The much narrower trade deficit for January, of $17.8 billion compared with $22.1 billion in December, may seem comforting. However, in reality, neither can the fall in exports of 6.6% y-o-y—much sharper than the 1.6% in Q3FY23—nor the drop in imports be good news. Both price and volume effects are at work. The softer prices of commodities, coupled with subdued investments domestically, are pulling down imports.
Should commodity prices get softer, the pace of deceleration of imports could be faster than that of exports. Right now, exports are unlikely to see any major spike in the near term and could end FY23 at levels similar to those in FY22. Although core exports (excluding oil, gold, gems, and jewellery) may have contracted less in January than they did in December, the fall of 7.5% y-o-y suggests the global environment is weak. Worryingly, the environment could worsen since the economic conditions in Asia (ex-Japan) are not yet to improve meaningfully despite the rebound in China; Asia’s export down-trend, economists believe, is yet to trough out.
India’s exports to China, Japan, and the rest of Asia are under pressure, as seen in the data up to December. Moreover, exports to the US moved into negative territory, albeit by a small amount. What would hurt India’s employment is that exports of labour-intensive goods, such as those made from leather are under pressure. Weak exports from sectors such as chemicals too are worrying. An analysis by Nomura shows that shorn of base and seasonal effects, exports have come off sharply; currently, they are about 24% above the pre-pandemic levels—down from the peak of 50% in June.
Imports fell 3.6% y-o-y in January, with core imports (non-gold, non-oil) coming down across the investment and consumption categories. The fall was sharper than in December. Imports of consumption goods are coming down—especially items like jewellery—possibly because demand is tapering off post the festive and wedding seasons. However, if fewer machinery and machinery tools are coming into the country, it would suggest that manufacturing and investment aren’t picking up pace. Importantly, in some encouraging news, gold imports plunged by 71% in January. Adjusting for base and seasonal effects, total imports are currently 27% above the pre-pandemic levels, down from 67% in June last year. Concerns around the current account deficit (CAD) should narrow further over the course of the next few months, driven not merely by moderating crude oil prices but also by a real trade-weighted depreciation of the rupee and the rise in policy rates. From 4.4% of GDP in September last year, most economists expect the CAD to end FY23 at about 3% of GDP and trend lower to around 2.4-2.5% of GDP in FY24. As such, the concerns are shifting to the capital account. For one, the investments in tech startups have decelerated sharply over the past few quarters; they fell to $24 billion in 2022 from $41 billion in the previous year. Also, there is some uncertainty on fund flows; so far in 2023, we have seen outflows of $3.6 billion from the equity markets and inflows of less than $1 billion into the bond markets. There is no cause for alarm on the external front, given exports of services continue to do well. However, the government must work to ensure exporters don’t lose markets that they can’t win back; all support must be provided.