Merchandise trade deficit widens to $22.12 billion

Merchandise trade deficit widens in May 2023

The overall trade deficit for the Indian economy is a combination of the merchandise trade deficit and the services trade surplus. Here merchandise trade refers to the trade in physical goods. For May 2023, the merchandise trade deficit for the Indian economy widened sharply from to $22.12 billion from $15.24 billion in April. Why did the trade deficit widen despite the imports falling? That was because the exports fell much sharper. On a yoy basis, the merchandise trade deficit is at par with the May 2022 figure. For the month of May 2023, the merchandise imports were lower by -6.6%, but merchandise exports fell much sharper at -10.3%. The trade deficit in May 2023 widened, despite lower commodity prices, due to two reasons. Firstly, there was a sharp spike in non-oil imports. Secondly, the exports took a sharp hit due to weak global demand over recession concerns in the West.

How merchandise trade deficit evolved last year

Here is the monthly data of merchandise exports, imports, and trade deficit between May 2022 and May 2023. 

Data Source: DGFT

For a high frequency picture, we will compare May 2023 over April 2023. The exports of goods have remained flat sequentially, but the imports of goods spiked sharply on the back of spike in non-oil imports. This resulted in the highest level of trade deficit in the last 6 months. Normally, a higher merchandise trade deficit is a sign of weakening currency, rating concerns raised as well as a lot of imported inflation. 

What were the goods that triggered shifts in the export basket in May 2023? The top 5 contributors to export growth in May 2023 were Electronic Goods (+74.0%), Cereals (+68.0%), Oil Meals (+52.9%), Spices (+49.8%) and Iron Ore (+48.2%). Let us also look at the export laggards. The major export losses were seen in Petroleum Products (-29.9%), Jute (-29.3%), Handicrafts (-21.1%), Plastic & Linoleum (-15.2%), and Chemicals (-12.72%).

Let us turn towards goods that triggered changes in the import basket in May 2023. Here are the top five products that boosted imports and the 5 key products that curtailed imports growth. Among the big import gainers were Pulses (+150.7%), Newsprint (+40.7%), Fertilizers (+26.9%), Non Ferrous Metals (+25.7%) and Machinery (+25.4%). Imports were also lower on a number of items like (-93.9%), Sulphur & Iron Pyrites (-81.9%), Raw Cotton (-39.8%) and Gold (-38.7%).

Service trade did not live up to expectations

In the month of May, it was not just that merchandise exports were lower, but even the services trade did not live up to expectations. Services trade is not reported by the Ministry of Commerce but by RBI; with a lag of one month. In May 2023, we saw the services exports falter due to weak demand from global companies. Check the table below.

Data Source: DGFT

On a MOM basis, the service exports and imports have done badly. However, since the exports are substantially larger than imports, the trade surplus is 15% lower.

• For May 2023, the services exports fell by -16.7% while the services imports fell by -18%. However, India’s services exports are normally twice the size of services imports, so in absolute terms, the impact was felt on total services trade and on service trade surplus.
   
• The slowdown in services exports came from weakness in global technology spending, which has hit volumes and pricing power of Indian IT companies. In addition, other segments like BPO services, consultancy services have also been negatively impacted.
   
• The net impact on services trade is that the total services trade has fallen MOM by -17% while the total services surplus has also fallen by -15.1% This put pressure on the overall deficit as we shall see in our concluding observations.

In April 2023, the services surplus had almost wiped out the entire merchandise trade deficit. The situation is much weaker in May 2023.

Extrapolating current account deficit for FY24

One of the most important components of the current account deficit is the overall trade deficit (merchandise trade deficit adjusted for services trade surplus). This explains about 85-90% of the current account deficit and so if the CAD has to controlled then this overall deficit has to be contained. For now, we only have 2-months data for FY24. But, first a look at overall trade numbers. 

Data Source: DGFT (FY24 and FY23 refer to April-May)

For the first 2 months of FY24, we have an overall deficit of $13.29 billion. If this trend is maintained, then the overall CAD for FY24 should be in the vicinity of $70 billion to $75 billion. That would translate into current account deficit (CAD) of less than 2% of GDP. That is a relatively comfortable scenario. CAD in FY24 may be less worrisome than in FY23.

Content Source: DGFT