KEY TAKEAWAYS - India’s merchandise trade deficit widened to a record high of USD 22.9 bn in Nov-21 from USD 19.7 bn in Oct-21.
- Although both exports and imports moderated sequentially in Nov-21, the widening of trade deficit was on account of a relatively sharper decline in exports vis-à-vis imports.
- FYTD exports and imports, nevertheless, are running above the pre pandemic levels in corresponding period of FY20.
- While recent moderation in commodity prices lowered both exports and imports, lower momentum in global demand with Covid risks resurfacing again could have weighed on exports.
- Meanwhile, benign Covid risks in India continues to support demand for imports as ongoing expansion in vaccination coverage continues to unlock pent-up demand.
- While we continue to stick to our FY22 current account deficit forecast of USD 38 bn (compared to USD 24 bn surplus in FY21), we do note emergence of upside risk on the back of elevated trade deficit, especially in last three months.
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India’s merchandise trade deficit widened to a record high of USD 22.9 bn in Nov-21 from USD 19.7 bn in Oct-21. Although both exports and imports moderated sequentially in Nov-21, further expansion of the trade deficit was on account of a relatively sharper decline in exports vis-à-vis imports.
For the first eight months of FY22, cumulative trade deficit stands at USD 121 bn, higher than USD 113 bn seen in the corresponding pre-pandemic period of FY20, reflecting a sharper pace of normalization that what we expected.
Exports: Sharp sequential decline
In value terms, merchandise exports dropped significantly to USD 30.0 bn in Nov-21 (its lowest monthly figure in FY22 so far) from USD 35.6 bn in Oct-21. This translates into a 15.7% MoM contraction, the worst sequential decline since the nationwide lockdown in Apr-20 with a sharper decline in non-oil exports.
- Sequentially, the decline was led by exports of Gems & Jewellery (-USD 1.8 bn), Petroleum Products (-USD 1.4 bn), Engineering Goods (-USD 1.3 bn), Chemicals & Products (-USD 0.6 bn), and Textiles (-USD 0.4 bn).
- Except export of Electronics that saw a mild sequential increase of USD 0.1 bn, all other key export items remained broadly unchanged.
Notably, exports for the first eight months of FY22 has consistently remained above USD 30 bn with cumulative exports in Apr-Nov’21 standing at USD 263.6 bn, an expansion of 24.8% compared to the corresponding pre-pandemic period of FY20.
Imports: Moderate, but remain elevatedMerchandise imports moderated to USD 52.9 bn in Nov-21 from USD 55.4 bn in Oct-21, translating into a 4.4% MoM contraction. At a granular level:
- Bulk of the sequential decline was driven by imports of Gems & Jewellery (-USD 2.1 bn amid waning of festive season), Electronic Items (-USD 1.1 bn), and Machinery Equipment (-USD 0.3 bn).
- Meanwhile, Ores & Minerals and Chemicals saw a sequential increase of USD 0.5 bn each while Petroleum Products inched up by USD 0.2 bn.
- NONG (Non-oil-non-gold) imports, a key indicator of domestic demand, moderated to USD 34.0 bn from its record high of USD 35.8 bn in Oct-21.
Cumulative imports for the first eight months of FY22 stand at USD 384.3 bn, an expansion of 18.4% compared to the corresponding pre-pandemic period of FY20.
OutlookThe near-term outlook on trade deficit faces uncertainty from both commodity price volatility as well as demand side factors.
Most commodity prices declined in the month of Nov-21 from Oct-21 levels (as per the World Bank, global energy prices and base metals fell by 6.4% and 3.7% respectively, even as prices of most agricultural commodities hardened). While this impact from commodity prices by and large manifested in sequential decline in both exports and imports, the trade deficit worsened nevertheless as the drop in exports outpaced imports. We believe the following factors are at play here:
- Few countries have started to see a let up in growth momentum in the final quarter of 2021 with pockets of resurgence in Covid infections (especially in Europe). While still early, the rapid spread of Omicron variant of the coronavirus poses a potential threat of scuttling the pace of global economic recovery in the short term, thereby providing some pressure on India’s exports.
- Meanwhile, India’s domestic recovery continues to move ahead amidst further reduction of Covid infections (on 7-day moving average basis, incremental daily confirmed cases have dropped under 8k, the lowest since Jun-20), while the threat of Omicron is yet to show up.
- As per high frequency Google Mobility Indicators, the aggregate individual level mobility after returning to pre pandemic levels in Oct-21 has since made further gains. In addition, the inoculation coverage continues to improve (partial and complete coverage stood at 59% and 38% of total population as of Dec 14, 2021). The unlocking of pent-up domestic demand could continue to support demand for imports in the near term, although some moderation can be expected as the festive spurt recedes.
- Covid related supply disruptions could continue to persist in the near term (with risk of worsening on Omicron threat), thereby keeping upside pressure on import of certain electronic items, edible oil, and coal.
- However, any significant worsening of risk from Omicron could pull down global commodity prices, in general. This could benefit India’s trade deficit via greater compression of imports (provided lockdowns get imposed domestically).
Despite risks from Covid, traction in exports continues to highlight the possibility of achieving government’s FY22 target of USD 400 bn. In the medium to long term, exports could find support from PLI schemes. In a recent development, the government has further approved the PLI scheme worth INR 760 bn for semiconductors. This could possibly iron out the supply imbalances by spurring the domestic semiconductor manufacturing segment thereby providing opportunities for both import substitution and export growth.
Meanwhile, the strength in NONG imports needs to be watched for signs of durability. Any loss of momentum on fading of festive support or increased Omicron risks could lower the sequential pressure on trade deficit.
As of now, we retain our FY22 current account deficit forecast at USD 38 bn (compared to USD 24 bn surplus in FY21). However, we do note emergence of upside risk on the back of elevated trade deficit, especially in the last three months.
Annexure
Table 1: Highlights of merchandise trade balance
Chart 1: Growth in imports has consistently outpaced that of exports in last 6-months
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