March 2024 trade deficit at $15.6 Billion touches 11-month low

16 Apr 2024 , 11:02 AM

TRADE VOLUMES IMPACTED, BUT LOWER IMPORTS HELP

Since the trade data was last reported last month, not much has changed in terms of the geopolitical risk in Middle East and West Asia. If anything, it has only aggravated with the recent sabre rattling between Iran and Israel. It still may not be full-fledged war, but the situation is volatile and threatens to spiral out of control at short notice. Did these factors impact Indian exports. It surely did, but from a trade deficit perspective, the lower imports helped. India, merchandise exports were almost flat in March 2024, even as imports came under pressure. The trade deficit for March 2024 at $15.60 Billion is not only lower than February, but also represents an 11-month low. March is also the fourth successive month when the merchandise trade deficit has stayed under $20 Billion. In 7 out of the last 13 months, the trade deficit has now been under $20 Billion, despite touching a lifetime high merchandise trade deficit of $31.46 Billion in October 2023. That is the redeeming feature.

UNDERSTANDING GROSS AND NET MERCHANDISE TRADE FOR FY24

Gross merchandise trade is the aggregate of imports and exports. The gross merchandise trade reading is relevant as it shows the volume of trade handled; which has a direct impact on the revenues of the government in the form of indirect taxes, as well as jobs created. Now, a clearer picture emerges if we compare the gross merchandise trade (exports + imports) and the net merchandise trade (exports – imports) for FY24 and compare it with the corresponding 12 months of FY23. For the full fiscal year FY23, total merchandise exports stood at $451.07 Billion while imports were $715.97 Billion. Let us turn to FY24!

For the full fiscal year FY24, the total exports were lower by -3.11% at $437.06 Billion while total imports were also lower by -5.41% at $677.24 Billion. Hence, cumulative merchandise trade deficit for the full fiscal year FY24 is lower by -9.33% at $240.18 Billion compared to FY23. This lower import intensity, amidst falling commodity and oil prices has been the key factor in keeping merchandise trade deficit for FY24 well under control. However, on an overall basis, the services surplus wiped out 67.47% of the merchandise trade deficit leaving overall the overall trade deficit (goods and services combined) at just $78.12 Billion for FY24. We will look at the overall deficit in elaborate detail in the subsequent paragraph.

MAR-24 OVERALL DEFICIT HIGHER, BUT FY24 UNDER CONTROL

India currently runs a deficit in the merchandise trade account (physical goods) but it runs a surplus in the services trade account. if you combine these two figures, we still have a deficit, but it is substantially lower. For fiscal year FY24, the services surplus wiped out 67.47% of the merchandise trade deficit. This overall deficit can be restrained; either by boosting exports of goods and services or by cutting imports of goods and services. The low hanging fruit for government is to boost export of services and cut imports of goods.

In recent months, the services surplus dwindled due to weakness in services exports amidst a slowdown in IT services demand. For instance, in March 2024, the services surplus of $12.70 Billion was -5.79% lower than March 2023 (yoy) and sharply lower by -24.22% compared to February 2024. There is some relief to the services surplus coming from exports of financial services and via global capability centres (GCC). In March 2024, overall trade deficit (merchandise and services combined) came in at a subdued $2.90 Billion higher than February 2024, but lower yoy. However, by containing the gap, the overall deficit for FY24 stands at just $78.12 Billion. This is one of the most important components of current account deficit (CAD), so it also augurs well for containing CAD at under 1% of GDP for FY24.

HOW MERCHANDISE TRADE PANNED IN LAST 1 YEAR

The table below captures the monthly data of merchandise exports, imports, and trade deficit over last one year. March 2024 marks the fourth successive month when the merchandise trade deficit has been under the $20 Billion mark.

