Trade balance: Services offset weak goods exports as deficit widens

By: Shantanu Bhattacharji

Merchandise and services exports totalled $70.67 billion, marginally exceeding last year’s $70.02 billion, highlighting the growing importance of services in mitigating the impact of a widening goods trade deficit.

India’s merchandise trade deficit narrowed unexpectedly to $21.94 billion in December, below the $27.33 billion predicted by experts, offering a rare break in what has been a year of widening trade imbalances. Exports reached $38.01 billion, while imports amounted to $59.95 billion. This improvement follows a recalibration of import data, notably due to a $11.7 billion overestimation of gold shipments from April to November, which had inflated November’s deficit to a record $37.84 billion. This correction shows systemic issues in trade reporting and highlights the country’s exposure to volatility in precious metal imports.

Despite December’s improvement, the broader trend of rising trade imbalances—peaking at $37.84 billion in November—remains a concern, driven by fluctuations in global demand and New Delhi’s heavy reliance on imports. India’s dependency on gold, as the world’s second-largest consumer, adds further strain, particularly during the festive and wedding seasons when demand surges. Additionally, India imports 80 per cent of its crude oil requirements, exacerbating the trade deficit.

In December, merchandise exports fell slightly to $38.01 billion, down from $38.39 billion in the same month the previous year, reflecting subdued demand from key global markets. Meanwhile, imports rose to $59.95 billion from $57.15 billion, driven by higher crude oil and comm

odity prices.

However, services sector continues to shine, with exports rising to $32.66 billion in December from $31.63 billion a year earlier. Imports in the services sector also grew to $17.50 billion, up from $15.63 billion, driven by strong global demand and India’s growing integration into global value chains. The combined value of merchandise and services exports reached $70.67 billion, slightly surpassing last year’s $70.02 billion, highlighting the critical role services are playing in offsetting pressures from a widening goods trade deficit.

For FY24, merchandise exports totalled $437.06 billion, a dip from $451.07 billion in FY23, while imports dropped to $677.24 billion from $715.97 billion. The contraction in goods trade reflects global demand softening and fluctuating commodity prices. On the contrary, services exports rose to $339.62 billion from $325.33 billion in FY23, while service imports fell slightly, contributing to a favourable trade surplus in services. This helped reduce India’s overall trade deficit to $78.12 billion in FY24, down from $121.62 billion in FY23.

Despite these gains in services, the stagnation in goods exports emphasises the need for structural reforms to revitalise the manufacturing sector. Analysts put stress on the urgency of targeted interventions to restore balance in the trade portfolio and capitalise on emerging global trade opportunities.

Looking ahead, services sector is set to outpace merchandise exports by 2030, according to the Global Trade Research Initiative (GTRI). The report projects services exports to reach $618.21 billion by FY30, slightly surpassing merchandise exports, which are forecasted to total $613.04 billion. From FY2019 to FY2024, services exports have grown at a compound annual growth rate (CAGR) of 10.5 per cent, nearly double the 5.8 per cent CAGR for merchandise exports, signalling the increasing dominance of services in export profile. The growth is driven by key segments like software, IT services, and other business services (OBS), which together accounted for 86.4 per cent of total services exports in FY24. Software and IT services alone contributed $190.7 billion, or 56.2 per cent, of total services exports in FY24, positioning India as a global leader in this sector.