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Oct-23 External Trade: Deficit zooms

16 Nov 2023

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KEY TAKEAWAYS 

  1. India’s merchandise trade deficit rose sharply to a record high level of USD 31.5 bn in Oct-23 vis-à-vis USD 19.4 bn in Sep-23. 
  2. The sequential deterioration in merchandise trade deficit was on account of a spurt in imports, even as exports moderated a tad.
  3. As much as ~71% of the sequential deterioration in monthly merchandise trade deficit was on account of gems & jewellery and petroleum products. While elevated price for precious metals and crude oil is partly responsible for this, the deterioration is also on account of higher import volumes, supported by festive season demand.
  4. Services trade surplus is estimated to have risen slightly in Oct-23 to USD 14.4 bn from USD 13.8 bn in Sep-23. 
  5. While we expect monthly trade deficit prints to moderate from the record high levels as festive demand tapers and prices of commodities such as crude oil stabilize, we nevertheless continue to maintain our view that the cumulative trade deficit in H2 FY24 will be higher vis-à-vis H1 FY24.
  6. Overall, we maintain our FY24 current account deficit forecast at USD 67 bn (1.9% of GDP) i.e., unchanged from FY23 levels.


India’s merchandise trade deficit touched a record high level of USD 31.5 bn in Oct-23 from USD 19.4 bn in Sep-23. This is the highest trade deficit point in the last five years and clearly one of the highest in recent history. The sequential deterioration in merchandise trade deficit was on account of a spurt in imports particularly in crude oil and gold, even as exports moderated a tad. 

 

Merchandise Exports


Merchandise exports stood at USD 33.6 bn (-2.5% MoM and +6.2% YoY) in Oct-23. 

  1. Of the 14 key export sub-categories, 11 registered an annualised expansion, up from 5 in the previous month. The highest growth was clocked by Stone, plaster, cement etc. (+48.2%YoY), Ores and minerals (+37.0%YoY), Drugs and Pharmaceuticals (+29.4%YoY) and Electronic items (+28.2% YoY). However, the value in these export categories is not that significant to drive the overall export figure. Engineering goods, one of the major export categories from India, clocked a growth of 7.3%YoY from USD 7.5 bn to USD 8.1 bn. 
  2. Meanwhile, Gems and Jewellery (-9.8%YoY), Leather products (-5.0%YoY), and Petroleum products (-4.6%YoY) showed contraction on annualized basis. Notably, petroleum exports moderated in value terms to USD 6.0 bn from USD 6.5 bn in Sep-23 despite crude prices remaining elevated – this could be capturing some disruption to petroleum exports to Israel (its share in India’s petroleum product exports stood at 5.4% in FY23) during the month.  
  3. Core exports (i.e., Exports excluding Petroleum and Gems & Jewellery exports) remained almost steady at USD 24.6 bn in Oct-23 vis-à-vis USD 24.7 bn in the previous month. 

 

Merchandise Imports


Merchandise imports scaled a record monthly peak of USD 65.0 bn (+20.8% MoM and +12.3% YoY) in Oct-23. 

  1. Import of petroleum products jumped to a 15-month high of USD 17.7 bn amidst the backdrop of elevated crude oil prices. This stood at USD 14.0 bn in Sep-23 and averaged USD 13.7 bn in the first half of the current fiscal. 
  2. At a granular level, 8 of the 15 sub-categories registered an annualised expansion within imports. At an itemized level, imports of Fruits & Vegetables, Silver, and Machine Tools touched a record monthly high.
  3. Gems & Jewellery, with a growth of 62.8% YoY emerged as the best performer, followed by Electronics items (+26.2% YoY), and Optical, Medical & Surgical instruments (+18.8% YoY). Spurt in first two categories reflects strong seasonal demand of gold ahead of the busy festive season. Specifically, gold imports have virtually doubled in Oct-23 vs Oct-22 at USD 7.2 bn. 
  4. On an annualized basis, drag on imports was prominent in case of Transport equipment (-34.0% YoY), Textiles (-33.5% YoY), and Project Goods (-23.7%YoY).
  1. Core imports (i.e., imports excluding Petroleum and Gems & Jewellery imports) firmed up to USD 36.9 bn in Oct-23 from USD 33.6 bn in Sep-23.

 

 

 

Trade balance


As much as ~71% of the sequential deterioration in monthly merchandise trade deficit was on account of deficit from gems & jewellery and petroleum products. While elevated price for precious metals and crude oil is partly responsible for this, the deterioration is also on account of higher volumes, supported by festive season demand.

 

Services Trade


Services trade surplus is estimated to have risen in Oct-23 to USD 14.4 bn from USD 13.8 bn in Sep-23. 

  1. Growth in both services exports and imports is estimated to have reverted to positive territory to 13.4% YoY and 6.0% YoY respectively, after a brief phase of contraction. 

 

Trade Outlook


While we were expecting merchandise trade deficit to widen in H2 FY24, the Oct-23 print appears to be amplified on account of the latest price trends (in case of oil and precious metals) along with festive season demand. Hence, we would expect monthly trade deficit prints to moderate from record high levels as festive demand tapers (crude oil prices have also eased on global slowdown concerns along with localized impact of Israel-Hamas war as of now). Having said so, we nevertheless continue to maintain our view that the cumulative trade deficit in H2 FY24 will be higher vis-à-vis H1 FY24.

  1. Global merchandise trade volume continues to remain sluggish. As per IMF’s latest World Economic Outlook update, world trade volume is projected to rise by a meagre 0.9% in 2023 vs. 2.4% projected earlier.
  2. Meanwhile, export restrictions on select agri commodities such as rice and wheat remain in place to rein-in domestic price pressures.
  3. India’s strategic advantage with respect to importing relatively cheaper Russian oil (vs. Brent) has narrowed considerably with Russian Urals consistently trading above the imposed price cap of USD 60 pb since Jul-23.

 

Overall, we maintain our FY24 current account deficit forecast at USD 67 bn (1.9% of GDP) i.e., unchanged from FY23 levels. 

 

Rupee Outlook


Notwithstanding INR’s tendency to sporadically flirt with its record low levels in FY24 so far, net movement has been modest so far in the current fiscal. Over the last one month, the INR has ranged between 82.9 – 83.4. In fact, with a 1.3% depreciation on FYTD basis, INR stands out as one of the best performing major EM currencies.

 

Says Suman Chowdhury, Chief Economist and Head – Research “While pressure for incremental weakness in INR might persist in the near-term given the volatility in the global markets, it is no longer likely to be intense in the coming weeks and the risks of INR breaching the level of 84 has reduced. The recent softness in US labor market/ inflation data has weighed upon the US dollar (DXY index has slipped 2.2% since its recent highs in Oct-23), thereby providing respite to EM currencies. Further, the likelihood of Fed opting for another rate hike in Dec-23 has also progressively declined, mitigating the risks of further capital outflows. 

 

Meanwhile, we maintain our view of rupee reclaiming partial strength by Mar-24, with INR moving towards 82 levels due to (i) market positioning ahead of the anticipated Fed pivot in mid-2024 and India’s inclusion in JPM EM bond index, (ii) favorable year-end seasonality, and (iii) relatively stable and sound growth-inflation balance.” 



Table 1: Highlights of India’s trade balance




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


Chart 1: Moderation in crude oil price to ease merchandise trade deficit in near term