India: Exports Growth Resilient Amidst Geopolitical Challenges, Rising Trade Deficit

In an impressive start to the new financial year, India’s merchandise export in April 2022 has achieved a record monthly value of $38.19 billion, with a 24.22 per cent jump over $30.75 billion in April 2021, which is not only the highest ever exports in April but also a continuation of the record-breaking streak of 2021-22, defying formidable geopolitical constraints.

Led by a whopping 113.21 per cent increase in export of petroleum products, 64.04 per cent increase in export of electronic goods and 26.71 per cent increase in chemicals export, India’s outbound shipments have grown significantly in April 2022, as per the provisional data of the Ministry of Commerce and Industry released on Tuesday (3 May).

The government data puts value of non-petroleum exports in April 2022 at $30.46 billion, a growth of 12.32 per cent over non-petroleum exports of $27.12 billion in April 2021 while value of non-petroleum and non-gems and jewellery exports -- which comprises a basket of gold, silver and precious metals -- in April 2022 is seen at $27.16 billion which is a 14.38 per cent jump over $23.74 billion of export of the same items in April 2021.

The sobering thought beyond the headlines is a stubborn rise in trade deficit stemming from imports surpassing India's shipments despite a robust growth in overseas orders for Indian goods. India’s merchandise import in April 2022 has increased 26.55 per cent to $58.26 billion as compared to $46.04 billion in April 2021, taking the gap between export and import figures in April 2022 to $20.07 billion.

Value of non-petroleum imports was $38.75 billion in April 2022 showing a growth of 9.87 per cent over imports of $35.27 billion in April 2021. Imports of gold, silver and precious metals also grew to $34.43 billion in April 2022, a 29.68 per cent jump over imports of the same in April 2021.

The non-gold trade deficit widened multifold to $17.5 billion in March 2022 from $5.1 billion in March 2021, driven by petroleum products, coal and electronic goods and partly by the spike in commodity prices following the Russia-Ukraine conflict. All this is part of a prolonged upside in India's trade deficit figures which have ballooned from $118.37 billion in 2014–15 to $161.34 billion in 2019–20 and surged sharply by 87.5 per cent in FY 2021-22 over the last fiscal to reach $192.41 billion.

Aditi Nayar, chief economist of ICRA sees the April 2022 trade deficit as an ‘unsavoury yet expected fallout of the higher commodity prices engendered by the Russia-Ukraine conflict.' According to Nayar, although the non-oil trade deficit remained stable, there was a shift in its composition with a plunge in gold imports being offset by a rise in non-oil non-gold imports such as coal and chemicals.

For some comfort, the $20.07 billion deficit is below expert estimate of $22.8 billion and is attributed to the encouraging overshooting of exports which curtailed the trade deficit that otherwise would have been steeper.

This is a temporary reprieve going by a Nomura projection of India’s trade deficit staying elevated in coming months and the current account deficit widening to 2.6 per cent of GDP in 2022-23 from 1.7 per cent of GDP this year.

It bases the projection on the surge in oil prices amid a pickup in domestic demand, a consequent jump in India’s import bill aided by the broader rise in commodities and fertilizers and an anticipation that gold imports will remain high as investors look to hedge against market volatility and inflation. “Unless commodity prices recede appreciably, we expect the merchandise trade deficit to print above $20 billion in a majority of the months of FY2023,” Nayar cautions.

However, India could use all this geo-economics as an opportunity to significantly boost exports and narrow the deficit. The Asian Development Bank’s 2022 outlook report supports this. Elevated oil and gas prices due to the ongoing Russia-Ukraine war may have put direct pressure on the rest of the world, but it can help boost India’s exports this year, the report highlights.

“Rising oil and commodity prices, as well as a depreciating Indian rupee may provide an impetus to exports, especially petroleum products and food products,” according to the report. This will be helped by various schemes from the government, including the flagship Production Linked Incentive (PLI) scheme, the ADB added.

A closer look at trends in India’s exports of top 10 major commodity groups in April 2022 clearly indicates that the country is gradually moving towards becoming a manufacturing powerhouse in the world which complements the PLI schemes. Data shows engineering goods logged a 15.38 per cent jump over exports in April 2021, organic and inorganic chemicals grew 26.71 per cent over exports in April 2021 and drugs and pharmaceuticals grew 3.93 per cent over April 2021.

As a top performer, the engineering goods sector contributes more than 25 per cent in India's $400 billion plus exports and is seeing a continuity in the growth momentum set in the last financial year, according to Mahesh Desai, Chairman of Engineering Export Promotion Council India. “Exports of engineering items in value terms stayed above US$ 9 billion in April and recorded 15 per cent year-on-year growth,” Desai points out.

The other top grossers in the April 2022 export show were cotton yarn/fabs/madeups, handloom products etc. which saw exports jump 5.05 per cent over shipments in April 2021, RMG of all textiles whose exports grew 16.42 per cent over April 2021 and plastic and linoleum whose exports were 4.28 per cent higher than that in the corresponding month of 2021. Interestingly, export growth of gems and jewellery saw a year-to-year decline of 2.11 per cent in April 2022 while that of rice saw a y-o-y 14.24 per cent decline in the first month of the fiscal.

Indian would also be betting on the new free trade agreements which government believes will help tap more export markets, enhance volume of exports and curtail the trade deficit to pave way for a $5 trillion Indian economy by 2025.

India cannot achieve this without strong backing from the external sector and is hence urgently pursuing FTAs to large markets that are performing below their potential. With the UAE and Australia deals wrapped up and parleys on with the United Kingdom, EU and Canada, India can aim at larger outbound consignments of goods and a potential “$1 trillion of exports by 2030,” according to Commerce Minister Piyush Goyal.

Of course, the intent to enhance exports to bridge the trade deficit needs to be supported by policy interventions to help exporters buffer against the lurking pandemic-led uncertainties, alarmingly high oil prices and geopolitical turbulence in some regions.

India would have to offer robust, long-term solutions for the high logistics cost and unprecedented increase in raw material prices in order to strengthen India’s export capabilities and bring trade deficit under control.

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