May 2022 trade deficit widens to all-time high of $24.29 billion

Let us first savour the good news on the trade front. May 2022 marks the third consecutive month that the total trade (imports plus exports) stayed above the $100 billion mark. The total trade was $102.96 billion in March 2022, $100.49 billion in April 2022 and $102.17 billion in May 2022. However, this also marks third successive month, the merchandise imports stayed above $60 billion. Merchandise trade deficit at $24.29 billion was an all-time record. If this run is maintained, India could end FY23 with total trade above $1.20 trillion and merchandise trade deficit of around $270 billion.

Data Source: DGFT
Three months of solid trade performance
We have seen stable total trade performance for last 3 months. Total trade matters to the creation of jobs and also for MSME performance. Here are some key takeaways.
a)      In the last 3 months between March and May 2022, exports have maintained an average run of $40 billion a month, even amidst the global supply chain constraints.

b)      If you look at comparisons of May 2022 over May 2021, exports are up over 20% while imports are up over 60%. That is where trade deficit pressure is coming from.

c)      India’s overall trade deficit (merchandise plus services) for Apr-May is over $27 billion. At this rate, the overall deficit for the full year could be well above $150 billion, putting immense pressure on the current account deficit.

One specific area that policy makers should look at is the forex reserve cover for merchandise imports. If you consider the current run rate as being reflective, India could be staring at total merchandise imports of $720-$750 billion for FY23. At the current forex reserve levels of $600 billion, that would cover just 9 months of merchandise imports. That is already low and if the RBI continues to intervene to defend the rupee, then the situation could be vulnerable. That is something to be cautious about.

Exports maintain the median tempo in May 2022

Exports at $38.94 billion in May 2022 were up 20.55% yoy. On a sequential basis, the exports were lower by -3.11% compared to April 2022. Despite a weak rupee, the exports are facing strong headwinds in the form of shutdowns in China, Ukraine war, commodity inflation, supply chain constraints and money market tightness. In this light, it is appreciable that export performance has averaged above $40 billion in last 3 months.

There were several star export performers in May 2022. Exports of Petroleum Products (+60.87%), Coffee (+52.67%), Leather products (+48.53%), Electronic Goods (+47.37%), Oil Meals (+45.11%), Cereal preparations (+43.94%), Textiles (+27.85%), Jute (+21.37%), organic and inorganic chemicals (+17.35%) and Tobacco (+16.55%) were among the key export growth drivers in May 2022.

However, there were also some export laggards in May 2022. Iron ore (-66.07%), Other cereals (-32.92%), Cashew (-29.74%), Handicrafts (-17.86%), Plastics & Linoleum (-11.35%) and Carpets (-8.42%) lagged. Non-petroleum and non-jewellery exports in May 2022 stood at $27.16 billion compared to $24.02 billion in May 2021.

Crude oil, coal and gold imports put pressure in May 2022

Merchandise imports for April 2022 stood at $63.22 billion, up 62.83% yoy. Imports were up 4.86% sequentially. Crude oil imports at $19.20 billion in May 2022 was sequentially lower on Russian oil import impact. On a yoy basis, crude imports were up 102.72%. The spike in oil imports was less a function of higher volumes and more a function of higher crude prices amidst supply chain constraints created in the light of the Russia Ukraine war.

The big import surge in May 2022 came from Silver (+2,800%), Gold (+789%), Coal, coke & briquettes (+172%), Petroleum & Crude (103%), Raw Cotton (80.12%), leather products (51.74%) and pulses (42.24%). Major items in the basket that showed lower imports yoy in May 2022 were Project Goods (-63.11%), Professional Instruments (-39.47%), Medicinal Products (-14.52%) and Machine Tools (-10.30%). Gold imports in May 2022 bounced back to $6.05 billion; sharply higher on a yoy basis and also on a sequential basis.

Combined deficit for FY23 hints at a big CAD challenge

The overall trade deficit combining merchandise and services trade stood at $(8.08) billion in April 2022 but burgeoned to $(27.30) billion as of the close of May 2022. That is a sharp increase of $19.22 billion to the overall deficit in one month. At this run rate, the overall deficit could end up closer to $150 billion and could pose a real challenge to the current account deficit (CAD) levels.

Data Source: DGFT 

Now for a quick recap. India closed FY21 with combined deficit of $-12.75 billion or $1.06 billion a month. The combined deficit in FY22 was $-87.79 billion, or $7.32 billion a month. At the current run rate, it looks like India could close FY23 with an overall deficit in the vicinity of $150 billion, substantially higher than FY22. That would put a lot of pressure on the Indian rupee and also on the sovereign ratings of India.

Here are 2 challenges for trade policy

FY 2022 saw overall trade cross $1 trillion for the first time ever, but it came at the cost of sharply higher crude imports. Additionally, imports of gold, fertilizers, coal, coke and edible oils also surged. Here are 2 possible challenges to trade policy.

·         Supply chain issues remain the big challenge as they make exports difficult and imports more expensive. The China lockdown has already created a shortage of chemicals and API inputs for pharma companies, non-availability of containers and tepid Chinese demand. That is showing impact on a slew of sectors.

·         The Fed is ultra-hawkish and most central banks (including the RBI) are likely to avoid monetary divergence. That means higher rates and tighter liquidity will be the norms for the future. Trade growth is robust, but high inflation and low unemployment could suddenly transition into a recession. Policy risks are abundant in global trade.

In FY22, India scaled the $1 trillion total merchandise trade mark and $400 billion merchandise export mark. FY23 could see record trade numbers but it could also see record trade deficits. That is where the Commerce Ministry will have to figure a way out.