Trade deficit widens to $23.3 billion in May 2022

In the last 2 years, as India worked hard to extricate itself from the lag effect of the pandemic, there was one saving grace. That saving grace came in the form of exports which have not only grown robustly over the FY21 levels but also over the pre-COVID FY20 levels. It is in this context that the monthly trade data becomes relevant. In FY22, Indian reported total exports of $422 billion and total trade of over $1 trillion; both all-time records.

Just a word on these provisional trade numbers. Normally, the actual trade numbers for merchandise goods is put out by the Ministry of Commerce around the middle of the month. The services trade is announced by RBI with a lag of one month. In the last few months, government has been releasing the provisional trade figures for the month based on early trends although the final numbers are still announced in the middle of the month. 

Let us now talk about the numbers for the month of May 2022. India's merchandise exports rose by 15.46% to a level of $37.29 billion. This export growth was largely driven by healthy growth in the export of petroleum products, electronic goods and chemicals. In fact, last year, India even touched record levels of exports for electronics, chemicals and also for textiles, where the PLI scheme boosted exports to $44.4 billion for the full year.

However, it is not just the exports but even the imports have been extremely strong in May 2022. As per the provisional figures put out by the Ministry of Commerce, imports for May 2022 were up by 56.14% at $60.62 billion.

This resulted in the merchandise trade deficit widening to $23.33 billion for the month of May 2022, close to record highs. This is giving an indication that the full year trade deficit could be closer to $250 billion in FY23.

What were the triggers for this sharp surge in imports for the month of May 2022. Actually, there were 3 major drivers of imports in May 2022. Firstly, petroleum and crude oil imports for May 2022 were up 91.6% YoY at $18.14 billion, or nearly 30% of total import bill.
 

One item that has been surging amidst domestic shortages and rising global prices is the import of coal, coke and briquettes which jumped to $5.33 billion. The problematic gold imports for May 2022 were also sharply higher at $5.82 billion on surge in jewellery demand.

How does the trade picture look on a cumulative basis for the first two months of FY23? For the April-May 2022 period, the exports were up 22.26% YoY at $77.08 billion. During the same 2-month period, the imports were up by a whopping 42.35% at $120.81 billion. Consequently, for the first two months of the fiscal FY23, the trade deficit has cumulatively more than doubled to $43.73 billion.

There have been some positive takeaways in the export mix in that it is not just about petroleum products but new product lines are seeing expanded exports. For instance, in May 2022, the export of engineering goods was up by 7.84% YoY at $9.3 billion.

This was followed by a sharp growth of 52.71% in export of petroleum products at $8.11 billion. There also was an increase in exports of gems and jewellery to $3.1 billion and export of chemicals at $2.5 billion in the month of May 2022, based on provisional figures.

One factor that will be foremost is the cover that India has on the forex reserves front. At the current run rate, India should close the year with total imports in the range of $720 to $750 billion. With the forex reserves of $596 billion, the average cover is about 9.5 months of merchandise imports. That is slightly disconcerting considering that India still is a predominant import driven economy.