By Yuvika Singhal, Vivek Kumar and Shubhada Rao
India’s merchandise trade deficit in November 2021 surpassed the number registered in September this year. While domestic demand has been improving, Covid situations in some overseas markets are yet to improve. The latest outbreak of the Omicron variant of Coronavirus too is becoming a growing concern.
India’s merchandise trade deficit touched a record high of $23.3 bn in November 2021. In comparison with the previous high in September 2021 that was driven by a relative outperformance of imports over exports, the record high print in November 2021 was on account of a relatively faster pace of sequential decline in exports vis-à-vis imports. The receding Covid wave has helped to revive domestic demand while a resurgence in infections (esp. in Europe) is prompting a tightening of lockdown restrictions in some countries.
Meanwhile, the rapid spread of the Omicron variant of the virus in a few countries is a matter of concern as it will have trade implications globally via the channels of price as well as demand. While we hope to get some clarity on the virulence in the coming weeks, some upside to our forecast of India’s FY22 current account deficit of $40 bn has emerged.
As per preliminary estimates of India’s merchandise trade data, the monthly trade deficit touched a record high of $23.3 bn in November 2021 from $19.7 bn in October 2021. While both exports and imports moderated sequentially in November 2021, the relatively sharper decline in the case of exports, led to a widening of the trade deficit.
- Exports came off from its record high of $35.7 bn in October 2021 to $29.9 bn in November 2021 (-16.2% MoM)
- Imports moderated to $53.2 bn in November 2021 from $55.4 bn in October 2021 (-4.0% MoM)
Key highlights of November 2021 data
While preliminary estimates do not provide detailed granularity, we can nevertheless look at a few important drivers:
- Moderation in exports was led by Gems & Jewellery and Petroleum Products that together accounted for ~58% of the sequential decline in headline exports. Besides these, drag also emanated from Engineering Goods and Chemical Products, which together accounted for ~33% of the sequential decline in headline exports. As such, the above four categories of products explained ~91% of the sequential decline in headline exports during November 2021.
- While imports of Petroleum Products have consolidated around $14.6 bn levels in the last two months, Gems & Jewellery decelerated sharply towards $6.5 bn in November 2021 from $8.5 bn in October 2021.
- Trade balance for Electronic Goods saw an improvement towards $4.3 bn in November 2021 compared to an average level of $5.6 bn seen during Sep-Oct 2021. This happened as imports moderated sequentially while exports showed a
- Coal imports created a new record high of $3.6 bn in November 2021 from its previous high of $3.3 bn in October 2021.
- Vegetable oil imports consolidated at an elevated level of around $1.8 bn for the third month in a row.
Inference and outlook
- Further increase in coal imports from record-high levels reflects the demand for augmenting domestic supplies amidst shortage in production by power plants. This could linger on for a few months as the power crisis on account of the coal shortage continues to persist despite some attenuation in its severity.
- Deceleration in case of import of precious metals and electronic items points towards waning of seasonal/festive demand.
- Excluding petroleum products and precious metals, India’s core trade deficit has been widening continuously for the last three months and stood at a record high of $8.4 bn in November 2021.
This highlights a relatively faster pace of improvement in domestic demand vis-à-vis external demand.
Comparing the two instances of record-high monthly trade deficit prints in September 2021 vs. November 21, we note that while the
former was driven by imports (petroleum products, electronic items, and vegetable oils, to name a few), the latter is primarily on account of the relatively higher magnitude of the sequential drop in exports (as outlined above).
This holds relevance for India as a receding Covid wave has helped to revive domestic demand while a resurgence in infections in a few countries (esp. in Europe) is prompting them to once again resort to some form of lockdown. While it is still early to say given scant information; the limited, but rapid spread of the Omicron variant of the virus in a few countries is a matter of concern.
We hope to get some clarity on the virulence and effectiveness of existing vaccines in the coming weeks. From a trade perspective, the Omicron variant could potentially hasten the process of tightening lockdown restrictions in some countries (esp. in Europe, which was under the grip of a severe reinfection wave already).
This will have a three-fold impact:
- External demand from India’s trading partners could see a moderation, thereby impacting exports. With India as of now going through its most lenient form of lockdown restriction, imports could remain relatively elevated amidst pent-up demand and revenge spending. This will provide a bias for the trade deficit to remain elevated in the immediate near term.
- Global commodity prices will come under pressure on account of a weaker demand outlook in the near term. We note that most commodity prices have corrected sharply with Reuters Commodity Index (CRB) falling by ~9% from its November 2021 peak levels. While this would impact both exports and imports, the price impact would dominate India’s import basket, thereby providing a bias for moderating its trade deficit.
- In the event of a severe impact scenario from the spread of Omicron, it is unlikely that India will remain insulated. In this case, lockdown restrictions could get re-imposed, thereby once again curtailing domestic demand and imports, and in the process, the trade deficit.
While it is difficult to gauge the magnitude of impact on India’s trade deficit in the coming months on account of heightened uncertainty with respect to Covid, in the immediate term, there can be a bias for the trade deficit to remain elevated. This can provide some upside risk to our existing current account deficit forecast of $40 bn.
(Yuvika Singhal is an economist at QuantEco Research. Vivek Kumar is an economist at QuantEco Research. Shubhada Rao is the founder of QuantEco Research.)
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