June 2024 trade deficit narrows to $20.98 Billion

18 Jul 2024 , 01:19 PM

WHAT WE READ FROM THE TRADE NUMBERS

It is said that not all crises are bad, and some crises can actually be positive. One such case is the Red Sea crisis, which has had a deep impact on the goods trade. For instance, the Red Sea crisis has been positive for Indian trade deficit. While exports have had a negative impact dur to the slow movement of vessels and the higher insurance and freight costs, it has impacted imports of goods a lot more. As a result, the net impact has been to narrow the merchandise trade deficit from $23.78 Billion to $20.98 Billion for June over May 2024.

If you look at a quick view of the trade numbers for June 2024, merchandise exports were 7.7% lower than May but merchandise imports were lower 9.3%. This helped to narrow the trade deficit on the merchandise account. However, trade volumes have taken a hit in June 2024 at $91.38 Billion compared to $100.04 Billion in May 2024. Total trade volumes (the sum of exports and imports of goods) are critical as it shows the impact on jobs created as well as the impact on government tax collections. Let us now turn to the services surplus!

OVERALL DEFICIT NARROWS BY 27% IN JUNE 2024

The merchandise trade deficit in June 2024 at $20.98 Billion marks the second occasion when the figure has been above $20 Billion since December 2023. Of course, it may be recollected that in October 2023, the trade deficit had touched a peak of $31.46 Billion, which is the highest trade deficit ever reported by India. Normally, it has been observed that the trade deficit exerts more pressure in the first half of the fiscal year, but tends to taper in the second half of the fiscal. For the month of June 2024, the merchandise exports and the merchandise imports were higher on a yoy basis but clearly lower on an MOM basis. For example, on  yoy basis, the exports were up 2.56% while the goods imports were up 4.99%. On MOM basis, the goods exports were down -7.7% while imports were down -9.3%.

Let us now turn to the services trade, which is reported by the RBI with a lag of 1 month. However, based on the RBI data, the DGFT (Directorate General of Foreign Trade) extrapolates the latest month services trade data and updates the same. What does services exports comprise of? In the Indian context, services exports are predominantly IT services. However, other services like accounting services, legal services, auditing services, medical services, and global competency centres (GCCs) are also gathering steam. They have given the edge to India in bringing its CAD progressively under control. For June 2024, services exports and services imports were almost flat on a sequential MOM basis. However, on a yoy basis, services exports were up 8.9% while services imports were up 10.8%. The services trade surplus was up just 0.78% on sequential basis, but up by a sharp 6.6% yoy. As a result, the overall deficit narrowed by 27% in June 2024, compared to May 2024. Here, overall deficit refers to the sum of merchandise trade deficit and the services trade surplus.

STORY OF MERCHANDISE TRADE IN LAST 1 YEAR

Here is the monthly data of merchandise exports, imports, and trade deficit over last one year. June 2024 was only the second occasion since November 2023, when the merchandise trade deficit stayed above the $20 Billion mark.

Monthly Data	Exports ($ Billion)	Imports ($ Billion)	Total Trade	Trade Surplus / Deficit
Jun-23	32.97	53.10	86.07	-20.13
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

Data Source: DGFT

In the last 12 sequential months prior to June 2024, the average monthly exports have been $36.10 Billion while the average monthly imports have been $57.01 Billion. As a result, the average monthly total trade has been $93.11 Billion while the average monthly trade deficit has been $20.90 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. One positive takeaways is that the Red Sea crisis has not overly impacted the total trade value nor has it spiked the trade deficit.

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. While the Red Sea crisis continues to pose a headwind for the growth in exports, India has still managed to boost exports of engineering goods, electronic goods, and pharmaceuticals. At the same time, India has also sharply cut its imports of gold, fertilizers, sulphur etc.

WHAT BOOSTED MERCHANDISE EXPORTS IN JUNE 2024

Obviously, one of the key strategies to reduce the trade deficit has been to boost exports. Here are the star export performers in June 2024, based on the yoy percentage increase in exports. Coffee (+70.02%), Tobacco (+37.71%), Iron Ore (+24.66%), Electronic Goods (+16.91%), Cereal Preparations (+15.43%), Carpets (+10.64%), Engineering Goods (+10.27%), Plastic & Linoleum (+9.94%), and Drugs & Pharmaceuticals (+9.93%) were the key export growth drivers in the month of June 2024. What is encouraging is that several items in the star export list are high value added items like electronic goods, engineering goods, drugs & pharmaceuticals etc. That shows a shows a shift in the export quality of India. Top 5 export destinations, in terms of change in absolute value of exports, and also exhibiting positive growth in June 2024 over June 2023 include The US (+5.98%), the UAE (13.81%), Malaysia (93.82%), Bangladesh (25.20%), and the Republic of Tanzania (59.13%). UAE exports have been boosted by the signing of the comprehensive free trade agreement (FTA) with UAE.

