Aug-24 trade deficit widens to $29.7 Billion on $10 Billion gold import bill

19 Sep 2024 , 03:24 PM

QUICK TAKE ON INDIA’S TRADE BASKET IN AUGUST 2024

For the month of July 2024, India reported merchandise trade deficit of $29.7 Billion. This is the highest level since October 2023, when India reported an all-time record trade deficit of $31.5 Billion in October 2023. But, which were the products that were the key drivers of the India trade story in August 2024. For the month of August, the top export from India was once again engineering goods at $9.44 Billion, up 4.4% yoy. The other key contributors to the export basket in July 2024 were petroleum products at $5.96 Billion (down -37.6%), organic & inorganic chemicals at $2.37 Billion (up 8.3%), drugs & pharmaceuticals at $2.35 Billion (up 4.7%), Electronic goods at $2.33 Billion (up 7.9%), and gems & jewellery at $2.00 Billion (down -23.1%). Electronic exports appear to have slowed in the month, while chemicals and pharma have surged ahead in August 2024.

Let us now turn to the import story of India trade. No prizes for guessing, but the import basket was led by crude & petroleum products at $11.02 Billion (down -32.4%), gold at $10.1 Billion (up 103.7%), electronic goods at $8.93 Billion (up 12.8%), machinery at $4.97 Billion (up 10.2%), coal/coke/briquettes at $2.79 Billion (up 8.9%), organic & inorganic chemicals $2.62 Billion (up 21.2%), and transport equipment $2.59 Billion (up 7.1%). Gold imports crossed $10 Billion in August 2024 and was one of the key drivers of the surge in the import deficit this month. In most other cases, the higher imports are an outcome of higher costs due to supply chain constraints caused by the strife in West Asia. Even silver imports were up 8-fold yoy at $1.32 Billion in August 2024.

KNOW INDIA’S KEY TRADING PARTNERS IN AUGUST 2024

Let us first talk about the total exports in August 2024. Out of the total exports of $34.71 Billion, the top 20 countries accounted for $23.6 Billion of these exports. In terms of geographies, the biggest chunk of the exports in August 2024 went to the US at $6.56 Billion (down -6.3% yoy). The other big export destinations for India in August 2024 were United Arab Emirates at $2.87 Billion, the Netherlands at $1.95 Billion, UK at $1.13 Billion, and China at $1.01 Billion. The sharpest spike in yoy exports was visible in to the Netherlands at 28.9%, while exports to the UK, Brazil, Mexico, and Indonesia also grew in double digits. The ranking on exports were exactly similar, even if you considered the year-to-date numbers for the first 5 months of FY25 (April to August).

Let us now turn to the countries from where India imports the maximum products. India’s biggest import source continues to be China, from where India imported goods worth $10.80 Billion in August 2024. The other big import sources for India were United Arab Emirates at $6.38 Billion, Switzerland at $3.95 Billion, the US at $3.83 Billion, Russia at $3.58 Billion, and Indonesia at $2.04 Billion. The biggest yoy growth in imports in August 2024 were from Switzerland, United Arab Emirates, South Africa, Thailand, Vietnam, and Taiwan. The big surge in imports from United Arab Emirates was on account of the free trade agreement (CEPA) signed between India and the UAE. Bulk of these imports emanate from gold and silver. In fact, the surge in gold and silver imports in August can largely be attributed to this CEPA agreement with UAE. In terms of two of its biggest trading partners; India ran a trade surplus of $2.73 Billion with the US in August 2024, while it ran a trade deficit of $(9.80) Billion with China. India also runs a fairly large trade deficit of $(3.51) Billion with the UAE and a trade deficit with other oil nations like Russia and Iraq.

HOW MERCHANDISE TRADE EVOLVED IN LAST 1 YEAR

Here is the monthly data of merchandise exports, imports, and trade deficit over last one year. With August 2024 trade deficit at a steep $29.7 Billion, this is the highest trade deficit since October 2023, when trade deficit had touched a record $31.5 Billion.

Monthly Data	Exports ($ Billion)	Imports ($ Billion)	Total Trade	Trade Surplus / Deficit
Aug-23	34.48	58.64	93.12	-24.16
Sep-23	34.47	53.84	88.31	-19.37
Oct-23	33.57	65.03	98.60	-31.46
Nov-23	33.90	54.48	88.38	-20.58
Dec-23	38.45	58.25	96.70	-19.80
Jan-24	36.92	54.41	91.33	-17.49
Feb-24	41.40	60.11	101.51	-18.71
Mar-24	41.68	57.28	98.96	-15.60
Apr-24	34.99	54.09	89.08	-19.10
May-24	38.13	61.91	100.04	-23.78
Jun-24	35.20	56.18	91.38	-20.98
Jul-24	33.98	57.48	91.46	-23.50
Aug-24	34.71	64.36	99.07	-29.65

Data Source: DGFT

In the last 12 sequential months prior to August 2024, the average monthly exports have been $36.43 Billion while the average monthly imports have been $57.64 Billion. As a result, the average monthly total trade has been $94.07 Billion while the average monthly trade deficit has been $21.21 Billion. However, it must be said here that the trade deficit had stayed under $20 Billion for 5 months in a row between December 2023 and April 2024, before it again spiked above the $20 Billion mark since May 2024. The spike in the trade deficit in August 2024 can be largely attributed to the surge in gold imports to above $10 Billion in the month, largely through the UAE CEPA route.

