Trade Deficit lower, but CAD is a challenge

The Ministry of Commerce has announced the merchandise trade numbers for November 2022 while the RBI has already announced the service trade numbers for October 2022. The services trade is reported with a lag of 1 month and the Ministry of Commerce uses its projections to extrapolate the services data each month. What is gratifying about November merchandise trade is that exports have inched up and trade deficit is lower. However, the cumulative trade deficit for FY23 is far from comfortable and gives an indication that the current account deficit (CAD) for FY23 could be closer to 4.5% of GDP.

Total trade and trade deficit in last one year

Data Source: DGFT
 

Total trade in the above table refers to the total of imports and exports for the month. This figure was consistently in excess of $100 billion between March and July 2022; but that was on account of higher commodity prices. The fall in total trade is more due to falling commodity prices and not so much about volumes. However, export volumes have been impacted by the weaker than expected. Trade deficit had touched a peak of $30 billion in July 2022, but has since tapered.

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Going beyond the trade deficit numbers

Why has the trade deficit been consistently falling after peaking at $30 billion in July 2022? There are a couple of interesting takeaways. Firstly, exports and imports have fallen from the peak levels of June and July. You can substantially attribute that to a fall in commodity prices and to a lesser extend to lower volumes. Despite the lower trade deficit, there is an interest takeaway on the exports front. Some of the sectors to bear the brunt of weak exports are textiles and leather, which are also contributing to lower GDP and IIP. Global uncertainty is impacting demand for Indian products. Thirdly, on the import front, lower oil prices are an advantage but imports of fertilizers, ores and chemicals have spiked. 

What boosted merchandise exports and what pulled it down? 

For November 2022, merchandise exports stood at $31.99 billion, up 7.4% yoy. Let us look at the major products that drove exports higher. The surge was led by Tobacco (+101.02%), Electronic Goods (+54.48%), Cereals (+53.78%), Oil Seeds (+38.83%) and Tea (+27.03%). These were the product items in the export basket that contributed the most to export growth on yoy basis. But, there were laggards too. The exports, on the other hand, were pulled out by a slew of products viz. Handicrafts (-38.45%), Cotton Yarn (-34.53%), Iron Ore (-32.25%), Jute (-23.40%) and Carpets (-22.61%). The weakness in select product exports were partly due to weak global demand and partly due to restrictions imposed by India.  

What boosted merchandise imports and what pulled it down? 

For the month of November 2022, the imports are lower from the peak levels seen in the middle of 2022. However, at $55.88 billion, merchandise imports are still up 5.37% yoy. The surge in imports was led by Raw Cotton (+84.66%), Newsprint (+82.02%), Pulp & Waster Paper (+49.05%), Iron & Steel (+47.95%) and Fertilizers (+20.53%). However, there were several products where the merchandise imports were lower on a yoy basis. These include Project Goods (-43.13%), Ores & Minerals (-38.02%), Silver (-36.59%), Sulphur and Iron Pyrites (-33.99%) and Gold (-23.24%). The fact that gold and silver imports are down show that India is using up less forex reserves for importing precious metals.

Why India must worry about the current account deficit (CAD) 

Data Source: DGFT

The latest Reuters poll pegging current account deficit at 4.3% of GDP for Q2FY23 looks a lot more realistic. Let us under understand why the old estimates of full year CAD of $100 billion is not practical at all. As you can see from the above table, the cumulative overall deficit (merchandise trade deficit adjusted by services trade surplus) stands at $111.03 billion as of November 2022. If you extrapolate this run rate for FY23, the overall deficit could be closer to $170 billion. Normally, the overall deficit is the closest proxy for the current account deficit, since other factors normally tend to cancel out. 

What does really mean? If India closes FY23 with CAD in the range of $150 to $170 billion, then that would be approximately 4.3% to 4.5% of GDP. That is what the latest Reuters estimates are also showing. Why does a higher CAD really matter? At 4.5% of GDP, the Current Account Deficit will be the highest level seen since the year 2013. India will be seeing such high current account deficit levels after a gap of almost 10 years. The latest trade deficit figure only reinforces that view. In terms of impact, it will be a challenge managing the rupee.