India's exports contract for first time in 2 years, trade deficit remains all-time high: India Tracker explainer

By: Anshul Vipat

Consequently, trade deficit inched up to $26.9 billion in October from $25.7 billion in the previous month; but it still remained lower than July’s record level of $30 billion

Countering ongoing geo-political and rising global uncertainties, India’s merchandise trade for October 2022 hit the $58.36 billion, exhibiting a positive growth of 4.03 per cent over the same period last year. But it’s not all good news. The most significant data is on merchandise exports that showed contraction for the first time in two years.

According to the latest data released by the Ministry of Commerce, exports dropped below the crucial $30-billion mark for the first time since March 2021 to hit $29.8 billion. The exports declined by eight percent when compared to September 2022 when it was $32.2 billion. It was in November 2020 when exports had contracted last time, by 8.74 per cent. Imports, however, rose 5.7 percent, to $56.7 billion. Consequently, trade deficit inched up to $26.9 billion in October from $25.7 billion in the previous month; but it still remained lower than July’s record level of $30 billion.

Exports fall in major commodities

The export decline in October was rather broad-based, as 24 of the 30 key segments–including petroleum products, engineering goods, gems and jewellery, textiles and garments, chemicals and pharmaceuticals– witnessed contraction, due to an economic slowdown in key markets that started to weigh down demand. Engineering goods, a mainstay of India’s exports in recent years, dropped over 21 percent to $7.4 billion (when compared to October 2021 figures), with the Ministry stating that the $2 billion drop ‘includes steel and its products’, signaling that the export tax on iron and steel is hurting these exports.

Exports from major job-intensive sectors such as readymade garments and gems and jewellery also dropped by over 20 percent, while cotton yarn, handlooms and handicraft products nearly halved from a year ago. Outbound shipments for iron ore fell by 90% in value terms in October, led by a steep decline in international prices.

Exports impacted due to global slowdown and festive season

Commerce Secretary Sunil Barthwal pointed out that both global as well as domestic factors had an impact on India’s exports. He also pointed out the “heavy impact” of the festival season. “Tightening of monetary policy in most of the developed world – Europe, the US and elsewhere – puts less money in the hands of the public. Therefore, consumption slows down. These are going to be tough times for us. There will be a lot of headwinds for us, and this will impact our exports too,” Barthwal told reporters on Tuesday.

Global inflation, Russia-Ukraine war, simmering China-Taiwan crisis and supply disruptions are hurting economic growth worldwide, leading to poor demand, experts say. The pinch from slowing external demand is going to get more painful for Indian economy in the months to come.

Trade deficit continues to remain all-time high

The decline in exports also fueled the trade deficit. The trade deficit, which is the gap between exports and imports, widened to $26.91 billion from $25.71 billion in the previous month.  The trade deficit has remained above the $25-billion mark for a fifth straight month. As the accompanying chart shows, apart from a small blip in March and September, the trade deficit has been rising persistently in 2022. It was USD 17.94 billion in January and jumped to USD 31 billion in July.

The reason is simple: domestic factors are sustaining economic growth in India leading to an inevitable surge in imports, apart from high crude oil prices. The IMF's energy price index which includes prices of crude oil, natural gas and coal has doubled from 156.2 in June 2021 to 330.8 in September 2022. These three form the bulk of India's imports. Besides, imports of other commodities has also swelled as demand is slowly moving back to pre-pandemic period.

A looming global recession means that growth in exports will be a tough challenge. According to analysts, the current account deficit of India will almost certainly cross 5 per cent of GDP in the current year. That is definitely a worrying signal. Analysts reckon that unless value of crude oil, coal, fertilisers and gold doesn’t come down substantially, the trade deficit for this year would comfortably surpass $ 250 billion.

Thanks to a weakening Rupee and the exit of short term investors from Indian stock markets, the total foreign exchange reserves have fallen by a significant $110 billion to USD 530 billion in the last few months. Most analysts expect that the investors would not be back in a hurry as they are exiting all emerging markets; not just India. In the event, it becomes critical that the dollar inflows though foreign direct investment and through remittances maintain their momentum.

Although some parameters has shown hope for our economy. As mentioned above, imports in the country has increased suggesting growing domestic consumption. This is good news for the consumer market. Besides, as per latest figures, both the retail inflation and food inflation has declined significantly. The industrial production is increasing and consumer sentiments is at record high.