India’s trade deficit has clocked $24.8 Bn a month in FY23 so far. At this rate, the FY23 full year deficit can reach $298 Bn or ~8.5% of GDP. FY13 recorded the highest trade deficit ($190Bn) ever at 10.4% of GDP. A crisis year.

What’s ailing the foreign trade?

This is how India’s trade balance has moved over the years.

What is the major source of trade deficit for India? Last 10Yr avg deficit is $150 Bn

1. Crude oil (Petroleum or POL) ~$80Bn per annum over the last 10 years. In bad years it goes to $100 Bn or more, in good years it falls to $52 Bn. What’s the 2nd biggest source of deficit?

2. Electronic goods: ~$40 Bn p.a. deficit over the last 10 years, but $50 Bn over the last 5 years and $60 Bn last year. This year the run rate if already at $66 Bn. These two items (Petroleum and electronic goods) explain more than 3/4th of India’s trade deficit problems.

There are also two balancing items India’s Agri trade has an avg annual surplus of $17 Bn and, Textile + Readymade garments add another $30 Bn p.a. in surplus. These are the only two areas where India has a meaningful surplus. We haven’t grown in either in over a decade.

Last 10 year Avg annual numbers Imports: $460 Bn Exports: $310 Bn Deficit: $150 Bn All the three numbers can vary massively depending on volatile commodity and end product prices.

If you look at the averages, we do a monthly trade deficit of about $12.5Bn. This is business as usual (BAU). Nothing special. But in FY23 so far, we have seen a monthly trade deficit of $24.8 Bn (2x of our long term avg) and last four months has seen this number at $27 Bn. Alarming.

What has changed so dramatically? In BAU years our monthly Oil trade deficit is around $6 Bn a month. In FY23 so far it has jumped to $10.5 Bn. When you take the past Oil spike years of FY12-13 and FY19, the avg monthly RR used to be $8.5 Bn. This extra $2 Bn is discomforting.

For Non-Oil trade there is a more dramatic change. In BAU years, Non-POL trade deficit is about $5.5Bn a month. In FY23 it has shot up to $14 Bn. This is a more than 2-fold jump. What has caused this jump? The answer to this question is the key.

Three clear trends are visible

1. Electronic goods imports have increased. Deficit is up 10% y-o-y and vs long term avg.

2. Chemicals & related products deficit is up 3-fold over last year and vs long term avg

3. Engineering goods exports have dropped from $10bn to $7.5Bn a month

Why? Domestic demand has been robust, and demand has recovered. This has caused local businesses to import inputs at higher prices. Supply side problems has also led to an increase in import prices. This trend is visible even in WPI number, though it is now receding.

Global demand has been weakening which explains dwindling India exports. Engineering goods exports, which is one fourth of all exports that India does has declined back to monthly run rate seen in May 2019 of $7.5 Bn.

A $27Bn a month trade deficit is not sustainable. Steady FDI, increased Banking capital and a restart of FPI inflows has helped India’s BOP to remain stable so far. But how do we exit this high trade deficit regimen?

Historically we have seen two things play out-

1. Domestic economy slows, which causes India imports to drop and stabilize the trade deficit.

2. Global demand recovers and allows India’s exports to provide breathing space. There is another odd combination which is possible….

A large drop in global commodity prices due to slowing global growth. If this is combined with steady India domestic growth, it is what is called ‘decoupling’. We haven’t seen this happen over a long period. But never say never. What does the data tell us, for now?

Data says

1. India domestic demand is steady. Even post festive season demand downtick is minor for now.

2. Global commodity markets are aligning to lower demand and therefore prices are falling gradually.

3. Supply side pressure is easing. This can take away the added pressure

India’s trade deficit numbers need to fall, the current levels are too high. There are signs that this pressure may ease, but they are not definitive, though probable. Commodity prices needs to fall to ease this pressure.

This will have a bearing on the Indian Rupee. So, what to watch? Since manufacturing goods trade is a gradual process, the only joker in the pack now is Oil & commodity prices. A thumb rule: If Oil prices fall below $75 Brent, this mathematics will shift back in India’s favour.

This articles was presented by @sahilkapoor as a thread on his twitter account. Thanks Sahil, of great help to educate the youth.