What trade data show

For the period April to November in the current financial year (2022-23 or FY23), India’s merchandise exports stood at $295 billion as against $266 billion during April-November 2021. India’s merchandise imports for the period April-November 2022 were $494 billion as against $381 billion during April-November 2021.

What to look for in trade data?

There are three main variables — exports, imports and the trade deficit. The deficit is nothing but the difference between exports and imports. Typically, India tends to have a trade deficit every year because it imports far more (in terms of value, measured in $) than it exports.

A trade deficit implies that Indians need dollars more than the rest of the world needs rupees for the trades to settle. As such, a trade deficit puts pressure on the rupee’s exchange rate against the dollar (presuming that all imports require payment in US dollars). Persistently high trade deficits tend to weaken the rupee’s exchange rate.

Within the exports and imports trend, apart from knowing whether exports (and imports ) are growing or contracting, it also matters whether the growth (or contraction) is happening more on account of a change in the total volume of goods traded or because the prices of the goods traded are changing.

For instance, it is possible that India’s exports of a particular commodity, say bananas, doubles in value terms ($ terms) not because India exports more bananas, but because the price of bananas in the international market has doubled. Similarly, it is possible to double the volume of bananas exported without registering any growth in exports in value terms because the price of bananas has halved.

Have exports rebounded from the October contraction?

Most observers believe that India’s export momentum remains weak. For one, the growth in November is just 0.6 per cent. This is lower than even the growth in recent months such as 5 per cent in September and 11 per cent in August.

Moreover, as pointed out in a recent research note by economists at Nomura research, “Export growth improved in November, but the rebound largely reflects the reversal of the effects of fewer working days (owing to Diwali in October this year vs November last year)”.

Simply put, since growth rate is calculated year-on-year or by comparing the performance over the same month last year, this November’s performance appears better because last year, Diwali was in November and that resulted in fewer working days and, as a result, lesser exports. It is over that smaller base that exports have grown by less than a percentage point.

That is why the rebound in exports is not a robust one. For instance, if one calculates the average export growth over October and November this year and compares it to what it was in the same two months last year, then exports register a contraction of almost 6 per cent.

What is causing the decline in exports growth?

The chart, sourced from Nomura Research, shows not just the trajectory of exports growth rate but also breaks it down by volume and price components. It removes the exports of oil to get a better understanding of the underlying trend of India’s exports.

The analysis shows that the bulk of the decline in India’s growth rate is being contributed by the fall in volumes exported. This is understandable to the extent that across the world, economies — especially those of India’s biggest trading partners such the US and European countries — are either in recession or struggling to grow. This, in turn, implies a fall in demand for Indian goods that reflects in weaker exports growth.

What about India’s imports?

As the similar chart on imports shows, the decline in imports growth has been more a balanced effect of declines in volume and prices. Overall, imports grew by just 5.4 per cent in November and import growth fell sharply over the past few months. In August, imports grew by almost 42 per cent; since then they have decelerated to 15 per cent in September, 10 per cent in October, and 5.4 per cent in November.

The fall in imports growth suggests that India’s domestic demand is weakening as the effect of a tighter monetary policy — that is, the higher interest rates and their drag on overall consumption and investment demand.

What about the trade deficit?

The gap between the exports and imports line in the chart shows the fluctuation in trade deficit every month since the start of the current financial year in April.

On the face of it, the trade deficit narrowed in November. But as the data show, this narrowing has happened because the loss of momentum was more in India’s imports than in India’s exports. The more desirable way to bridge the trade deficit is for exports to grow relatively faster than imports.

India’s trade deficit during April to November stood at $196 billion. As the chart shows, this is considerably higher than the trade deficit in the same period in any of the last 10 years. It is more important to compare the FY23 performance with that in FY22 and FY20 because they are recent and more comparable years; FY21 was a clear aberration as a result of the breakdown of global trade in the wake of the pandemic.

Higher trade deficit will not only push up India’s current account deficit (which includes the trade in goods as well as services) but also create pressure on the rupee’s exchange rate to weaken further.