Merchandise trade deficit lowers to $15.24 billion

April trade deficit for goods softens

The merchandise trade deficit (for physical goods) for April 2023 came in sharply lower at $15.24 billion. This is the extent to which goods imports exceeds goods exports. Back in July 2022, the trade deficit had spiked to $30 billion raising apprehensions that current account deficit (CAD) could spiral out of control. In this improvement in the merchandise trade deficit, two things played a part. Firstly, the sharp fall in the prices of most commodities, especially crude oil, led to a sharp fall in the import value content of Indian trade basket. Second, the government has adopted a conscious import substitution policy, which has more than compensated for weak exports amid fears of a global slowdown. 

Merchandise trade over last one year

We have captured the gradual progression of merchandise trade deficit over the last 13 months to give a yoy view. 

Data Source: DGFT

After peaking in July 2022 at $30 billion, the merchandise trade deficit has been on the way down. On the export front, the spike came from oil meals, electronic goods, and rice while weakness came from gems & jewellery, cereals, and jute products. On the import front, the spike came from pulses, paper, and electrical machinery while weakness came from project goods, sulphur & Iron pyrites, and fertilizers. If one look at the export laggards, the pressure is coming in the traditional export leaders due to the global economic slowdown fears.

Forget goods, the real story is in services

If you read the latest Goldman Sachs report on the Indian current account deficit, it has identified services exports as a key driver of lower CAD. This is why

Data Source: DGFT

Here are some key takeaways from the above table on the increasingly important role played by services exports in India. Key data points have been highlighted.

• Services exports for April 2023 were $30.36 billion. This is 26.24% higher compared to the services exports reported in April 2022 at $24.05 billion.
   
• Total services trade (service imports plus service exports) for April 2023 stood at $46.86 billion. This is 22.96% higher than the services exports of April 2022 at $38.11 billion.
   
• Services trade surplus (service exports minus services imports) for April 2023 stood at $13.86 billion. This is 38.74% higher compared to April 2022 at $9.99 billion.
   
• As a result, overall trade deficit for April 2023 stood at just $1.38 billion, which is 83.49% lower compared to the overall trade deficit of $8.36 billion in April 2022.

Let us just put this final point in perspective. For April 2023, merchandise trade deficit was $15.24 billion while services trade surplus was $13.86 billion. If you combine these two the overall deficit of goods and services put together stands at a mere $1.38 billion. In short, the boost to services exports has made the overall trade deficit nearly neutral in April, meaning that the surplus in services is almost wiping out the goods deficit.

That is good news for the current account deficit

FY24 has just begun so it may be too early to start talking about full year current account deficit (CAD). One of the biggest drivers of the CAD is the combined deficit of trade in goods and services and that has fallen 83.5% yoy in April. If that trend continues, then obviously, there will be a substantial reduction in the current account deficit (CAD) for FY24. In FY23, the CAD was expected to get close to 4.5% of GDP. That was after the September CAD data was put out. However, lower merchandise trade deficit and higher service surplus rectified the situation. The CAD data for FY23 will be published on the last day of June 2023, but early indications are that the CAD would be closer to 2.5% or lower for FY23. 

Some of the large macro research houses are pegging the CAD for FY24 in absolute terms at around $50 billion, but it could well end up less than that if the low inflation scenario continues. Even at $50 billion CAD, it would be just about 1.4% of GDP, a situation a lot more comfortable that what we envisaged in September 2022. Of course, macros have a nasty style of surprising when least expected, but for now the CAD situation looks less of a concern. For that there have been two important drivers. It has been a combination of tepid commodity prices, import substitution as a strategy and boost to service exports. Lower CAD would mean less pressure on the exchange rate and also less pressure of a downgrade by the sovereign rating agencies. Indian trade is finally playing to its core strengths.

Content Source: Ministry of Commerce (DGFT)