During the last 13 months, the highest total trade was achieved in February 2024 at $101.51 Billion while the lowest total trade was seen in September 2023 at $88.31 Billion. The highest trade deficit in the last 13 months was seen in October 2023 at $31.46 Billion (also a lifetime high). The lowest trade deficit was visible in the month of March 2024 at $15.60 Billion. India has definitely managed to boost exports of engineering goods, electronic goods, chemicals, and pharmaceuticals. However, while the crude is down in the import basket with falling Brent prices, it is the surge in gold imports that is worrying. However, the much bigger concern would be that just 3 countries viz. China, Russia and the United Arab Emirates account for more than 80% of the total trade deficit in August 2024.

WHAT BOOSTED MERCHANDISE EXPORTS IN JULY 2024

Here is a quick look at the star export performers in August 2024, based on the yoy percentage increase in exports. Coffee (+69.6%), Tobacco (+34.5%), Spices (+19.1%), Tea (+15.0%), Ready Made Garments (+11.9%), Plastics & Linoleum (+11.1%), carpets (+8.9%), chemicals (+8.3%), oil seeds (+8.1%), Electronic Goods (+7.9%), and Cereals (+7.6%) were the key export growth drivers in the month of August 2024. What is encouraging is that some of the traditional export drivers are back in action. Top 5 export destinations, in terms of change in absolute value of exports, and also exhibiting positive growth in August 2024 over August 2023 include The Netherlands (+28.9%), Brazil (27.1%), Indonesia (23.7%), Mexico (17.8%), and the United Kingdom (14.6%).

WHAT PULLED DOWN MERCHANDISE IMPORTS IN AUGUST 2024

If boosting exports is one way to bring down the trade deficit, the other is import substitution. That happened when India opted for Russian oil, although the magnitude is now down. More important is the import substitution in sectors like defence. Major items in the trade basket that showed lower imports yoy in August 2024 included Dyeing / Tanning material (-58.1%), Chemical Products (-53.1%), Pearls / Precious stones (-35.4%), Petroleum & Petroleum products (-32.4%), Sulphur & Unroasted iron pyrites (-25.2%), Fertilizers (-18.2%), project goods (-17.9%), and vegetable oils (-16.6%). The top 5 import sources, in terms of change in absolute value of imports in August 2024 over August 2023 included Switzerland (80.5%), United Arab Emirates (72.7%), South Africa (71.1%), Thailand (39.5%), Vietnam (25.7%), and Taiwan (24.6%). For India, the Red Sea crisis remains a sort of double whammy. It has mellowed the export thrust, but it has pushed up import costs.

TRADE DATA BREAK-UP FOR AUGUST 2024

In India, the Directorate General of Foreign Trade (DGFT) reports merchandise trade data, while the services trade data is reported by the RBI with a lag of one-month. However, DGFT provides indicative extrapolated figures of services trade for current month. Services trade surplus partially neutralizes merchandise trade deficit.

Macro Variables (Trade Related)	Aug-24 ($ Billion)	Jul-24 ($ Billion)	Aug-23 ($ Billion)	Change YOY (%)
Merchandise Exports	34.71	33.98	38.28	-9.33%
Merchandise Imports	64.36	57.48	62.30	3.31%
Total Merchandise Trade	99.07	91.46	100.58	-1.50%
Merchandise Trade Deficit	-29.65	-23.50	-24.02	23.44%
Services Exports	30.69	28.43	28.71	6.90%
Services Imports	15.70	14.55	15.09	4.04%
Total Services Trade	46.39	42.98	43.80	5.91%
Services Trade Surplus	14.99	13.88	13.62	10.06%
Combined Exports	65.40	62.41	66.99	-2.37%
Combined Imports	80.06	72.03	77.39	3.45%
Overall Trade Volume	145.46	134.44	144.38	0.75%
Overall Trade Deficit	-14.66	-9.62	-10.40	40.96%

Data Source: DGFT and RBI

Here is what we glean from the August 2024 analysis of India merchandise and services trade numbers. We shall focus more on the services trade numbers here.

