October trade deficit widens to $26.91 as trade shrinks sharply

For 5 months in succession, between March 2022 and July 2022, India’s total trade stayed above the coveted $100 billion mark. The fears of global recession have had an impact on the total trade with August and September seeing total trade dip below $100 billion. Total trade was just $95.82 billion in August 2022 and $96.61 billion in September 2022. However, October 2022 has seen the total trade dip to just $86.47 billion, led lower by a sharp fall in exports.

The impact has been on exports and imports too. Merchandise exports in October 2022 marks the first reading of below $30 billion in the last 13 months. Even merchandise imports have fallen below $60 billion for the first time since February 2022. Beyond the hawkishness of central banks, Chinese lockdown measures and Russian sanctions; there is a more pragmatic story that is hurting trade. Recession is forcing corporates to go easy on spending and inventories are taking a hit. Also, commodity prices are down sharply and that is hitting total trade, although volumes have not seen much of an impact.

Data Source: DGFT

Apart from the monthly chart trend above, let us also look at the macro picture for the first 7 months of FY23. If you look at the total merchandise trade (imports plus exports for FY23 till date, it stands at $700.16 billion; a good 20.3% higher than the comparable figure last year. If India is able to maintain this growth ratio for the full year, we are looking at total trade in the vicinity of over $1.20 trillion to $1.25 trillion. If you look at overall trade in goods and services, it stands at $988 billion for FY23 so far (including services trade) i.e. 27% higher than last year. So it would surely be record trade numbers in FY23; both in terms of merchandise trade and overall trade.

Trade deficit position is good, but not great

The trade deficit had peaked at $30 billion in July 2022, but has tapered since. Here are some key takeaways.

1. Both exports and imports have fallen from the peak levels of June and July. That is largely due to a fall in commodity prices rather than a fall in trade volumes.
2. Trade deficit for October 2022 at $26.91 billion is well below the peak trade deficit of $30 billion in July 2022. However, sharp fall in exports is a worry as it is a key growth trigger for the Indian economy.
3. The tapering of the trade deficit is good news for the current account deficit, although the impact may not be substantial. At the end of October 2022, The trade deficit stands at $173.46 billion, hinting at full year trade deficit of around $300 billion. So the current account deficit could still be around 4% to 4.5% of GDP, which is worrying.

One important metrics is the import cover of forex reserves. India could see total merchandise imports of $750 billion in FY23. At the current forex reserve levels of $518 billion, that would cover just about 8 months of merchandise imports. Clearly, the RBI is going to be more cautious and calibrated in its currency market intervention going ahead.

Exports see sharp fall sequentially in October 2022

Exports at $29.78 billion in October 2022 is down -16.7% yoy. On a sequential basis, the exports were down 16% compared to September 2022 as lower commodity prices and weak global demand amid recession fears had an impact on export value. In fact, after staying above the $40 billion mark for 4 months, merchandise exports fell below $40 billion in July 2022. Since then, it has stayed under that level. However, October 2022 is the first time in more than 13 months that exports have fallen decisively below the $30 billion mark.

There were several star export performers in October 2022. Oil Seeds (+78.00%), Oil Meals (+64.64%), Electronic Goods (+37.62%), Tobacco (+20.40%), Tea (+11.49%) and Rice (+1.67%) were the key export growth drivers. After a long time, the month of October 2022 saw the exporter depressors far outnumbering the export drivers.

There were a number of major export laggards in October 2022. Iron ore (-90.05%), Handicrafts (-50.73%), Cotton Yarn (-46.18%), Jute (-45.88%), Cashew (-41.73%), Carpets (-38.14%), Other Cereals (-28.44%), Plastic & Linoleum (-25.85%), Meat & Dairy Products (-22.02%), Gems & Jewellery (-21.56%), Engineering Goods (-21.26%) and Readymade Garments (-21.16%) lagged in terms of the exports. Restrictions imposed on select exports amidst domestic shortages played a part in the large number of items showing negative growth in exports in October 2022. Non-petroleum and non-jewellery exports in October 2022 stood at $21.71 billion compared to $26.15 billion in October 2021.

Crude and Fertilizers put pressure on merchandise imports

Merchandise imports for October 2022 stood at $56.69 billion, up 5.69% yoy. In the case of imports and exports, the base effect is gradually waning. Imports were -7.31% lower on a sequential basis. Crude oil imports at $15.85 billion in October 2022 was higher on a yoy basis by 29.1% while it was flat on a MOM basis. Crude still accounts for about one-third of India’s import bill, so this only puts more pressure on the trade deficit.

The big import surge in October 2022 came from Raw Cotton (+352%), Fertilizers (+161%), Newsprint (+113%), Pulp & Waste Paper (+61.14%), Iron & Steel (+37.85%), Crude Oil (+29.10%), Leather / Leather products (+29.08%), Transport Equipment (+27.19%) and Wood Products (+22.21%). Major items in the basket that showed lower imports yoy in October 2022 were Sulphur / iron pyrites (-64.83%), Pulses (-45.88%), Silver (-34.80%) and Gold (-27.47%). The big news for the month September 2022 was that the gold imports are sharply down at $3.7 billion as the festive season also showed tepid demand for gold.

Current account deficit could be over 4.5% of GDP

Most economists are playing the CAD story cautiously. The general estimate is that CAD will cross $100 billion in FY23 or 3% of GDP. However, that is rather optimistic if you were to use a simple extrapolation. The overall trade deficit combining merchandise and services trade has surged from $(87.16) billion in September 2022 to $(98.52) billion in October 2022. At this run rate, the overall deficit could end up closer to $170 billion and does pose a challenge to the CAD levels.

Data Source: DGFT (# - DGFT estimates due to 1-month lag in RBI reporting)

The Indian economy 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. In the first 7 months of FY23, India almost achieved the combined overall deficit of FY21 and FY22. At the current run rate, it looks like India could close FY23 with overall deficit of $170 billion. That would translate into current account deficit of over 4.5% of GDP. India looks set to end FY23 with merchandise trade deficit of around $300 billion. That is a lot of imported inflation and will work boost CPI inflation. With the USDINR already at around 81/$, the pressure on the currency is really going to be relentless.