PL EcoFlash - India's Trade Deficit Narrows to USD 19.4 bn in September

India's Trade DeficitNarrows to USD 19.4 bn in September – Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd

India's trade deficit narrowed to USD 19.4 billion from USD 24.2 billion in August, primarily due to a reduction in merchandise imports and an enhanced services surplus. Despite both exports and imports contracting annually, the deficit eased due to a a relatively lower contraction in exports vis-à-vis imports. Only a third of key export commodities expanded, reflecting global economic deceleration, though electronic goods thrived under the Government's PLI scheme. Gold imports declined, hinting at global demand weakness, while oil imports rose, indicating diminishing benefits from Russian oil imports and volatility in crude oil prices following decision by OPEC+ countries to cut production. The current merchandise trade deficit trajectory suggests potential challenges ahead, given rising global commodity prices influenced by the robust US economy, geopolitical factors, and Chinese policy stimulus. The World Bank predicts a global economic slowdown and reduced commodity prices, potentially impacting India's exports. Concurrently, India's anticipated GDP growth moderation might reduce imports. On the currency front, the Rupee, nearing its record high against the USD, faces pressures from geopolitical tensions, commodity price volatility, and diminishing advantages from Russian imports. With the USD strengthening and emerging market currencies faltering, especially given China's economic concerns, the Rupee might experience further depreciation.

§ India’s total trade deficit moderated to USD 19.4 bn in Sept-23 from USD 24.2 bn in Aug-23. This was primarily due to easing of merchandise imports to USD 53.8 bn from USD 58.6 bn, accompanied by an improvement in services surplus to USD 14.5 bn from USD 12.5 bn.

§ Both exports and imports contracted annually in Sept-23, but a relatively lower contraction in exports vis-à-vis imports helped in moderating the trade deficit print.

§ On annualized basis, of the 30 key export commodities, only 10 registered an expansion, indicating the impact of a global slowdown. Electronic goods continued to post a healthy expansion, benefiting from the Government’s PLI scheme.

§ On annualized basis, of the 30 key import commodities, 8 registered an expansion.

§ Gold imports moderated to USD 4.1 bn in Sept-23 from USD 4.9 bn in Aug-23, clearly underscoring the weakness in global demand. The impact felt from higher demand due to withdrawal of Rs 2000 banknote seems to have cushioned this moderation, but imposition of import restrictions on plain gold jewelry by the government could provide some offsetting impact.

§ Oil imports jumped to USD 14.0 bn in Sept-23 from USD 13.2 bn in Aug-23, underscoring that India’s price advantage of importing Russian oil is narrowing as Russian oil has breached the price cap set by G7 countries. Additionally, the decision by OPEC+ countries to cut oil production reflects the increase in oil imports.

§ The run-rate, so far for India’s merchandise trade deficit exudes comfort, which could however wane in the coming quarters owing to increase in global commodity prices seen in recent weeks reflecting the resilience in US economy, persistence of geopolitical factors and policy stimulus in China.

§ On the global front, while near complete normalization of global supply chains has been facilitating trade flow, the anticipated slowdown in global demand (World Bank projects Global GDP to moderate to 2.1% in 2023 from 3.1% in 2022) and lower commodity prices (World Bank projects a 23.2% decline in its commodity price index in 2023 vs. a 41.9% increase in 2022) would weigh upon India’s exports – not just merchandise but also services.

§ On the other hand, the anticipated moderation in India’s GDP growth to 6.0% (with some upside likelihood) from 7.2% in FY23 could drive imports lower.

Rupee Outlook

§ While the Indian Rupee has been trading with subdued volatility compared to peers, it has been depreciating at a gradual pace in last 2-3 months. USDINR is currently trading close to its record high level of 83.25 and could show bias for further weakness in the near-term.

§ Geopolitical tensions, volatility in in international commodity prices (esp. crude oil) in recent days, and the dissipation of strategic advantage in the form of cheaper imports from Russia are the key reasons that would put incremental pressure on India’s CAD. With capital flows unlikely to be playing a neutralizing role, this could manifest in waning of BoP advantage in FY24, esp. in H2.

§ With USD clawing back strength, other EM currencies are on a back foot. For EMs, additional factor of a lower CNY (on account of weaker than expected growth momentum and renewed concerns over real estate stability in China) further imparts weakness to other currencies.

Exhibit 1: Trade deficit in Sep’23 registered a degrowth of 30.7% YoY at USD19.37bn.