Month	Exports ($ Billion)	Imports ($ Billion)	Trade Surplus / Deficit
Mar-23	38.38	58.11	-19.73
Apr-23	34.66	49.90	-15.24
May-23	34.98	57.10	-22.12
Jun-23	32.97	53.10	-20.13
Jul-23	32.25	52.92	-20.67
Aug-23	34.48	58.64	-24.16
Sep-23	34.47	53.84	-19.37
Oct-23	33.57	65.03	-31.46
Nov-23	33.90	54.48	-20.58
Dec-23	38.45	58.25	-19.80
Jan-24	36.92	54.41	-17.49
Feb-24	41.40	60.11	-18.71
Mar-24	41.68	57.28	-15.60

Data Source: DGFT

The good news is that the recent spike in the crude prices to around $90/bbl as well as the constraints to trade imposed by the Red Sea crisis had limited impact on merchandise exports, which was flat for the month. In fact, for March 2024, the merchandise exports at $41.68 Billion is at the highest level in the last 13 months but is flat compared to March 2023 and when compared to February 2024. India crossed $1 Trillion in total trade for third financial year in a row, repeating the feat of fiscal years FY22 and FY23. While total merchandise trade at $1.1 Trillion was slightly lower yoy, the services trade was marginally higher than FY23 on a yoy basis.

WHAT BOOSTED MERCHANDISE EXPORTS IN MARCH 2024

Obviously, one of the key strategies to reduce the trade deficit has been to boost exports. Here are the star export performers in March 2024, based on the yoy percentage increase in exports. Handicrafts (+128.39%), Spices (+51.01%), Coffee (+40.30%), Organic & Inorganic Chemicals (+39.67%), Tobacco (+35.81%), Tea (+27.05%), Electronic Goods (+23.12%), Carpets (+16.23%), and Drugs & Pharmaceuticals (+12.73%)were the key export growth drivers in the month of March 2024.

In March 2024, the mix favoured the gainers over losers in the ratio of 17:13, which is a signal that export momentum picked up stayed strong in March 2024. Handicrafts gained from a big export push, while the sterling growth in electronic goods is largely reflective of the surge in export of mobile phones under the product linked incentive (PLI) schemes. In March, the quality of the export basket improved with value added products like electronic goods, chemicals, and pharmaceuticals playing a key role.

WHAT PULLED DOWN MERCHANDISE IMPORTS IN MARCH 2024

If boosting exports is one way to contain the trade deficit, the other way is to substitute the imports with domestic manufacture. That was amply visible in the month of March 2024, leading to lower imports. In fact, out of the 30 key items of imports, March 2024 saw 18 products reporting lower imports while 12 products in the basket reported higher imports, showing a lot of favourable traction for the trading deficit reading for March 2024.

Major items in the trade basket that showed lower imports yoy in March 2024 included Gold (-53.56%), Newsprint (-36.42%), fertilizers (-36.23%), Leather Products (-25.67%), Vegetable Oils (-24.29%), Ores & Minerals (-22.15%), and Chemicals (-20.26%). The lower imports were triggered by lower import demand due to the global demand slowdown, combined with the enhanced domestic output and import substitution policy.

WHAT WE READ FROM SERVICES TRADE FOR MARCH 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)	Mar-24 ($ bn)	Feb-24 ($ bn)	Mar-23 ($ bn)	Change YOY
Merchandise Exports	41.68	41.40	41.96	-0.67%
Merchandise Imports	57.28	60.11	60.92	-5.98%
Total Merchandise Trade	98.96	101.51	102.88	-3.81%
Merchandise Trade Deficit	-15.60	-18.71	-18.96	-17.72%
Services Exports	28.54	32.15	30.44	-6.24%
Services Imports	15.84	15.39	16.96	-6.60%
Total Services Trade	44.38	47.54	47.40	-6.37%
Services Trade Surplus	12.70	16.76	13.48	-5.79%
Combined Exports	70.22	73.55	72.40	-3.01%
Combined  Imports	73.12	75.50	77.88	-6.11%
Overall Trade Volume	143.34	149.05	150.28	-4.62%
Overall Trade Deficit	-2.90	-1.95	-5.48	-47.08%

Data Source: DGFT and RBI

Here is what we read from the March 2024 analysis of India merchandise and services trade numbers.

