Trade deficit for August lower, but CAD risk still there

Trade deficit at $28 billion
Trade deficit at $28 billion

by 5paisa Research Team Last Updated: Dec 13, 2022 - 09:40 pm 16k Views
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Trade deficit for August lower, but CAD risk still there

The good news is that India's merchandise trade deficit for August 2022 at $27.98 billion is lower than the $30 billion reported in July 2022. However, on a yoy basis, this is still much higher and risks taking the current account deficit (CAD) to the range of 4% to 5% in a worst-case scenario. Exports have really struggled and for the month of August 2022, the merchandise exports grew marginally by about 1.62% to $33.92 billion. The exports were hit by several supply chain factors, but we will come back to that point later.
For the cumulative five months of FY23 from April 2022 to August 2022, the exports registered a growth of 17.68% to $193.51 billion. However, during the same period, the merchandise imports grew by 45.74% to $318 billion. Now that translates into a whopping trade deficit for the first 5 months of $124.52 billion. If you annualize this number, India risks getting close to $300 billion of trade deficit for the full fiscal year FY23. You realize the impact when you see that in April-August trade deficit was just about $53.78 billion.
The big villain of the piece was once again crude oil which saw a spike in imports by 87.44% to $17.7 billion. Even silver imports and the imports of fertilizers and ores were higher on a yoy basis. The good news is that gold imports dipped by about 47% to $3.57 billion, although this could change sharply once the festive season commences and the demand for jewellery picks up steam. Among key contributors to the import spike in August 2022 were coal, coke and briquettes (up 133.64%), chemicals (up 43%) and vegetable oil (up 41.55%).
Several specific products saw a sharp spike in exports during the month of August 2022. At a granular level, the export of petroleum products surged 22.76% to $5.71 billion, while chemicals exports rose by 13.47% to $2.53 billion and pharma exports also was up 6.76% at $2.14 billion. However, exports of engineering goods, gems & jewellery, ready-made garments of all textiles as well as the export of plastics showed negative growth. Meanwhile, even ICRA has raised the concern that if this trend continues then the current account deficit (CAD) could touch a high of 5% of GDP in FY23.
One of the big challenges has been handling the slowing of exports, which has been hit by factors like recession fears, reduced spending in other countries, growth impact in major client countries etc. In addition, the spike in COVID cases and its zero-tolerance approach has created a situation where the world continues to be starved of key inputs and that is causing a lot of supply chain constraints. Of course, the shortage of containers is back and the big sufferer is Indian exports. That will be the big challenge for Indian trade in FY23.

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