The story so far: Having crossed a record $400 billion mark in 2021-22, India’s exports have moderated in the first quarter of this year, with May and June clocking upticks of 20.6% and 16.8%, respectively, slowing from a 30.7% rise in April. Sequentially too, overall goods exports declined for the third month in a row in June, even as imports continued to rise sharply, triggering fresh peaks for India’s monthly trade deficit.

How has the merchandise trade balance changed in recent months?

While India’s exports were surging last year, imports were rising too, according to the Ministry of Commerce. Total goods exports in 2021-22 amounted to $422 billion, up sharply from the pre-COVID levels of $313 billion in 2019-20. This was the highest ever export number, and marked the first time in years that an official export target ($400 billion) was not only met, but surpassed. Imports hit a fresh high of $613 billion, compared to $394 billion in the pandemic affected previous year and $475 billion before that. The trade deficit thus stood at $191 billion, nearly double of 2020-21.

The chasm between exports and imports has widened in the first quarter of this year, with the cumulative trade deficit already hitting $70 billion, translating into an average of $23.3 billion a month. By contrast, the previous highest monthly trade deficit was $22.9 billion in November 2021. That record has been surpassed significantly in the past two months, with the deficit hitting $24.3 billion in May and peaking to a new high of $25.6 billion in June. Economists reckoned the deficit was higher on a seasonally adjusted basis, with Nomura analysts estimating that it stood at $25.8 billion in May and widened to $29.9 billion in June. Economists at HSBC Securities and Capital Markets (India) pegged the trade deficit even higher in seasonally adjusted terms, at $31 billion from $26 billion in May.

In value terms, imports jumped for the fifth month in a row to a fresh record of $63.6 billion in June, 51% over the same month a year ago and 6.9% higher than May’s tally, which in turn was 7.3% over the value of April’s inbound shipments. On the other hand, exports slid 2.6% from May’s $38.9 billion to $37.9 billion in June.

What is driving up imports and denting exports?

While Russia’s continuing conflict with Ukraine since late February this year has propped up commodity prices globally, the spill over effects of runaway inflation are hurting global growth prospects as well as trade demand. The ‘lacklustre’ exports in June reflect an underlying slowdown in external demand, with weakness seen in exports of engineering products, chemicals, pharmaceuticals, cotton yarn and plastic products, Nomura said in a note. Outbound shipments for these four categories, part of India’s top ten exports, contracted. While petroleum exports were still up a sharp 98% from June 2021, they were $0.7 billion lower than May 2022 levels. And though exports of readymade garments, electronics and rice remained healthy, non-oil exports fell for the second successive month in June on a seasonally adjusted basis, HSBC cautioned in a note on Tuesday. “…We find that in volume terms, low-skill exports like agriculture and textiles have weakened more than high skill exports like engineering goods and pharma,” said its chief economist Pranjul Bhandari (along with co-authors).

Imports, on the other hand, have literally been fuelled by energy sources — oil and coal, with the former driven by higher prices and the latter driven by India’s domestic coal supply crunch compelling power producers to import more each passing month. The volatility in financial markets and the sharp inflation have also driven up imports of gold — considered a safe haven and hedge against price rise. Coal imports were up 242% in June, gold by 170% (after a dazzling 789% uptick in May), and crude oil imports grew over 94%. But non-oil, non-gold imports (also known as core imports) also grew by a robust 31.7% in June — spurred by higher inflows of plastics, chemicals, electronics and vegetable oils. While higher prices are feeding a large part of the increase in headline imports, import volumes are also growing in line with steady domestic demand, Nomura analysts argued.

What will determine the trade trajectory through the rest of the year?

With several developed economies expected to fall into recession over this year, the dip in exports could accelerate in coming months. The fresh taxes and restrictions imposed on petroleum exports could weaken outbound volumes further, while Indians’ appetite for gold may not be dented much by the higher import duties levied by the Centre last week. Oil and gold prices may have corrected a bit recently, but still remain significantly high. Moreover, coal imports will only surge further as Coal India’s production levels slide through the monsoon. The weakening rupee will continue to make imports costlier while slowing exports may not be able to capitalise enough on it. Indian exporters don’t expect a change in the narrative till the war in Europe abates, along with the high volatility in commodity prices. Economists at Nomura and HSBC expect ‘record high trade deficits’ to remain the norm for India, for now. But India is not alone, and can perhaps, take solace from the fact that even super-exporter Germany recorded its first trade deficit in 30 years this May, albeit a minor one.