June 2022 trade deficit touches record $26.2 billion

The month of June 2022 was always going to be a month of record merchandise trade deficit. That indication had been given by the Ministry of Commerce at the start of July 2022 itself. However, in the final analysis, the imports were steeper than expected and the trade deficit was wider than anticipated. June 2022 was the 4th successive month, merchandise imports stayed above $60 billion and the trade deficit touched a record $26.18 billion. That means, India could end FY23 total trade of $1.20 trillion and trade deficit of $280 billion.

Key takeaways from the June 2022 trade numbers

Here are some interesting takeaways that we can glean from the trade numbers announced by the Ministry of Commerce. 

    a) In the last 4 months exports maintained an average run of $40 billion a month. In fact, the good news is exports are up 23.52% while imports are up 57.55% on a yoy basis. That in a nutshell explains why the trade deficit is widening so rapidly. 

    b) The overall trade deficit (merchandise plus services) for the Q1FY23 is already $45 billion. At this rate, FY23 could see the overall deficit well over $175 billion and this is likely to put intense pressure on the current account deficit (CAD).

    c) There is a major concern on the import cover of the forex chest of the RBI. Total imports could touch $750 billion in FY23 and with $580 billion in forex reserves, it covers just about 9 months of merchandise imports. That limits the RBI in defending the rupee.

    d) On a yoy basis, exports at $40.13 billion were up 23.52% yoy and on a sequential basis it was up 3.06%. Despite headwinds like China shutdowns, Ukraine war, commodity inflation and monetary tightness, Indian exports have averaged $40 billion a month.

    e) For the month of June 2022, merchandise imports touched a record $66.31 billion, up 57.55% yoy and up 9.97% sequentially. Crude oil still accounts for one-third of India’s import bill, but there are other heads that are catching up quite rapidly.

    f) Overall trade deficit of merchandise and services trade stood at $(27.30) billion in May 2022 but burgeoned to $(45.18) billion in June 2022. At this rate, overall deficit could end up closer to 180 billion and pose a challenge to current account deficit (CAD) levels.

Let us quickly look at how this combined deficit of $45.18 billion was arrived at for FY23 till date.

Here is the story. The combined deficit of the Indian economy burgeoned from $12.75 billion in FY21 to $87.79 billion in Fy22 and could touch $180 billion in FY23. That would mean the CAD or the current account deficit would scale past 5% of GDP and that will put a lot of pressure on the Indian rupee value as well as on the sovereign ratings of India.

Two factors that could impact India trade

Overall trade in India grew to $1 trillion in FY22 and could further grow to $1.20 trillion in FY23. However, the higher total trade is being driven by a spike in imports of crude oil, gold, fertilizers, coal, coke and edible oils. These are the 2 factors to watch out on trade front.

    • China Q2FY22 GDP grew at a paltry 0.4%. That will negatively impact the demand for a wide array of consumer and industrial goods. It also means tepid production in China and that is likely to impact the supply chains across the world. India will not be spared. 

    • There is also the risk from Fed hawkishness amidst rising inflation. With June inflation at 9.1%, FOMC may hike rates by 100 bps. This has heightened the fears of recession and is likely to have a spill-over impact on industrial demand and retail consumption.

When India formulates its trade strategy for FY23 and FY24, it has to keep these 2 risk factors in mind. China and the US, where the problems are most pronounced, also happen to be India’s largest trading partners.