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India’s real exports declined in May’22

…but real imports saw a strong increase

* Notwithstanding the strong 20.6% YoY growth in merchandise exports, India’s trade deficit stood at a record high of USD24.3b in May’22, led by a massive growth (62.8% YoY) in imports. Although such trade deficits are unsustainable, higher exports reflect strong domestic production, while higher imports suggest strong domestic demand. To understand these implications more carefully, we have segregated the impact of price inflation and estimate India’s real exports and imports.

* Based on 28 major commodities, each accounting for over 90% of exports and imports, our calculations suggest that India’s real exports shrank by 1.9% YoY in May’22, marking its first fall in eight months. On the other hand, real imports grew by 21.4% YoY in May’22, its first growth in three months.

* Non-oil non-gold exports grew by 0.6% YoY, its 15th successive growth, and NONG imports rose by 9.3% YoY in May’22.

* It implies that while nominal exports grew by 25.5% YoY in Apr-May’22, following a surge of 44.7% in FY22, real exports rose by only 2.9% YoY in Apr-May’22, following a growth of 21.4% in FY22. While nominal exports have posted a growth of 8.5% in FY20-22 (during the COVID-19 period) v/s 8% in the pre-COVID period (FY17-19), real exports have grown slower at 1.2% v/s 3% during the corresponding period.

* While nominal imports grew by 45.5% YoY in Apr-May’22, following a surge of 56.1% in FY22, real imports rose by only 6.4% YoY in Apr-May’22, following a growth of 13.3% in FY22. While nominal imports grew by 6% during the COVID-19 period v/s a growth of 10.5% in the pre-COVID period, real imports actually declined by 2.2% v/s a growth of 4.8% over FY17-19.

* A look at the 25 major export commodities suggests that as many as 15 of them declined in real terms in May’22, including five of the largest 10 items. While exports of petroleum products/textiles grew 61%/10% YoY in May’22, they fell 12.8%/2.1% YoY in real terms.

* As many as eight of the major import commodities declined in May’22, including two of the 10 largest items. The real imports of ‘coal, coke and briquettes, etc.’ and ‘vegetable oil’ contracted in May’22, but grew 172%/18.8% YoY in nominal terms.

* This exercise of broadly separating the impact of price inflation from the nominal exports and imports confirm that the average growth (of 1.2%) in India’s real exports during the past few years(FY20-22) is weaker than the pre-COVID period. It means that nominal exports have to continue to grow for many more years. We hope that the decline in real exports in May’22 is an aberration.

* While real imports posted very strong growth in May’22, there has been an average contraction (of 2%) in the COVID-period as compared to ~5% growth in the pre-COVID period. It confirmsthe narrative of a weak recovery in domestic demand and the very important role that inflation has played in driving the record high trade (crossing USD1t for the first time in FY22) in India during the past many months.

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