According to figures issued by the Commerce Ministry on November 15, India's merchandise trade imbalance increased to an all-time high of $31.46 billion in October, up from $19.41 billion in September. While exports increased by 6.2 percent to $33.57 billion, imports increased by 12.3 percent to $65.03 billion. Imports, like the trade imbalance, reached an all-time high in October.
"India's merchandise trade deficit was a surprise in October." While we had expected a widening of the trade deficit with the start of the holiday season and the September spike in crude oil prices, the actual print surprised us much on the upside clocking," QuantEco Research economists said.
Apart from the delayed effect of the September increase in crude oil prices, the massive increase in the trade deficit was also due to the festive season, which sees a surge in demand for gold. India's gold imports were up 95 percent year on year in October, totaling $7.23 billion. The year-on-year comparison for gold imports was skewed due to a change in the festival calendar in 2023, with Diwali falling in November this year rather than October in 2022. India, the world's largest gold importer, anticipates an uptick in gold purchases ahead of Diwali. Gold imports are up 5.5 percent year on year in 2023-24, totaling $29.48 billion.
With the 'Diwali effect' behind us, the trade imbalance is projected to fall further, with the figure for November hovering around $23 billion-25 billion. Overall, economists see little cause to revise their predictions for the full-year current account deficit.
"While the April-September 2023 CAD is tracking at less than 1.2 percent of GDP, October-December started on an ominous note, with likely widening in trade deficit versus the previous two quarters," Emkay Global Financial Services' Madhavi Arora and Harshal Patel wrote in a note.
"However, the current reduction in oil and gold prices is positive, and overall commodity prices are projected to remain lower than in 2022-23... "We maintain our 1.4 percent of GDP CAD estimate for 2023-24," they added. A CAD of 1.4 percent of GDP in 2023-24 would be around $53 billion. India's CAD in 2022-23 was $67 billion, or 2% of GDP in that year.
This year's CAD is expected to be between 1.3 and 2.0 percent of GDP, according to economists. The CAD was $9.2 billion in the first quarter of 2023-24. The second-quarter data will be available at the end of December.
While the product trade deficit expanded, the services trade surplus increased to $14.38 billion in October, the biggest so far in 2023, from $13.84 billion in September and $11.88 billion in October 2022.
"Despite the slowdown in software services demand, the support to services is coming from Global Captive Centres, providing engineering, research and development services," Elara Capital said in a press release.
Underlying Figures
Although there are no CAD worries at this time, the underlying numbers for October trade data have raised some red lights.
Export increase of 6.2 percent was supported by a positive base effect, with October 2022 having fewer working days due to Diwali, according to Nomura's Sonal Varma and Aurodeep Nandi. This helped to disguise exports' sluggish sequential momentum.
"However, we note continued excellent performance in electronics, as well as early signs of recovery in engineering goods, textiles, and chemical (including pharmaceutical) exports... According to our data, both export and import volumes are increasing," Varma and Nandi stated. According to Emkay Global Financial Services' Arora and Patel, the drop in October shipments from September reflects "somewhat uneven external demand."
"This is in contrast to the rest of Asia, where exports fared relatively well in October." However, most significant Asian nations are tech-led and often benefit from a tech cycle upturn. "However, India's exports are commodity-oriented and have not seen the same gains as other Asian export hubs," Arora and Patel added. While external demand is sluggish, record high imports indicate that Indian demand for foreign goods is holding up, even when gold is excluded.
"Domestic demand conditions have held up better than external demand, resulting in net non-oil, non-gems, and jewellery imports widening over the last few months," stated IDFC First Bank's India Economist Gaura Sen Gupta.
"Indeed, over May to October, net non-oil, non-gems and jewellery imports have averaged at $10.3 billion per month versus $6.7 billion per month over January to April." Sen Gupta forecasts a monthly goods trade deficit of $25 billion for the remainder of 2023-24, with domestic demand staying more resilient than external demand.
