July 2024 trade deficit widens to $23.5 Billion

21 Aug 2024 , 10:21 AM

OUR QUICK TAKE ON INDIA’S TRADE BASKET IN JULY 2024

For the month of July 2024, India reported merchandise trade deficit of $23.5 Billion. This is the highest level in the last 9 months, since India had reported record trade deficit of over $31 Billion in October 2023. But, which were the products that were the key drivers of the India trade story in July 2024. For the month of July, the top export from India was engineering goods at $9.04%, up 3.7% yoy. The other key contributors to the export basket in July 2024 were petroleum products at $5.23 Billion (down -22.2%), Electronic goods at $2.81 Billion (up 37.3%), drugs & pharmaceuticals at $2.31 Billion (up 8.4%), organic & inorganic chemicals at $2.27 Billion (down -12.0%), and gems & jewellery at $1.84 Billion (down -20.4%). Clearly, barring electronic goods (let by Apple iPhone exports) showing a strong yoy growth, the Red Sea crisis appears to have hit exports of other products.

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 $13.87 Billion (up 17.4%), electronic goods at $8.66 Billion (up 11.5%), machinery at $4.47 Billion (up 3.2%), gold at $3.13 Billion (down -10.7%), coal/coke/briquettes at $2.99 Billion (up 9.07%), and chemicals $2.51 Billion (up 8.1%). The spike in the import bill for crude and petroleum is due to the reduced dependence on Russia and the higher on-board prices of crude in the month. Gold imports may have come down yoy but still remains elevated at above $3 Billion in July. In most other cases, the higher import value has been a function of the higher freight and insurance costs that importers have to bear for taking a more circuitous route to Asian.

OUR QUICK TAKE ON INDIA’S TRADING PARTNERS IN JULY 2024

Let us first talk about the total exports in July 2024. Out of the total exports of $33.98 Billion, the top 20 countries accounted for $23.2 Billion of these exports. In terms of geographies, the biggest chunk of the exports in July 2024 went to the US at $6.56 Billion (up 3.2% yoy). The other big export destinations for India in July 2024 were United Arab Emirates at $2.72 Billion, the Netherlands at $1.89 Billion, UK at $1.16 Billion, and China at $1.06 Billion. The sharpest spike in yoy exports was visible in to the Netherlands at 29.2%, while exports to Singapore, Bangladesh and Mexico also grew in double digits. The ranking on exports were almost similar, even if you considered the year-to-date numbers for the first 4 months of FY25.

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 $10.29 Billion in July 2024. The other big import sources for India were United Arab Emirates at $5.73 Billion, Rusia at $5.42 Billion, the US at $3.71 Billion and Indonesia at $2.16 Billion. The biggest yoy growth in imports in July 2024 were from Emirates, Indonesia, Qatar, Russia, Taiwan, Thailand, and Vietnam. China remains a concern, while the spike in Russia imports was driven by crude oil. 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. While India ran a trade surplus of $2.85 Billion in July 2024. On the other hand, India had a huge trade deficit with China at ($9.28) Billion; with Russia at ($5.1) Billion, and a deficit of ($3.01) Billion with the UAE.

STORY OF MERCHANDISE TRADE IN LAST 1 YEAR

Here is the monthly data of merchandise exports, imports, and trade deficit over last one year. With July trade deficit at $23.5 Billion, this is the third consecutive month in which the trade deficit has been above $20 Billion.

Monthly Data	Exports ($ Billion)	Imports ($ Billion)	Total Trade	Trade Surplus / Deficit
Jul-23	32.25	52.92	85.17	-20.67
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

Data Source: DGFT

In the last 12 sequential months prior to July 2024, the average monthly exports have been $36.29 Billion while the average monthly imports have been $57.26 Billion. As a result, the average monthly total trade has been $93.55 Billion while the average monthly trade deficit has been $20.97 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 in May 2024. Since May, the trade deficit has been persistently above $20 Billion, widening sharply in July 2024 to $23.5 Billion..

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 July 2023 at $85.17 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, and pharmaceuticals. However, the high level of imports of crude oil and gold are also a concern. However, the much bigger concern would be that just 3 countries viz. China, Russia and the United Arab Emirates account for close to 75% of the total trade deficit in July 2024.

WHAT BOOSTED MERCHANDISE EXPORTS IN JULY 2024

Obviously, one of the key strategies to reduce the trade deficit has been to boost exports. Here are the star export performers in July 2024, based on the yoy percentage increase in exports. Meat / Dairy / Poultry (+56.18%), Tobacco (+39.90%), Electronic Goods (+37.31%), Oil Meals (+22.01%), Tea (+21.79%), Handicrafts (+13.23%), Spices (+13.0%), RMG (+11.84%), and Carpets (+10.53%) were the key export growth drivers in the month of July 2024. What is encouraging is that electronic goods is there at the top and that is largely thanks to the surge in mobile phone exports from India. Top 5 export destinations, in terms of change in absolute value of exports, and also exhibiting positive growth in July 2024 over July 2023 include The Netherlands (+29.18%), the US (3.15%), Republic of Tanzania (53.14%), Singapore (14.28%), and Mexico (25.91%). India is one of the key exporters of petroleum products to the Netherlands.

