September 2022 trade deficit narrows to $25.71 billion on oil exports

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. What exactly has triggered the fall in total trade; is it imports or exports?

The answer lies somewhere in between. Tepid imports and resilient exports contributed to the tapering of trade deficit. However, if you compare September 2022 with July 2022 (when total trade was last above $100 billion), exports are down by just $0.82 billion while merchandise imports are lower by $5.11 billion. That has made the big impact on squeezing the trade deficit to much lower levels.

Data Source: DGFT

Based on the monthly chart trend above, let us also look at the macro picture for the first 6 months of FY23. If you look at the total merchandise trade (imports plus exports for FY23 till date, it stands at $612.22 billion; a good 31.6% 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 $1.30 trillion. If you look at overall trade in goods and services, it stands at $851.78 billion for FY23 so far (including services trade) i.e. 29.7% higher than last year. So it would surely be record trade numbers in FY23.

Trade deficit position breathes a sigh of relief

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

a)      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.

b)      Trade deficit has narrowed in the last 2 months from $30 billion in July 2022 to $25.71 billion in September 2022. Sequentially, exports did much better than imports.

c)      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 September 2022, The trade deficit stands at $148.46 billion, hinting at full year trade deficit of over $300 billion. So the current account deficit would still be around 3.5% to 4% of GDP, which is worrying.

One important metrics is the import cover of forex reserves. India could see total merchandise imports of $770 billion in FY23. At the current forex reserve levels of $532 billion, that would cover just about 8 months of merchandise imports. Clearly, the RBI is going to be more cautious and calibrated in its intervention in the currency markets.

Exports bounce sequentially in September 2022

Exports at $35.45 billion in September 2022 has grown just 4.82% yoy. On a sequential basis, the exports were up 4.51% compared to August 2022 as oil exports got a boost from lower windfall taxes. 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 and weak global demand and tepid prices have had an impact on the export front.

There were several star export performers in September 2022. Electronic Goods (+71.99%), Tobacco (+62.16%), Petroleum products (+43.01%), Oilseeds (+17.47%), Gems & Jewellery (+17.27%), Coffee (+13.89%), Fruits & Vegetables, (+13.10%), Tea (+10.82%), Leather Products (+8.98%) and Cereal Preparations (+7.65%) were the key export growth drivers.

However, there were also several  export laggards in September 2022. Iron ore (-96.71%), Cotton Yarn (-38.99%), Cashew (-38.05%), Handicrafts (-33.09%), Carpets (-32.87%), Other Cereals (-27.08%), Readymade Garments (-18.06%), Jute (-16.11%) and Ceramic Products (-12.21%) 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 September 2022. Non-petroleum and non-jewellery exports in September 2022 stood at $24.22 billion compared to $25.31 billion in September 2021.
 
Imports taper as commodity prices fall

Merchandise imports for September 2022 stood at $61.16 billion, up 8.66% yoy. In the case of imports and exports, the base effect is gradually waning. Imports were -1.2% lower on a sequential basis. Crude oil imports at $15.88 billion in September 2022 was lower on a yoy basis by -5.38%. Crude still accounts for about one-third of India’s import bill, so this fall has really helped in trimming the merchandise trade deficit.

The big import surge in September 2022 came from Raw Cotton (+621%), Silver (+88.31%), Transport Equipment (+65.56%), Pulp & Waste Paper (64.54%), Coal / Coke/ Briquettes (60.82%), Fertilizers (48.26%) and Leather / Leather products (46.20%). Major items in the basket that showed lower imports yoy in September 2022 were Sulphur / iron pyrites (-30.38%), Gold (-24.62%), Pulses (-19.01%) and Machine Tools (-15.91%). The big news for the month September 2022 was that the import of crude and petroleum products fell by -5.38% yoy at $15.88 billion; a rare trend in the Indian context

Current account deficit would still be above 4% 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 more optimistic than realistic. The overall trade deficit combining merchandise and services trade has surged to $(87.16) billion in September 2022. At this run rate, the overall deficit could end up closer to $180 billion and poses a real challenge to the CAD levels.

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

It may be recollected that 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 FY23, we have achieved the overall deficit of FY21 in the first 6 months itself. At the current run rate, it looks like India could close FY23 with overall deficit of $180 billion. That would translate into current account deficit of over 4.5% to 5% of GDP; and the RBI and the government must be prepared for more pressure on the INR and ratings.

India looks set to end FY23 with merchandise trade deficit of over $300 billion. That will imply a good deal of imported inflation and will work against the efforts of the RBI to cut CPI inflation. With the USDINR already at around 82.40/$, the pressure on the currency is really going to be relentless. That would keep monetary and fiscal policy makers busy.