WHAT PULLED DOWN MERCHANDISE IMPORTS IN JUNE 2024

If boosting exports is one way to bring down the trade deficit, the other is import substitution. That is happening with Russian oil on one side and through domestic focus on sectors like defence. Major items in the trade basket that showed lower imports yoy in June 2024 included Gold (-38.66%), Fertilizers (-36.44%), Sulphur & Unroasted Iron Pyrites (-30.55%), Raw & Waste Cotton (-26.16%), Chemical Products (-22.30%), Pearls and semi-precious stones (-18.91%), and Leather Products (-17.38%). The top 5 import sources, in terms of change in absolute value of imports in June 2024 over June 2023 included United Arab Emirates (48.15%), China (18.37%), Russia (18.57%), Indonesia (23.22%) and the US (10.65%). Today, Russia dominates 41% of India’s crude basket and that is showing.

OVERALL TRADE DATA BREAK-UP FOR JUNE 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 also provides indicative extrapolated figures of services trade for current month. Services trade surplus largely neutralizes merchandise trade deficit.

Macro Variables (Monthly)	Jun-24 ($ bn)	May-24 ($ bn)	Jun-23 ($ bn)	Change YOY
Merchandise Exports	35.20	38.13	34.32	2.56%
Merchandise Imports	56.18	61.91	53.51	4.99%
Total Merchandise Trade	91.38	100.04	87.83	4.04%
Merchandise Trade Deficit	-20.98	-23.78	-19.19	9.33%
Services Exports	30.27	30.16	27.79	8.92%
Services Imports	17.29	17.28	15.61	10.76%
Total Services Trade	47.56	47.44	43.40	9.59%
Services Trade Surplus	12.98	12.88	12.18	6.57%
Combined Exports	65.47	68.29	62.11	5.41%
Combined  Imports	73.47	79.19	69.12	6.29%
Overall Trade Volume	138.94	147.48	131.23	5.88%
Overall Trade Deficit	-8.00	-10.90	-7.01	14.12%

Data Source: DGFT and RBI

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

• Services exports in June 2024 were higher 8.92% compared to the year ago period. The services imports were higher by 10.76% yoy. As a result, the services trade surplus in June 2024 increased by 6.57% on a yoy basis to $12.98 Billion. On MOM basis, the services trade surplus was just marginally higher.
• 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 June 2024 was wider by 9.33% yoy at $20.98 Billion. It was, however, sharply lower on MOM basis. The services surplus improved 6.57% yoy. As a result, the overall trade deficit for June 2024 stood at $-8.00 Billion, compared to $-10.90 Billion in May 2024; which is sharply narrower.

Let us now turn our attention to the trade data for FY25, although we only have 3 months of data available right now.

OVERALL TRADE DATA BREAK-UP FOR Q1-FY25

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 Trade Variables (FY Cumulative)	FY25 ($ bn) (Apr-Jun)	FY25 ($ bn) (Apr-May)	FY24 ($ bn) (Apr-Jun)	Change (%) YOY
Merchandise Exports	109.96	73.12	103.89	5.84%
Merchandise Imports	172.23	116.01	160.05	7.61%
Total Merchandise Trade	282.19	189.13	263.94	6.91%
Merchandise Trade Deficit	-62.27	-42.89	-56.16	10.88%
Services Exports	90.37	60.49	80.57	12.16%
Services Imports	50.67	33.91	45.45	11.49%
Total Services Trade	141.04	94.40	126.02	11.92%
Services Trade Surplus	39.70	26.58	35.12	13.04%
Combined Exports	200.33	133.61	184.46	8.60%
Combined  Imports	222.90	149.92	205.50	8.47%
Overall Trade Volume	423.23	283.53	389.96	8.53%
Overall Trade Deficit	-22.57	-16.31	-21.04	7.27%

Data Source: DGFT and RBI

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

• Services exports in FY25 were higher 12.16% compared to the year ago period. The services imports were higher by 11.49% yoy; showing a slight pick-up in the recent months. As a result, the services trade surplus in FY25 increased by 13.04% on a yoy basis to $39.70 Billion. The key question is; whether this is good enough to cover the deficit on the merchandise trade account?
• How did services trade impact the overall picture of trade for Q1-FY25? The deficit on merchandise trade account in FY25 was wider by 10.88% yoy at $62.27 Billion. However, this was partially offset by the services surplus, which improved 13.04% to $39.70 Billion. As a result, the overall trade deficit stood at a level of $-22.57 Billion, which is 7.27% wider on yoy basis.

We finally turn to the million dollar question; What does this array of data mean for the current account deficit (CAD) for the current 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 one quarter 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. The FY24 CAD came in sharply lower at $23.2 Billion or just 0.7% of GDP. This was largely assisted by a current account surplus in the fourth quarter. The CAD data for the first quarter ended June 2024 will be put out only by the last week of September 2024.

However, we can safely extrapolate full year current account deficit in the region of $50 Billion to $60 Billion. That would still be about 1.5% to 1.6% of the GDP. In short, the CAD picture for FY25 is likely to be higher than FY24, but closer to what was achieved in FY23. From here on, a lot will depend on how the government is able to reduce the gap on an overall basis. The Red Sea crisis remains a major X-factor for trade, although WTO is optimistic that FY25 trade will be better than FY24. For now, it is wait and watch mode!