WHAT PULLED DOWN MERCHANDISE IMPORTS IN JULY 2024

If boosting exports is one way to bring down the trade deficit, the other is import substitution. That happened with Russian oil, although that has come down. More important is the import substitution, especially in sectors like defence. Major items in the trade basket that showed lower imports yoy in July 2024 included Project Goods (-73.06%), Pearls / Precious stones(-32.85%), Fertilizers (-31.00%), Dyeing / Tanning material (-29.03%), Chemical Products (-26.90%), Gold (-10.65%), and Transport equipment (-9.65%). The top 5 import sources, in terms of change in absolute value of imports in July 2024 over July 2023 included United Arab Emirates (84.87%), China (13.05%), Russia (20.33%), Qatar (34.61%) and Indonesia (15.05%). For India, the Red Sea crisis has been a sort of double whammy. It has mellowed the export thrust, but it has pushed up import costs.

OVERALL TRADE DATA BREAK-UP FOR JULY 2024

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

Macro Variables (Trade Related)	Jul-24 ($ Billion)	Jun-24 ($ Billion)	Jul-23 ($ Billion)	Change YOY (%)
Merchandise Exports	33.98	35.20	34.49	-1.48%
Merchandise Imports	57.48	56.18	53.49	7.46%
Total Merchandise Trade	91.46	91.38	87.98	3.96%
Merchandise Trade Deficit	-23.50	-20.98	-19.00	23.68%
Services Exports	28.43	30.27	26.22	8.43%
Services Imports	14.55	17.29	13.74	5.90%
Total Services Trade	42.98	47.56	39.96	7.56%
Services Trade Surplus	13.88	12.98	12.48	11.22%
Combined Exports	62.41	65.47	60.71	2.80%
Combined  Imports	72.03	73.47	67.23	7.14%
Overall Trade Volume	134.44	138.94	127.94	5.08%
Overall Trade Deficit	-9.62	-8.00	-6.52	47.55%

Data Source: DGFT and RBI

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

• Services exports in July 2024 were higher 8.43% compared to the year ago period. The services imports were higher by 5.90% yoy. As a result, the services trade surplus in July 2024 increased by 11.22% on a yoy basis to $13.88 Billion. On MOM basis, the services trade surplus was higher by 6.93%.
• Services trade surplus arises from export of IT and other 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 boosted services surplus in recent months.
• How did services trade impact the overall picture of trade for June 2024? The deficit on merchandise trade account in July 2024 was wider by 23.68% yoy at $23.50 Billion. It was, also up by 12.01% on MOM basis. The services surplus improved 11.22% yoy. As a result, the overall trade deficit for July 2024 stood at $-9.62 Billion, compared to $-8.00 Billion in June 2024; which is sharply higher. This also puts pressure on the cumulative deficit for FY25, as we shall see in the next paragraph..

Let us now turn our attention to the trade data for FY25, although we only have 4 months of data available right now.

OVERALL TRADE DATA BREAK-UP FOR FY25 (APR-JUL)

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. The estimates for services trade are fairly reflective of the bigger picture.

Macro Variables (Year-to-Date)	FY25 (Apr-Jul)	FY25 (Apr-Jun)	FY24 (Apr-Jul)	Change YOY (%)
Merchandise Exports	144.12	109.96	138.39	4.14%
Merchandise Imports	229.70	172.23	213.53	7.57%
Total Merchandise Trade	373.82	282.19	351.92	6.22%
Merchandise Trade Deficit	-85.58	-62.27	-75.14	13.89%
Services Exports	117.35	90.37	106.79	9.89%
Services Imports	62.95	50.67	59.19	6.35%
Total Services Trade	180.30	141.04	165.98	8.63%
Services Trade Surplus	54.40	39.70	47.60	14.29%
Combined Exports	261.47	200.33	245.18	6.64%
Combined  Imports	292.65	222.90	272.72	7.31%
Overall Trade Volume	554.12	423.23	517.90	6.99%
Overall Trade Deficit	-31.18	-22.57	-27.54	13.22%

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 4 months of the fiscal year (Apr-Jul). Our focus will be more on the services trade numbers here.

• Services exports in FY25 were higher 9.89% compared to the year ago period. The services imports were higher by 6.35% yoy; showing a slight pick-up in recent months. As a result, the services trade surplus in FY25 increased by 14.29% on a yoy basis to $54.40 Billion. The key question is; whether this is good enough to cover the deficit on the merchandise trade account? Obviously, it is not!
• How did services trade impact the overall picture of trade for Q1-FY25? The deficit on merchandise trade account in FY25 was wider by 13.89% yoy at $85.58 Billion. However, this was partially offset by the services surplus, which improved 14.29% to $54.40 Billion. As a result, the overall trade deficit stood at a level of $-31.18 Billion, which is 13.22% wider compared to the first four 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

With fourth months trade data, we have a good starting point to assess how the full year CAD could be, since overall trade deficit is the most important component of the current account deficit (CAD). The FY24 CAD came in sharply lower at $23.2 Billion or just 0.7% of GDP. This was assisted by a current account surplus in the fourth quarter and back-ending some of the last quarter imports. The delays in freight movement due to the Red Sea crisis also played a part in shifting some of the deficit to FY25. So, what is the CAD picture?

We can safely extrapolate full year current account deficit in the region of $60 Billion to $70 Billion. That would still be about 1.7% to 1.8% of the GDP. In short, the CAD picture for FY25 is likely to be meaningfully higher than FY24, but closer to what was achieved in FY23. From here on, a lot will depend on how the Red Sea crisis pans out as that is putting undue pressure on the trade deficit. We will get the first indications only when the Q1FY25 current account deficit is announced around the end of September 2024. Till then; it would be wait and watch!