June marked yet another weak month for India’s external trade trajectory. This time, the pressure seems to be evident both on the goods and services side. The goods trade deficit remained at above $20 billion in June even as it dropped sequentially. Services trade surplus narrowed to $11.2 billion in June—the lowest so far in 2023, showed government estimates.
A deeper look hardly offers much comfort. For instance, on the goods trade front, both headline exports and imports contracted sharply in June, with the pace of decline being much sharper than the trend seen in recent months. Even stripping of the volatile components of oil, gold and gems and jewellery, both core exports and imports posted double digit year-on-year (y-o-y) decline.
View Full Image
While the muted export story has been playing out lately, this time the sharp deceleration in import also warrants some caution. Particularly, as the drop in the latter is broad-based, with 21 out of 30 key sectors seeing a contraction. To be sure, a sharp 82% y-o-y rise in gold shipments, accounting for roughly 9% of the overall import basket, held the fort for overall imports.
Further, stress is visible across import of some heavyweight consumer and capital expenditure related goods like organic and inorganic chemicals, electrical and non-electrical machinery, iron and steel and machine tools that had hitherto held up well. But it is premature to draw concrete conclusions from the June data. Even so, if the trend sustains, it could be an early signal of slowing domestic economic momentum. This comes amid spillover from weakening global growth, strong external headwinds and transmission of Reserve Bank of India’s (RBI) monetary tightening on aggregate demand.
On the services side, export growth has been on a downtrend since early 2023 and dropped to a low of 0.7% y-o-y in June. This has culminated in a sizeable narrowing in services surplus, a pillar of economy’s current account balance and foreign exchange earnings.
“The trend in services exports is likely a reflection of slowing software exports, with domestic IT companies seeing weakness due to the unfavourable macro environment in major DMs,” pointed out a 14 July Emkay Research report.
And that’s not all. Another crucial support for the current account—foreign inward remittances from Indians working abroad—is also likely to face headwinds this year.
According to a World Bank report, after topping $100 billion in 2022, growth in remittances to India is likely to slow to 0.2% y-o-y in 2023, owing to job cuts in high income economies and easing oil prices along with likely growth slowdown in Gulf countries.
These pressure points could get a saving grace from capital inflows channel. A rebound in foreign portfolio inflows into Indian equities lately has provided the much-needed optimism. But some concerns remain on the long term and relatively resilient foreign direct inflows (FDI). In FY23, net FDI inflows fell to a nine-year low and the downtrend continued with a 48% y-o-y contraction in April this year, showed RBI data.
It is still too early to ring the alarm bells. External sector challenges have been largely under wraps, owing to easing commodity prices capping import bill and robust services exports. This has lent support to the rupee.
However, recent trends show that these dynamics are not completely immune to global headwinds and growth slowdown.
Even as India’s trade deficit may remain capped, a revival in services exports and sustained recovery in long-term FDI inflows will be crucial to ensure a lasting stability in the rupee.