Both export and import growth in India moderated in the month of August. The fall remained more pronounced in exports, leading to the trade deficit staying elevated at $28.7 billion, down from $30 billion reported in July. So far in this financial year, the average monthly trade deficit has been around $26 billion. While moderating commodity prices and the uneven pace of growth recovery will affect import growth in coming months, analysts at Nomura believe that slowing global growth is likely to weigh further on India’s exports, and lead to persistently elevated trade deficits. The research firm raised its FY23 current account deficit forecast for India to 3.5% of GDP from 3.3% projected earlier. This is more than double of 1.2% recorded in the previous fiscal.
Export and import growth moderate in August
Exports slump continued last month as export growth fell to -1.1% year-on-year in August from 2.1% in July. On a sequential basis, exports further dropped by 4.8% after a 10.5% drop in July. Growth in oil exports moderated to 5.6% on-year from 9.1% in July, reflecting a continued fall in sequential momentum. The sharp fall in oil exports in July was attributed to the windfall taxes on petroleum exports, but the subsequent partial withdrawal at the end of July has not yet led to a material improvement, according to Nomura. Meanwhile, core exports fell 1.9% year-on-year in August, driven by a slump in engineering goods, textile products, gems & jewellery, and plastics exports. Electronic goods, rice, chemicals, and pharmaceutical export growth, however, remained robust.
Imports remained sticky in August as import growth moderated to 36.8% (year-on-year) in August from 43.6% in July. Sequentially, imports fell 5.4% in August vs 4.5% in the previous month, the second consecutive month of contraction. Crude oil import growth rose to 86.5% on-year from 70.3% in July, but on a seasonally adjusted basis, there was a drop. Gold import growth remained weak, while core import growth remained sticky at 40.4% on-year in August. Import growth remains elevated for coal, chemicals, plastics, vegetable oils, iron & steel, machinery and electronic goods.
External sector risks remain elevated
According to analysts at Nomura, despite the fall in both export and import growth, the deceleration in the former has been far more pronounced. The Nomura India Normalisation Index (NINI) for trade – that excludes base and seasonal effects – shows that export growth has fallen from a peak of around 48% above its pre-pandemic level (APPL) in June to around 26% in August. In contrast, imports have fallen from 78% APPL to 60% over the same period. High monthly trade deficits are increasingly becoming the norm rather than exception, according to the research firm. While the moderation in commodity prices, and the uneven pace of the recovery will weigh on imports, analysts suspect that overall demand will remain sticky.
Sharp deterioration in global growth prospects to weigh on export growth
They said, “our price-volume analysis for imports shows that despite the falling price effect, the volume effect has remained robust. The widening trade deficit is also owing to weaker export growth, which reflects an increasingly challenging global environment. Our base case assumes a recession in the US, euro area, UK, and a synchronised global growth slowdown”. The sharp deterioration in global growth prospects is expected to further weigh on export growth over coming months.
“Overall, these factors are likely to keep current account deficit (CAD) pressures elevated in FY23. We are revising up our FY23 current account deficit projection from 3.3% of GDP to 3.5% of GDP vs 1.2% in FY22,” they added. While FDI flows are likely to remain stable, they are unlikely to fully offset the weakness in FII flows, which should lead to a negative basic balance of payments, according to the Nomura report.