India trade deficit for May 2022 at record levels

Trade data (exports and imports) for the month of May 2022 has been a case of blow hot and blow cold. There has surely been some good news on this front. Let us first celebrate the good news first. May 2022 was the 3rd consecutive month when total trade (imports + exports) were above the $100 billion mark. One has to only look at the total trade numbers to estimate that India could end FY23 with total trade value closer to $1.2 trillion. Last year in FY22, India had crossed $1 trillion total trade for the first time in history.

But then it has also highlighted some areas of concern. For example, this is the third month in succession that the total merchandise imports have stayed above $60 billion. In addition, the trade deficit for May 2022 at $24.29 billion is the highest trade ever recorded by India in any given month. The worry is that if the current run is maintained, then India may end the year with trade deficit of closer to $250 billion and that would be on an import base of over $720 billion for the full year FY23.

 

Some good news on exports front

If you look back at the last 3 months between March and May 2022, the exports have maintained an average run of $40 billion a month. This is despite the serious global supply chain constraints, and things could really improve once these are resolved. Exports have also grown at a robust clip. Exports of goods in May 2022 are up by over 20% on a yoy basis. Exports were lower on a sequential basis by -3.11% compared to April 2022. 

If you look at specific products, the star performers for the month of May 2022 included products like Petroleum Products, Coffee, Leather products, Electronic Goods, Oil Meals, Cereal preparations, Textiles, Jute, organic and inorganic chemicals and Tobacco. That is not the full story, as there also some laggards. Some of the laggard exporters include Iron ore, cereals, Cashew, Handicrafts, Plastics & Linoleum etc. 

Imports have a mix problem

Merchandise imports for April 2022 came in at $63.22 billion and the growth was much better than exports. The imports were dominated by crude oil imports accounting for one-third of the basket. The big import surge was visible in Silver, Gold, Coal, coke & briquettes, Crude, Raw Cotton, leather products and pulses. However, some goods like Project Goods, Professional Instruments, Medicinal Products and Machine Tools. Gold imports were a concern in May 2022 at $6.05 billion.
 

There are two macro issues that need to be addressed. The trade deficit combined with the services surplus leaves India with a net deficit of $27.30 billion (check table above) in the first two months and a likely full year total deficit of $150 billion. That will put a lot of pressure on the current account and sovereign rating front. Also with full year imports likely at above $720 billion, the current forex reserves will only cover 9 months of imports.

What must the Indian policymakers focus on to boost trade?

In the last few months the imports of gold, fertilizers, coal, coke and edible oils have surged sharply. Here are 2 key challenges.

    • Supply chain issues will continue to make exports difficult and imports more expensive. For instance, China lockdown has already created a shortage of chemicals and API inputs for pharma companies, non-availability of containers and tepid Chinese demand. That is showing impact on a slew of sectors. Labour is another resources that is getting scared.

    • There is also a policy perspective. Fed and other central banks globally are ultra-hawkish and could create a case of monetary divergence. Trade growth is definitely robust, but high inflation and low unemployment could easily morph into a full-fledged recession.