InvestorQ : How do you see the impact of the rising trade deficit in May 2022?
sarah Leo made post

How do you see the impact of the rising trade deficit in May 2022?

Rashi Mehra answered.
11 months ago

Trade deficit for May 2022 came in at a record high of $24.29 billion. To understand the evolution of this higher trade deficit, let us first look at the exports and the imports. Exports have average around $40 billion in the last 3 months despite the global supply chain constraints. In May 2022, exports of goods grew by over 20% on a yoy basis. However, the exports were lower on a sequential basis by 3.11% compared to April 2022. What is it that drove this smart performance in the exports in May 2022?

Some of the star performers on exports front were Petroleum Products, Coffee, Leather products, Electronic Goods, Oil Meals, Cereal preparations, Textiles, Jute, organic and inorganic chemicals. However, there were some laggards too. Some of the segments where the exports of the goods lagged include Iron ore, cereals, Cashew, Handicrafts, Plastics & Linoleum etc. Overall, exports showed good traction and have grown visibly over 2020.

But the real challenge for India is on the merchandise imports front. For instance, the merchandise imports for May 2022 came in at $63.22 billion and the growth was much steeper than the exports. Oil continues to drive the growth in imports but the growth was also visible in the other problem areas like coal, coke and gold which are adding to the pressure imports. In fact, for the month of May 2022, the crude oil imports accounted for one-third of the basket.

In addition, the import surge was visible in other items of the import basket like Silver, Gold, Coal, coke & briquettes, Crude, Raw Cotton, leather products and pulses. However, some goods like Project Goods, Professional Instruments, Medicinal Products and Machine Tools. Gold imports were a concern in May 2022 at $6.05 billion. The problem for the RBI is that gold is an unproductive item of import but does eat away the forex resources of the government of India. That led to a trade deficit of $24.29 billion for May 2022.

Till now we have only looked at trade from a merchandise trade perspective. A better way to look at trade is from the perspective of goods and services. If you consider the period of April and May combined, the overall trade deficit of goods and services combined stood at $27.30 billion. That could translate into a full year overall deficit of more than $150 billion, in the process putting a lot of pressure on the current account and sovereign rating. The rising imports and falling forex cover also creates a problem.