India : "Trading" a Difficult Path

The Ministry of Commerce and Industry recently published the trade data for June 2020, and unlike that of any other period, this has caught everyone’s attention.

According to the report, we saw that for the first time in 18 years, India has recorded a monthly trade (predominantly talking about merchandise trade over here) surplus - that of $790 million. This essentially means that in June 2020, India was a net exporter of goods. The last monthly trade surplus that the country had recorded, way back in January 2002, was $10 million.

In this short article, we will try to break this down and find out what caused this surplus, especially amidst the current socio-economic turmoil.

Before we do that, let’s just see at a very high level, what trade balance or Balance of Trade (BOT) is. It is nothing but the difference between a country’s exports and its imports. When trade balance is positive, the country is a net exporter having a trade surplus. On the other hand, a negative trade balance means the country is a net importer having a trade deficit.

The current account balance includes not only the trade balance but also several other factors. Typically though, the trade balance constitutes a sizable part of the current account balance.

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Now that we have cleared the terminologies, we will get down to investigating the key drivers behind the current development.

In the report published for June 2020, the total trade in India amounted to $43.02 billion. This includes $21.91 billion in exports and $21.11 billion in imports, leading to a surplus of $0.8 billion. The total trade has seen an increase of ~$2 billion compared to that in May 2020.

How have the figures changed?

Data shows that the total exports have gone down by 12.67% YoY - it was $25.01 billion in the same period last year. But its effect has been trumped by a more significant reduction in the total imports - imports have contracted by a substantial 47.6% YoY, from $40.29 billion of trade imports that were recorded in June 2019.

Exports have seen a YoY decrease for certain commodities, notably in, gems and jewelry, leather products, RMG, Petroleum products, Cashew, Milk and Dairy, etc. while, encouragingly, have recorded a growth in commodities such as Iron ore, oilseeds, rice, oil meals, spices, etc.

Imports, however, have dwindled in almost all types of goods: Gold, Coke, Coal and Briquettes, Petroleum, Crude and products, Electrical and non-electrical machinery, electronic goods (from maximum to minimum, in terms of YoY contraction).

Now overall trade, at a very high level, has two major components: merchandise trade and trade in services.

While we have been mainly talking about the merchandise trade in the article, the trade in services has also seen a surplus of $6.83 billion in May 2020 (the data for June hasn’t been released yet). The overall trade surplus (services+merchandise) is expected to be ~$11.7 billion for the period of April-June 2020, as compared to a deficit of $26.32 billion in the same period last year - an estimated 144% YoY increase in the overall trade balance.

Imports have been dwindling!

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Even though the exports have been decreasing since the start of the pandemic and the commencement of the lockdown, the rate of its contraction is slowly receding. It is likely to improve in the coming few months as more and more economies start to open up, and the supply chains start getting streamlined. Domestic production is also being encouraged and is likely to improve the export rate.

Such a significant decline in imports, however, is a red signal. This primarily speaks of a contraction in domestic demand, that has been amplified by the uncertainties surrounding COVID-19. Layoffs, pay-cuts, unemployment are slowly leading to more and more people consuming much less than the pre-COVID levels.

With the way things are going, India might end FY2021 with a trade as well as a current account surplus. We need to remember that all this comes at the back of a Current Account Surplus (marginal surplus, i.e, relative to the previous quarter) of $0.6 billion recorded in the last quarter of FY2020 and the same trend is expected to be seen as we move into FY2021. This would lead to India ending FY2021 as a net exporter.

We also need to keep a close eye on international relations with China, and how the fact that it is gradually deteriorating is having an adverse effect on the Sino-Indian trade relations.

Any sanctions imposed on India’s part would lead to a decrease in imports and a temporary increase in the CAB. But such sanctions would be met by retrospective sanctions on our exports to China, which would then bring the CAB down.

All of these might even lead to an appreciation of the INR, but the RBI would want to rein in on any such excess gain. With India still a predominantly Current Account Deficit (CAD) country, a more than required strong rupee would inadvertently affect exports. We need to remember that the relationship between the exchange rate of a country’s currency and a country’s trade is cyclic - the exchange rate affects trade surplus or deficit, which, in turn, affects the exchange rate.

Interestingly though, the trade surplus and the investments on Jio are leading to an increase of Forex reserves in the country!