July trade deficit could cross record $31 billion

July Trade deficit widens to $31 bn
July Trade deficit widens to $31 bn

by 5paisa Research Team Last Updated: Dec 13, 2022 - 05:58 pm 20.1k Views

India may have a trade problem on hand. According to the latest estimates put out by the Ministry of Commerce, the merchandise trade deficit for the month of July could cross (hold your breath), $31 billion. In June, the merchandise deficit had crossed $26 billion and that was a record of sorts. So, the trade deficit in July is likely to be higher than June by about 20%. What is more scary is that the merchandise trade deficit for FY23 now stands at $100 billion, in the first 4 months, with negative implications for current account deficit.

The corresponding merchandise trade deficit in July 2021 was just about one-third this current month figure at $10.63 billion. The data is still provisional and the final data will be released only in the middle of July by the Ministry of Commerce. But, as we have seen in the last few months, the merchandise trade deficit has only been a snatch wider than the early estimates. So, we could well and truly end up with a merchandise trade deficit that is above $31 billion for the month of July 2022. 

For the month of July 2022, the provisional data indicates that imports were marginally higher but the exports actually tapered lower. For instance, the merchandise imports came in at $66.26 billion for July 2022 as per provisional estimates while the exports came in at $35.24 billion for the month. This pegs the merchandise trade deficit at around $31.02 billion, although the final figure could be slightly different. The widening of the trade deficit can be largely attributed to elevated global commodity prices. 

In addition, the weakening of the rupee has also resulted in higher import bills. India still imports nearly 85% of its crude oil needs on a daily basis. The rupee has weakened in 2022 from 73/$ to 80/$, although there has been some respite from these levels. The weakness in the rupee also means that India ends up importing inflation from other countries. Commodity inflation has benefited exports too. However, since India relies heavily on imports of crude oil, the impact of commodity inflation gets pronounced.

On a sequential basis, compared to June 2022, the exports for July 2022 were sharply lower by 12%. However, the import bill was largely unchanged and that is what led to the sharp widening of the trade deficit. While the government looks quite confident of total exports for the year touching $500 billion, what looks more likely is the merchandise trade deficit getting closer to the $300 billion mark. Last year, it may be recollected, was the first time that merchandise exports touched $400 billion and total trade crossed $1 trillion.

Let us look at some of the comparative export numbers for extrapolation. For the full fiscal year FY22, India’s merchandise exports stood at $429.2 billion. In the first four months of FY23, the merchandise exports are standing at $157 billion. By extrapolating that number we could get closer to $470 billion for the full year, so a stretch to $500 billion levels is perfectly possible. However, if that is driven by the spike in commodity prices, then India will also have a steep price to pay in the form of a higher merchandise trade deficit.

There have been several practical reasons for the fall in exports. For example, due to the sanctions imposed on Russia, India’s exports to Russia had virtually halved. At the same time, Sri Lanka which has been a key export market in South Asia, recorded zero exports as the island nations struggles with its own internal problems. The only bright spots that stood out in the export basket were electronic goods and rice; rising 46% and 30% respectively. However, in absolute terms they are less than 7% of the total export basket.

The story on the import side is almost the same old story. The big pressure on the trade deficit came from the elevated levels of imports of petroleum products and coal. In July 2022, India imported petroleum products to the tune of $21.13 billion; a spike of 70% on a yoy basis. Coal imports are up a whopping 164% yoy at $5.18 billion in the month of July 2022. The worry is that trade deficit has touched $100 billion in first 4 months against a full year trade deficit of $189 billion last year. That is the real worry.

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