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Motilal Oswal Report
In the first nine months of FY23, India's merchandise trade deficit widened to $215 billion from $136 billion in nine months-FY22. It means that the merchandise trade deficit stood at 8.6% of gross domestic product in 9MFY23, the worst in a decade and higher than 6% of GDP in FY22.
In Jan-23, however, it narrowed substantially and unexpectedly to $17.7 billion, compared to the Bloomberg consensus of $23.5 billion. Is this a one-off or could it narrow substantially in CY23/FY24? We believe the latter is true and this note explains why.
A look at details suggests that as much as 86% of the widening in the trade deficit in 9MFY23 was attributed to commodities – 55% by energy (fuel and coal) and another 31% by non-energy items (including edible oil, fertilisers, base metals and plastic and rubber).
The deficit in precious metals (i.e., valuables) narrowed by $4 billion to $30 billion in 9MFY23.
Assuming that commodity prices in the near future stay where they were in Feb-23 (since risks are balanced), there will be sharp contractions in prices of energy (down 24%), fertilisers (down18%) and edible oil (down 6%), with a modest rise in prices of precious metals and base metals (up 2-3%).
This should keep India's merchandise imports down for the next six-eight months. With expectations of weak economic environment, we expect India's merchandise imports to fall faster than exports, keeping the trade deficit subdued.
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