scorecardresearchMerchandise trade: Resilient core exports keep deficit in check

Merchandise trade: Resilient core exports keep deficit in check

Updated: 17 Jan 2023, 08:18 AM IST
TL;DR.
Oil exports declined by 8.5 percent sequentially despite cuts in December to the special excise and export duties on various petroleum products.
Trade deficit in December increased marginally to $23.7bn.

Trade deficit in December increased marginally to $23.7bn.

Trade deficit in December increased marginally to $23.7 billion (bn) from $23.4bn prior, logging the second consecutive month of a sub-$25bn reading after four consecutive months of strain and averaging at nearly $27bn.

The increase was led by imports staying flat, even as exports fell. Exports declined by a mild 1.1 percent month-on-month (MoM), after increasing by 10 percent in November and remained below the FYTD average of $36.9bn.

However, it was encouraging that 25 of the 30 sub-sectors saw positive sequential growth in December. The annualised print remains bleak, at -12.2 percent year-on-year (YoY) (+9.6 percent prior).

Oil exports declined by 8.5 percent sequentially (+13.6 percent prior, -26.9 percent YoY) despite cuts during the month to the special excise and export duties on various petroleum products.

Non-oil, non-gold (NONG) exports were virtually unchanged at $27bn (0.2 percent MoM, -8.5 percent YoY), led by increases in engineering goods (12.5 percent MoM), chemicals (9.8 percent MoM), pharmaceuticals (13.7 percent MoM), and electronic goods (2.6 percent MoM).

The rollback of the steel export tariff in late November has contributed to improved engineering goods exports, while the PLI scheme for the electronics sector is also helping push exports. Overall, exports remain higher by 9.1 percent on FYTD basis.

Imports stay virtually unchanged, with rising NONG imports

Imports came in at $58.2bn in December, the same level as November, albeit down 3.5 percent YoY. Oil imports declined by 3.2 percent MoM (+5.9 percent YoY), but oil deficit increased to $12.5bn since exports fell at a faster pace.

NONG imports rose, however, by 7.2 percent MoM (1.2 percent YoY, -0.6 percent prior) – indicating that domestic demand remains resilient.

Within core imports, transport equipment, machinery, and electronic goods saw significant sequential increases. Gold imports fell by 63.6 percent MoM as increasing domestic gold prices curbed retail demand in December.

Imports have increased by nearly 25 percent on FYTD basis so far, with NONG imports showing 23.5 percent growth during the same period.

Services trade surplus remains healthy

The trend in services trade continues to be robust. Services exports improved a tad, as per government estimates, to $27.3bn from $27bn in November, while imports also increased to $15.6bn, implying a surplus of $11.8bn ($11.6bn in November).

The monthly average surplus remains comfortable at $11.2bn for FY23TD, up from $8.8bn for FY22TD.

FY23 CAD/GDP may be at 3.1%; BoP deficit to be nearly $40bn

FYTD23 merchandise trade deficit has registered $218.9bn as against $136.5bn over the same period last FY, implying that the current account deficit pressure will be immense.

However, easing global commodity prices, especially for oil (with India continuing to receive Russian crude at a discount), as well as a solid services trade surplus will act as a strong offset for CAD.

We expect FY23 CAD/GDP at 3.1 percent ($107bn). The CAD funding pain will still be tricky as global portfolios continue to reassess positions and EM risk premia amid tighter financial conditions and recession fears.

We see mild FPI inflows ahead, as CY22 bears the front-loaded pain. Even if we assume slightly moderating net FDI flows, the BoP deficit would still be significant at $40bn for FY23.

This requires continuous complementary policy efforts on both fiscal and monetary fronts to ease the looming pain on BoP, funding risks, and external imbalances thereof, amid limitations on the RBI’s FX intervention.

(The author is the lead economist at Emkay Global Financial Services)

Disclaimer: The views and recommendations given in this article are those of the author. These do not represent the views of MintGenie.

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First Published: 17 Jan 2023, 08:18 AM IST