• Services exports in August 2024 were higher 6.90% compared to the year ago period. The services imports were higher by 4.04% yoy. As a result, the services trade surplus in August 2024 increased by 10.06% on a yoy basis to $14.99 Billion. On MOM basis, the services trade surplus was higher by 8.00%.
  
• Services trade surplus arises predominantly from export of IT and BPO services. In recent months, non-cyclical verticals like consultancy services to global clients, knowledge and innovation centres, global capability centres (GCC), outsourced legal / audit services etc, have assumed prominence. These have been a key contributor in recent months.
  
• How did services trade impact the overall picture of trade for August 2024? The deficit on merchandise trade account in August 2024 was wider by 23.44% yoy at $29.65 Billion. It was, also up by 26.17% on MOM basis. The services surplus improved 10.06% yoy. As a result, the overall trade deficit for August 2024 stood at $(14.66) Billion, compared to $(9.62) Billion in July 2024; which is sharply higher. This also puts pressure on the cumulative deficit for FY25, as we shall see subsequently.

Let us now turn our attention to the trade data for FY25, which should be a reasonable extrapolation with 5 months of data available.

CUMULATIVE TRADE DATA BREAK-UP FOR FY25 (APR-AUG)

The DGFT reports merchandise trade data and extrapolated services trade data on a monthly basis and also on a cumulative basis for the fiscal year. Here, with 5 months of data, one can get a fair extrapolation of the picture for the full fiscal year FY25.

Macro Variables (Year-to-Date)	FY25 (Apr-Aug)	FY25 (Apr-Jul)	FY24 (Apr-Aug)	Change YOY (%)
Merchandise Exports	178.83	144.12	176.67	1.22%
Merchandise Imports	294.06	229.70	275.83	6.61%
Total Merchandise Trade	472.89	373.82	452.50	4.51%
Merchandise Trade Deficit	-115.23	-85.58	-99.16	16.21%
Services Exports	148.04	117.35	135.50	9.25%
Services Imports	78.65	62.95	74.28	5.88%
Total Services Trade	226.69	180.30	209.78	8.06%
Services Trade Surplus	69.39	54.40	61.22	13.35%
Combined Exports	326.87	261.47	312.17	4.71%
Combined Imports	372.71	292.65	350.11	6.46%
Overall Trade Volume	699.58	554.12	662.28	5.63%
Overall Trade Deficit	-45.84	-31.18	-37.94	20.82%

Data Source: DGFT and RBI (Trade data in Billion $)

Here is what we read from the FY25 analysis of India merchandise and services trade numbers. Here FY25 refers to the first 5 months of the fiscal year (Apr-Aug). Our focus, once again, will be on the services trade numbers here.

• Services exports in FY25 were higher 9.25% compared to the year ago period. The services imports were higher by 5.88% yoy; showing a slight pick-up in recent months. As a result, the services trade surplus in FY25 increased by 13.35% on a yoy basis to $69.39 Billion. The key question is; whether this is good enough to cover the deficit on the merchandise trade account? Obviously, this can only cover partially.
  
• How did services trade impact the overall picture of trade for FY25? The deficit on merchandise trade account in FY25 was wider by 16.21% yoy at $(115.23) Billion. However, this was partially offset by the services surplus, which improved 13.35% to $69.39 Billion. As a result, the overall trade deficit stood at a level of $(45.84) Billion, which is 20.82% wider compared to the first 5 months of FY24.

We finally look at the Million dollar question; What does this array of data mean for the current account deficit (CAD) for the fiscal year FY25? It looks like the current account deficit (CAD) for FY25 could be wider than in FY24, but closer to the CAD achieved in FY23.

CURRENT ACCOUNT DEFICIT OUTLOOK FOR FY25

One of the key inputs for the current account deficit (CAD) figure is the overall deficit, combining the merchandise trade deficit and the services trade surplus. It is one of the most important components of the CAD and drives nearly 80% of the moves in the overall CAD. With 5 months trade data, we have a good starting point to assess how the full year CAD could be. The FY24 CAD came in sharply lower at $23.2 Billion or just 0.7% of GDP. This was helped along the way by a current account surplus in the fourth quarter and back-ending of last quarter imports. Delays in freight movement amidst the Red Sea crisis also played a part in shifting some of the deficit to FY25. So, how does the CAD picture look like for FY25.

We will get the official CAD for Q1 only by the end of September 2024; but we can safely extrapolate full year current account deficit in the region of $70 Billion to $75 Billion. That would still be about 1.8% to 1.9% of the FY25 nominal GDP. In short, the CAD picture for FY25 is likely to be meaningfully higher than FY24, but closer to the FY23 figure. One thing is clear; the CAD position in FY25 will not be as flattering as FY24. We will get the first indications when the Q1FY25 current account deficit is announced in late September 2024. However, the higher CAD expectations are already putting pressure on the Indian rupee!