Merchandise exports rose 23.5% in June from a year before even on an unfavourable base but a steep 57.6% jump in imports on the back of elevated global commodity prices drove up trade deficit to a new monthly record of $26.2 billion.
With this, trade deficit in the June quarter jumped to a record $70.8 billion, way above that of $31.4 billion in the same quarter last fiscal, according to the provisional data released by the commerce ministry on Thursday.
This will likely inflate the country’s current account deficit for the first quarter of FY23 to more than 3% of GDP, compared with 1.5% in the previous quarter, according to some analysts.
Given the fears of recession in top markets (US and the EU), which have contributed immensely to India’s stellar export performance in FY22, external demand for Indian merchandise may falter in the coming months. The global supply chains, despite some improvement in recent weeks, still remain tangled.
Of course, with softening commodity prices, some pressure on the CAD front is expected to ease in the second half of this fiscal. Moreover, the dramatic rise in imports for a second straight month (even without oil and gems & jewellery, imports jumped as much as 38.3% in June) signals improving domestic demand that had remained subdued for months in the wake of the Covid outbreak.
Exports increased to $40.1 billion in June, a record for the third month of any fiscal, and the growth is slightly higher than May’s 20.6%. Core exports grew 8.7% in June, against 8.6% in the previous month but well below 19.9% in April.
But imports spiked to $66.3 billion from $42.1 billion a year before, driven by a 99% jump in purchases of oil and petroleum products, 261% in coal and 183% in gold.
A spurt in prices inflated petroleum and coal import bill substantially, while massive gold imports were partly driven by jewellers’ bid to build inventory to cater for some pent-up demand. This is partly because many marriages were last year postponed to 2022 due to the pandemic, as pointed out in the finance ministry’s economic report for June. Fitch Ratings has already warned of a doubling of India’s CAD in FY23 to about 3.1% of GDP. Of course, senior government officials have assuaged concerns about financing the CAD.
Among high-value segments, the rise in exports in June was led by petroleum products (119%), followed by electronics (61%) and garments (50%).
Aditi Nayar, chief economist at Icra, said while the elevated trade deficit for June poses some upside risks to the CAD for Q1FY23, “the correction in commodity prices has softened the outlook for the ongoing quarter, even though export growth may undergo a slowdown amidst a weaker outlook for the global economy. She projected a modest downsides to our FY23 CAD forecast of $105 billion or 3% of GDP.”
A Sakthivel, president of the apex exporters’ body FIEO, said the spike in imports is a matter of concern. However, the decent export growth “indicates the strength of the export sector amidst challenging ongoing geo-political and rising global uncertainties”.