At $190 billion, FY22 trade deficit near previous record, but less onerous now

India’s merchandise trade deficit is set to breach the earlier record of $190 billion by a whisker in the current fiscal. But a close look at the data suggests the deficit, as a percentage of overall merchandise commerce, is still way below the earlier peak.

Trade deficit already hit $188.2 billion as of March 21 this fiscal. At this rate, it’s expected to touch 19% of overall goods trade in FY22, compared with a record 24% in FY13, 23% in FY12 and 20.5% in the pre-pandemic year of FY20 (See chart). In the last fiscal, however, given a Covid-induced demand compression in the economy, imports shrank at a much faster pace than exports, leading to a drop in deficit to just 15% of overall merchandise trade.

However, deficit in the second half of this fiscal grew dramatically, especially in the third quarter, as domestic demand had rebounded before the Omicron onslaught in January. This keeps up pressure on the current account deficit (CAD) at a time when foreign portfolio investors have turned net sellers in recent months.

Pronab Sen, noted economist and former chairman of the National Statistical Commission, said while the export sector has performed well in FY22 the more important question is whether this growth in outbound shipments (37% year-on-year) will sustain. Moreover, imports went up sharply this fiscal, partly because an income distribution in favour of the richer segment of population in the wake of the Covid outbreak led to higher purchases of (imported) luxury goods, Sen added.

Analysts also said if exports lose pace in the next fiscal and imports continue to rise, the pressure on the current account will only rise.

Aditi Nayar, chief economist at Icra, expected the CAD to have crossed 3% in the October-December 2021 period for the first time since the June quarter of 2013. However, it may recede somewhat in the ongoing quarter. In absolute terms, she estimated the CAD at $25-28 billion in the third quarter, and a moderately lower $20-23 billion in Q4 FY2022.

Bank of Baroda chief economist Madan Sabnavis estimated the CAD to be around 3% in the third quarter, which may ease to 2.5% in the March quarter.

Merchandise exports exceeded an ambitious target of $400 billion for FY22 nine days before the fiscal is set to end, staging a smart rebound after a 7% drop last fiscal due to the pandemic.

Exports jumped 37%, albeit on a contracted base, to $400.8 billion as of March 21, driven by a stellar performance by sectors like engineering, electronics, gems and jewellery, chemicals and petroleum products. Imports during this period, too, rose sharply to $589 billion, driven by a spike in oil prices and massive purchases of coal and gold.

However, the Ukraine crisis has now posed fresh risks for exporters, as global supply chains remain tangled and shipping costs have skyrocketed across countries. Of course, it has also created some opportunities for Indian suppliers of wheat (Russia and Ukraine are large exporters of the grain) and some other farm commodities in the export market.