Booming trade and widening deficit

by Manasi Swamy

India’s merchandise exports touched an all-time high of USD 117 billion in the quarter ended March 2022. These advanced further to scale a fresh high of USD 118.9 billion in the quarter ended June 2022. Imports too jumped to their highest quarterly level of USD 171.4 billion during January-March 2022 and peaked further at USD 189.7 billion during April-June 2022.

India’s foreign trade has been expanding unabated since the jolt of Covid-19 pandemic it received in the June 2020 quarter. Exports increased by a sharp 131.2 per cent between the quarter ended June 2020 and that ended June 2022. Exports of petroleum, oil & lubricants increased 5.1 times to USD 25.1 billion and that of non-POL items more than doubled to USD 93.8 billion.

Imports too increased between the quarters ended June 2020 and June 2022, and at a much faster clip than exports. Imports more-than-trebled from USD 61.3 billion in the quarter ended June 2020 to USD 189.7 billion in the quarter ended June 2022. POL imports rose by a whopping 359.4 per cent to USD 60.6 billion and non-POL imports increased by 168.6 per cent to USD 129.1 billion during the quarter ended June 2022.

India was not the lone country to witness a steep fall in foreign trade in the June 2020 quarter followed by a rapid growth in the next two years. Globally, trade shrank in the June 2020 quarter and then swelled to an all-time high of USD 6.1 trillion by the quarter ended March 2022, according to the statistics released by United Nations Conference on Trade and Development (UNCTAD). It claimed that global trade continued to grow in the June 2022 quarter, albeit the pace of growth slowed.

The growth in trade in the September and December 2020 quarters was a volume recovery from the shock of the lockdowns imposed by many countries in the world to arrest the spread of coronavirus infections. The growth thereafter was fuelled by rising commodity prices. Trade volumes too increased, but at a slower pace particularly after the outbreak of the Russia-Ukraine war towards end-February 2022.

In India’s case, imports rose at a faster clip than exports. This resulted in a widening of trade deficit. After dropping to a record low of USD 9.8 billion in the quarter ended June 2020, India’s merchandise trade deficit increased rapidly and peaked at USD 70.8 billion during the quarter ended June 2022. Half the deficit during the June 2022 quarter emanated from trade in POL and the other half from non-POL items.

We expect India’s merchandise trade deficit to remain elevated around USD 71.5 billion in the next two quarters - those ending in September and December 2022. Deficit is likely to ease to USD 63.3 billion in the March 2023 quarter following weakening of imports due to an expected softening of global commodity prices.

Exports are likely to remain elevated at USD 118.5 billion in the quarter ending September 2022 quarter. These are expected to ease to USD 116.3 billion in the December 2022 quarter on signs of a global slowdown, before showing a seasonal improvement to USD 120.1 billion in the March 2023 quarter.

During the entire fiscal year 2022-23, we expect merchandise exports to increase by 11.9 per cent to USD 472.3 billion. POL exports are expected to rise by 47.1 per cent to USD 99.4 billion and non-POL exports are expected to rise by a relatively lower 5.1 per cent to USD 372.9 billion. Among non-POL items exports of iron ore, metals and textiles are likely to fall, while that of agricultural products, pharmaceuticals, chemicals and gems & jewellery are likely to increase during 2022-23.

We expect India’s imports to inch up from USD 189.7 billion in the June 2022 quarter to USD 190.2 billion in the September 2022 quarter, before easing to USD 187.8 billion and USD 183.4 billion in the quarter ending December 2022 and March 2023, respectively. The easing of imports will be purely a reflection of softening global crude oil prices in the second half of 2022-23.

We expect India to import goods worth USD 745.8 billion in 2022-23. These will be 21.6 per cent higher than imports during 2021-22. The rise will be driven by a robust 53.5 per cent rise in POL import bill to USD 248.8 billion. Non-POL imports too are expected to rise, but at a relatively slower pace of 10.2 per cent to USD 497 billion. Among major non-POL imports, only edible oils and gold are expected to report a fall. Edible oil imports are projected to fall due to softening prices, while gold imports are likely to shrink in volume. Imports of chemicals including fertilisers are expected to grow by 13.5 per cent and that of engineering goods by 5.8 per cent. Imports of coal, coke & briquettes are expected to jump by 59 per cent due to a shortfall in domestic supplies to thermal power stations.

Merchandise trade deficit is projected to zoom up to USD 273.4 billion in 2022-23 from USD 191 billion in 2021-22. This will be the highest ever trade deficit witnessed by India in a single year.

The record high trade deficit has two macro-economic implications for the Indian economy. Firstly, it results into widening of current account deficit (CAD), which along with the foreign portfolio investments (FPI) exodus, is currently exerting pressure on the Indian rupee. The depreciation of rupee increases landed cost of imports, thereby adding to the domestic price inflation which is currently ruling well above the RBI’s upper limit of tolerance of 6 per cent. Secondly, the merchandise trade deficit in 2022-23 is expected to amount to 7.9 per cent of GDP, thereby eating into the growth of the economy. This will be the highest pie of GDP eaten away by merchandise trade deficit in the last 10 years.