India trade deficit widens but total trade is shrinking

There were two big stories in the merchandise trade data reported for October 2022. Firstly, the trade deficit widened but that was glossed over by the fact that the total trade had shrunk sharply due to global headwinds. Secondly, the Ministry of Commerce is likely to stop its practice of publishing the interim trade data at the start of the month due to the consistent variances with the actual data. While the latter is more of a policy decision and not too critical, what really matters is the shrinkage in total trade. Here total trade refers to the sum of merchandise exports and merchandise imports.

The big story for October 2022 was the perceptible shrinkage in total trade (imports + exports). Readers would recollect that for 5 months in succession, between March 2022 and July 2022, India’s total trade was above the $100 billion mark on a consistent basis. The fears of global recession impacted total trade, which dipped to $95.82 billion in August 2022 and $96.61 billion in September 2022. There has been a sharp shrinkage October 2022 with total trade dipping to just $86.47 billion, led by a sharp fall in the merchandise exports. The table below captures the monthly trade trend for the last 1 year.

Data Source: DGFT

Before we delve deeper into the exports and imports components, here is a quick take on the total trade deficit on the merchandise account. After peaking at $30 billion in July 2022, the trade deficit has been consistently lower. Both exports and imports have fallen due to a mix of weak commodity prices and tepid global trade. While the trade deficit of $26.91 billion in October 2022 is well below the July peak, India must worry about the sharp fall in exports. For the first 7 months, the cumulative trade deficit stands at $173.46 billion, hinting at full year trade deficit of $300 billion, which is the highest level ever recorded. For the RBI, the concern would be that forex reserves now cover just about 8 months of goods imports.

How exports panned out in October 2022?

For October 2022, the merchandise exports at $29.78 billion were down -16.7% yoy and 16% MOM. This was driven by lower commodity prices and weak global demand amid recession fears. The October merchandise exports fell below $30 billion for the first time in more than 13 months. To an extent, exports basket was redeemed by positive growth in Oil Seeds (+78.00%), Oil Meals (+64.64%), Electronic Goods (+37.62%) and Tobacco (+20.40%). However, there were export laggards too like Iron ore (-90.05%), Handicrafts (-50.73%), Cotton Yarn (-46.18%) and Jute (-45.88%). Weak exports can be attributed to restrictions on exports amidst domestic shortages which eventually triggered the negative export growth.

Imports fall, but not so much

For October 2022, merchandise imports at $56.69 billion were 5.69% higher yoy but -7.31% lower on sequential basis. The key drivers of imports in the month were Raw Cotton (+352%), Fertilizers (+161%), Newsprint (+113%), Pulp & Waste Paper (+61.14%) and Iron & Steel (+37.85%). However, some items also showed shrinkage in imports which included Sulphur / iron pyrites (-64.83%), Pulses (-45.88%), Silver (-34.80%) and Gold (-27.47%). The good news is that gold imports are below $4 billion despite being festive season. However, with the sharp depletion in the forex reserves in an attempt to defend the rupee, the forex cover has gone down to just about 8 months of merchandise imports. That can be sticky.

India must prepare for 4.5% CAD in FY23

As the above table suggests, the overall trade deficit (merchandise trade deficit adjusted for services surplus) is closing in on $100 billion. If you look back, this he overall trade deficit had surged from $-12.75 billion in FY21 to $-87.79 billion in FY22. Now in FY23, with just 7 months of the fiscal completed, the overall trade deficit at $98.52 billion is almost equal to the combined overall trade deficit for the last two full fiscal years. With 5 months to go in FY23, it looks like a challenging situation for the Indian economy. A likely scenario is that India may close FY23 with a current account deficit of over 4.5% of GDP. Clearly, the rupee is not going to have a very happy time.