April 2022 sees buoyant exports, but trade deficit widens

If you thought that the record trade numbers in the month of March 2022 were an year-end aberration, we now know it was not. April 2022 is the second month in succession when imports crossed $60 billion, exports were above $40 billion and overall trade crossed $100 billion. Of course, at this run rate, the total trade deficit promises to get closer to $250 billion for FY23, but we will come back to that issue later.

FY23 trade begins on a robust note

It is not often that you get to see 2 successive months of robust trade numbers, but April 2022 has been an extension of the March 2022 trade story. Here are some gratifying points.
a) April 2022 data has belied the sceptical theory of an year-end thrust to exports. Exports have sustained above $40 billion for the second month in succession..

b) If you just look at a yoy comparison, then both exports and imports in April 2022 are more than 30% above the corresponding levels for the month of April 2021.

c) India has commenced April 2022 with overall trade deficit (merchandise plus services) at over $8 billion, despite very strong services surplus. At this rate, the overall deficit for FY23 would be close to $100 billion, putting substantial pressure on current account.

One of the areas of focus that policy makers should look at is the forex reserve cover for merchandise imports. If you go by the current run rate, India could be staring at total merchandise imports of $720 billion for FY23. At the current forex reserve levels of $595 billion, that would cover just about 9 months of merchandise imports, if the forex chest was to deplete further with aggressive RBI dollar selling interventions. That could be a key concern for the sovereign rating agencies.

April 2022 exports maintained the March tempo

Exports at $40.19 billion in April 2022 were up 30.70% yoy. On a sequential basis, the exports were lower by -4.81% on the back of a record export month in March 2022. It must be remembered that currently, global trade is facing strong headwinds like COVID shutdown in China, Ukraine war, commodity inflation, Fed hawkishness and supply chain constraints. In this light, the export performance for the last two months is surely commendable.

There were several star export performers in April 2022. Exports of Petroleum Products (+127.69%), Electronic Goods (+71.69%), Cereals (+60.83%), Coffee (+59.38%), Leather products (+36.68%), Tobacco (+35.10%), Organic & Inorganic Chemicals (+32.30%), Mica, coal, ores (+24.81%), Jute (+22.73%) and Engineering Goods (+21.97%) were among the key growth drivers of exports in April 2022.

However, there were some export laggards too in April 2022. Iron ore (-34.16%), Cashew (-34.10%), Handicrafts (-24.98%), Spices (-20.39%), Oil Meals (-15.66%) and Rice (-9.48%). Non-petroleum and non-jewellery exports in April 2022 stood at $28.46 billion compared to $23.74 billion in April 2021.

Crude oil and coal imports put pressure in April 2022

Merchandise imports for April 2022 stood at $60.30 billion, up 30.97% yoy. Imports were down -0.72% sequentially. Crude oil imports at $20.19 billion in April 2022 sequentially grew  at 7.45% over March 2022. On a yoy basis, crude imports were up 87.54%. The spike in oil imports was less a function of higher volumes and more a function of higher crude prices. However, the supply chain constraints created by the Russia Ukraine war and the China shutdown, has led to a surge in imports of crude oil and coal in April 2022.

The big import surge in April 2022 came from Silver (+820%), Fertilizers (+219%), Sulphur & Iron Pyrites (+216%), Coal, Coke, Briquettes (146%), Petroleum & Crude (87.54%), Pulses (80.01%), Raw Cotton (57.64%) and leather products (56.08%). Major items that showed lower imports yoy in April 2022 were Gold (-72.35%) and Transport Equipment (-21.21%). Gold imports in April 2022 fell sharply on yoy basis from $6.24 billion to $1.72 billion. However, on a sequential basis, gold imports have risen from $1.04 billion in March 2022.

Combined deficit could deepen in FY23, impacting CAD

The overall trade deficit of $(8.08) billion shown in the table below is an important figure as it has a direct bearing on the current account deficit (CAD). 

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

India closed FY21 with a 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. Even with a very robust export performance in April 2022, the combined deficit is at $-8.08 billion or a possible annualized combined deficit of around $100 billion. That could be the big pressure point for the CAD and trade disruptions and rupee weakness could worsen the narrative.

Key challenges to the India trade story

FY 2022 saw overall trade cross $1 trillion for the first time ever. However, that came at a cost in the form of sharply higher crude imports. FY22 also saw a spike in import of gold, fertilizers and edible oils. Here is what one can look forward to in FY23 on the trade front.

- Brent Crude may have moderated to the range of $100 to $110 per barrel, but the situation can exacerbate at short notice. If the Russian sanctions harden and the EU is forced to fall in line, we could see a sharp spike in oil prices. That remains a key risk.

- Trade data has been broadly favourable for India with robust exports. But, these exports are subject to supply chain issues not snowballing. Already, the China lockdown means a shortage of chemicals and API inputs for pharma companies, non-availability of containers and weak China demand. These remain challenges to exports.

- The ultra-hawkish stand taken by the Fed and the re-appointment of Jerome Powell as Fed Chair, means hawkishness is here to stay. For now, growth remains robust, but experts have warned that high inflation and low unemployment could suddenly transition into a recession. Policy risks to trade remain the key.

Since last month, the Ministry of Commerce has been on self-congratulatory mode for crossing $400 billion exports and $1 trillion total trade in FY22. In FY23, the challenge will be to sustain export growth amidst all the global supply chain challenges.