• Services exports in March 2024 were lower -6324% compared to the year ago period and also lower by -11.23% compared to the previous month of February 2024. The services imports were higher by -6.60% yoy while it was marginally higher by 2.92% on MOM basis. As a result, the services trade surplus in March 2024 fell by 5.79% on a yoy basis to $12.70 Billion. On MOM basis, the services trade surplus was down -24.22%.
• 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 March 2024? The deficit on merchandise trade account in March 2024 was lower by -17.72% yoy and was also lower by -16.62% on MOM basis. However, this was only partially offset by the services surplus, which fell -5.79% on yoy basis. As a result, the overall trade deficit stood at a level of $-2.90 Billion, which is -47% lower on a yoy comparable basis.

Just 3 months back, the government of India had raised the import duties on gold from 10% to 15% to discourage gold imports and that appears to be working. Gold imports have shown the steepest fall in March 2024. The only big risk for India is if the Red Sea crisis also spreads to the Arab peninsula and to the Straits of Hormuz, which is a threat to oil prices.

SERVICES TRADE FOR FY24 PRESENTS A ROSY PICTURE

Having seen the monthly picture of services trade, we shift focus to the cumulative fiscal year picture for the full fiscal year FY24. The cumulative view gives a better idea of how the current account deficit (CAD) will pan out in FY24. The most important driver of the current account deficit (CAD) is the overall trade deficit; which is the combination of merchandise trade deficit adjusted for the services trade surplus. If we look at the combined trade deficit for the fiscal year FY24, it stands at $78.12 Billion. That is relatively comfortable compared to last year and should keep the CAD for FY24, hopefully under 1% of GDP.

Macro Variables (Year-to-Date)	FY24 ($ bn) (Apr-Mar)	FY24 ($ bn) (Apr-Feb)	FY23 ($ bn) (Apr-Mar)	Change YOY (%)
Merchandise Exports	437.06	394.99	451.07	-3.11%
Merchandise Imports	677.24	620.19	715.97	-5.41%
Total Merchandise Trade	1,114.30	1,015.18	1,167.04	-4.52%
Merchandise Trade Deficit	-240.18	-225.20	-264.90	-9.33%
Services Exports	339.62	314.82	325.33	4.39%
Services Imports	177.56	161.86	182.05	-2.47%
Total Services Trade	517.18	476.68	507.38	1.93%
Services Trade Surplus	162.06	152.96	143.28	13.11%
Combined Exports	776.68	709.81	776.40	0.04%
Combined  Imports	854.80	782.05	898.02	-4.81%
Overall Trade Volume	1,631.48	1,491.86	1,674.42	-2.56%
Overall Trade Deficit	-78.12	-72.24	-121.62	-35.77%

Data Source: DGFT and RBI

As of the close of March 2024, the cumulative overall deficit has just moved up to $78.12 Billion, lower by -35.77% compared to fiscal year FY23. That is truly commendable and gives a lot of comfort to the policymakers. That is not only favourable for the sovereign outlook, but also for stabilizing the value of the USDINR. The CAD as of December 2023 stood at $31.5 Billion. The overall deficit accretion in Q4FY24 has been in single digits; which means, there is a very strong possibility that the full year current account deficit (CAD) may end up at around $36 Billion, which would be very close to 1% of GDP.

With the US GDP showing robust growth in the last 4 quarters, concerns over hard landing are virtually out of the way. That is positive for the Indian IT sector, even amidst flat tech spending risks. The Red Sea crisis has impacted exports, but that has been offset by lowering of imports too. Of course, it remains to be seen if the Iran-Israel war can exacerbate the situation in the first quarter of FY25. There is also the demand risk coming from technical recession in the UK and Japan. For now, the reason to celebrate is that CAD could be well under control in FY24.