - This could weigh on domestic export growth, likely to dip into single digits for FY23.

Broadly, imports are likely to continue to outpace exports amidst relatively better domestic growth momentum, aided by government’s capex expenditure. Having said so, after peaking at USD 66.7 bn in Jun-22, imports have also moderated substantially and have sequentially moved lower in each of the last four months reflecting the decline in global commodity prices. The Reuters CRB index after peaking in early Jun-22, has moderated by over 12% despite some moderate bounce-back over the last one month. In addition, the anticipated moderation in domestic economic activity and increased reliance on Russia (its share in India’s import basket has jumped to 8% from 1.5-2.0% prior to the war with Ukraine) in H2 FY23 could further weigh down imports.

On net basis, we continue to stick to our FY23 current account deficit forecast of USD 130 bn with some downside risks.

 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: Despite recent moderation, India’s trade deficit remains elevated