January 2023 trade deficit sharply lower at $17.75 billion

16 Feb 2023 , 08:25 AM

This is a far cry from the peak trade deficit of $30 billion in July 2022. The January trade deficit figure of $17.75 billion puts much less pressure on the current account deficit for FY23. However, total trade which had gained a lot of traction amidst the commodity boom in early 2022, appears to have petered out.

Here is a quick take on total trade, which is material because it shows the total volume of trade and is key to job creation in the Indian economy. After staying above $100 billion for 4 months between March and July 2022, total merchandise trade (imports plus exports) tapered. Total trade fell to $95.82 billion in August, $96.61 billion in September, $86.47 billion in October, $87.87 billion in November and $92.72 billion in December 2022. Total trade for January 2023 fell further to $83.57 billion amid falling commodity prices.

Month	Exports ($ billion)	Imports ($ billion)	Trade Surplus / Deficit
Jan-22	34.50	51.93	-17.43
Feb-22	34.57	55.45	-20.88
Mar-22	42.22	60.74	-18.52
Apr-22	40.19	60.30	-20.11
May-22	38.94	63.23	-24.29
Jun-22	40.13	66.31	-26.18
Jul-22	36.27	66.27	-30.00
Aug-22	33.92	61.90	-27.98
Sep-22	35.45	61.16	-25.71
Oct-22	29.78	56.69	-26.91
Nov-22	31.99	55.88	-23.89
Dec-22	34.48	58.24	-23.76
Jan-23	32.91	50.66	-17.75

Data Source: DGFT

Several factors triggered lower trade deficit, apart from lower commodity prices. India has shifted to Russian oil (which accounts for 30% of oil import basket). This was combined with a consciously policy of import substitution where feasible. Global slowdown fears in the US, UK and EU resulted in lower spending and inventory accumulation in these regions and that has compressed the volume of global trade. 

How does the FY23 macro trade picture look?

For the first 10 months of FY23, the total merchandise exports are higher by 8.5% yoy at $369.25 billion while the total merchandise imports are higher by 21.9% at $602.20 billion. Cumulative total trade (imports + exports) for FY23 is up 16.4% at $971.45 billion while the total trade deficit for the year is sharply higher by 51.5% at $232.95 billion. While the merchandise trade deficit was expected to be closer to $300 billion for FY23 fiscal, the estimates have now been toned down closer to $270 billion.

On the subject of cumulative exports and imports, let us quickly look at the top-10 contributors to exports and imports for first 10 months of FY23.

Export Products	Amount ($ billion)	Import Products	Amount ($ billion)
Engineering Goods	88.27	Crude Petroleum	178.45
Petroleum	78.58	Electronic Goods	64.45
Gems & Jewellery	31.61	Coke / Coal	43.17
Chemicals	25.40	Machinery	37.47
Drugs & Pharma	20.85	Gold	29.09
Electronic Goods	18.78	Chemicals	28.52
Readymade Garments	13.34	Pearls & Stones	25.15
Cotton Yarn	9.04	Transport Equipment	22.52
Rice	8.98	Resins / Plastics	19.48
Plastic / Linoleum	7.06	Iron & Steel	18.81
Marine Products	6.87	Vegetable Oil	18.10

Data Source: Ministry of Commerce

On the exports side, the top 11 products account for 83.6% of the overall export basket for FY23. On the imports side, the top 11 products account for 80.6% of the import basket. Here are some major observations on the exports front. Among the top exported products, the yoy growth in petroleum products and electronic goods was extremely strong, with the latter attributed to the PLI scheme. Exports of cotton yarn as well as plastics and linoleum fell sharply in FY23 compared to FY22.

Let us now turn to the import story for FY23. There was a big surge in the import of coal, coke and briquettes, due to the shortage domestically. Fertilizers and petroleum also surged in terms of imports in FY23. Iron & Steel was another commodity where imports surged. Among the commodities that saw lower imports; there was a sharp fall in gold imports and in the import of medical and pharmaceutical products in FY23.

Electronics exports holds up the January 2023 story

Merchandise exports at $32.91 billion in January 2023 are lower -6.6% yoy. Sequentially, the exports were lower by -4.6% compared to December 2022. While exports held above the psychological $30 billion for the month, there was certainly some pressure coming from fears of a global slowdown in the light of the continued hawkishness of central banks.

There were several star export performers in January 2023. Electronic Goods (+55.54%), Oil Meals (+48.89%), Oil Seeds (+23.81%), Iron Ore (+21.00%), Rice (+18.80%) and Fruits & vegetables (+14.57%) were the key export growth drivers. In the month of January 2023, the export losers outnumbered the export gainers by a ratio of 16:14.

There were a number of export laggards in January 2023. Cotton Yarn (-37.42%), June Manufacturing (-34.12%), Plastics & Linoleum (-30.81%), Carpets (-27.42%), Coffee (-24.31%), Manmade fibre (-21.12%) and Gems & Jewellery (-19.28%) lagged in terms of the exports. Non-petroleum and non-jewellery exports in January 2023 stood lower at $25.35 billion compared to $27.41 billion in January 2022. 

Imports fell sharply in January 2023 led by precious metals

Merchandise imports for January 2023 stood at $50.66 billion, down -3.6% yoy. Imports were -13.02% lower on a sequential basis. The sharply lower imports can be partially attributed to the slowdown fears in the Western world as well as a greater focus on import substitution by the Indian government through its PLI scheme.

The big import surge in January 2023 came from Newsprint (+133.82%), Project Goods (+123.81%), Iron & Steel (+22.71%), Optical Goods (+21.86%), Crude Petroleum (+18.76%), Pulp & Paper (+18.58%), Transport Equipment (+13.02%) and Vegetable Oils (+7.85%). Major items in the basket that showed lower imports yoy in January 2023 were Silver (-82.05%), Gold (-70.76%), Sulphur & Iron Pyrites (-64.44%), Precious Stones (-29.65%) and Raw Cotton (-19.49%). The lower imports were largely triggered by the sharp fall in precious metal imports, which is a positive signal.

Current account deficit now looks manageable

The trade deficit for FY23, which was originally pegged at around $300 billion, now looks to edge closer to $270 billion. That is still substantially higher than last year, but certainly manageable compared to our apprehensions around 4-5 months back. Here is a quick view of overall deficit combining services and merchandise trade to give a good proxy for the current account deficit.

Particulars	Exports FY23 ($ bn)	Imports FY23 ($ bn)	Surplus / Deficit ($ bn)
Merchandise trade	$369.25 bn	$602.20 bn	$(-232.95) bn
Services Trade #	$272.00 bn	$150.99 bn	$+121.01 bn
Overall Trade	$641.25 bn	$753.19 bn	$(-111.94) bn

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

The overall trade deficit, which is a combination of the merchandise trade deficit and services trade surplus, had surged from $(111.03) billion in November 2022 to $(118.12) billion in December 2022. Thanks to lower merchandise imports and higher services surplus, this overall deficit has compressed to $(111.94) billion in January 2023. That raises hopes of the overall deficit ending closer to $130 billion and poses less of a challenge to CAD. 

That should translate into current account deficit of under 4% of GDP. That is high in absolute terms, but not as bad as the 4.5% envisaged after the September quarter CAD numbers were announced. Imported inflation remains a concern, although the persistently improving services surplus should come as a blessing in disguise for the current account deficit (CAD) for FY23.

It remains to be seen, if Commerce Ministry gives a last minute boost to exports of goods and services in the last 2 months of FY23. That may not change the narrative on CAD, but would make it a lot more palatable.