InvestorQ : What is your take on the record trade deficit reported in the month of June 2022?
Mahima Roy made post

What is your take on the record trade deficit reported in the month of June 2022?

1 month ago

I must admit that the news on the trade deficit front is not too enthusing. The Ministry of Commerce had already warned at the beginning of the month that trade deficit would be at a record level. June 2022 happened to be the fourth successive month that merchandise imports stayed above $60 billion. But the real shocker was that the trade deficit touched a record $26.18 billion. That means, India could end FY23 with a possible trade deficit of $280 billion, which would put a lot of pressure on the current account.

Here are 3 things that we read from the trade numbers

a) On a yoy basis, the exports scaled up 23.52% while imports are up 57.55%. This huge gap in growth of exports and imports explains why the merchandise trade deficit is widening so rapidly. In the first quarter ended June 2022, the overall trade deficit (merchandise trade and services trade combined) is at $45 billion. Here, an overall deficit of around $180 billion for the full year is going to impose huge pressure on the CAD.

b) The real issue now is on whether the forex reserves are insufficient to cover the rising imports. Let us look at some of the numbers. For instance, total merchandise imports for FY23 could touch $750 billion. India has around $580 billion in forex reserves and this number is falling rapidly by over 10% over last few months as the RBI defends the rupee. This forex chest just about covers 9 months of merchandise imports, which is shaky.

c) The export growth is lower than the import growth on a yoy basis and also on a mom basis, which is where the momentum is shifting in favour of imports. Merchandise exports for June 2022 were up 23.52% yoy $40.13 billion on a yoy basis. However, on a sequential basis, the exports were still up 3.06%l, despite headwinds like China lockdown, Ukraine war, commodity inflation etc. Imports rose 57.55% to $66.31 billion on yoy basis and on a sequential mom basis was up 9.97%. That explains the rising gap.

Twin worries for Indian trade

These are the 2 factors to watch out on the trade front in terms of emerging risks.

· GDP growth for China in the second quarter ended Jun e2022 was just 0.4%. That is likely to put pressure on consumer and industrial goods demand, since it is the predominant buyer of most products. Tepid production in China will also go and impact the supply chains across the world and have a deep imprint across, including in India.

· One big fear is the risk from too much hawkishness by the Fed. June inflation in the US has come in at 9.1% so it looks like the FOMC may hike rates by 75 basis points for sure with an outside possibility of 100 basis points. This has heightened fears of recession and could very well have an impact on industrial demand, impacting global demand.