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India’s trade deficit improved further to USD 17.4bn in Feb’23, as the decline in imports helped cushion the trade deficit to the lowest levels in last one year. The decline in exports (- 8.8%) was led by petroleum products (-29%) and chemicals (-12.3%) however the decline in NoNG exports indicated sluggish global demand environment. Sharp sequential uptick in gold imports (278% MoM), NoNG imports (2.5% MoM) indicates an uptick in domestic demand environment. Our expectation of CAD at 2.1% of GDP for FY23 and 2.6% for FY24 is on the back of India’s beneficial position on falling crude oil and robust services exports.

* Trade Deficit at its lowest in last one year: India’s merchandise trade deficit narrowed further to USD 17.4bn in Feb’23 vs USD 17.7bn in Jan’23. The deceleration in exports (- 8.8%) was sharper than in imports (-8.2%), however on an absolute level the decline in imports helped cushion the trade deficit to levels not seen in last one year. Oil deficit widened to USD 10.2bn in Feb’23 after a dip in Jan’23 (USD 9.7bn).

* Decline in exports led by petroleum and chemicals: The pace of decline in exports widened further in Feb’23 (-8.8% YoY vs -6.6% YoY in Jan’23). Of the top five commodities which constitutes 63% of the total exports, a decline (YoY) was reported in Engineering Goods (-10%), Petroleum goods (-29%) and Chemicals (-12%) while exports of gems and jewellery (14%) and Drugs and Pharma (5%) grew (Ex. 5). The decline in exports was mainly led by petroleum products and chemicals. Non-Oil and Non-Gold exports fell for 2nd month in a row (-6.4% vs -7.5% in Jan’23), indicating a sluggish demand environment globally. Although gold imports have grown 3.7% on 3Yr CAGR basis, exports of Jems and jewellery has risen by 6%, indicating a pick-up in skilled labour.

* Slowing Imports cushions trade deficit: The deceleration in imports has been way sharper than we had anticipated, although this decline has cushioned our trade deficit it may also indicate weakness in demand. The decline in gold imports on an annual basis (-45%) may optically seem constructive; however the sharp sequential growth (278% MoM) to USD 2.6bn from the lows of USD 700mn indicates an uptick in gold demand with the onset of the wedding season. On a YoY basis, the Non-Oil Non-Gold (NoNG) imports grew 2.5% YoY in Feb’23 with a sequential growth of 2.7% MoM, reverting from the sharp decline in Jan’23 (-67% YoY, -10.8% MoM), hinting towards a pickup in domestic demand.

* Robust growth in services exports continues in Feb’23: India’s trade surplus in services improved further to USD 14.6bn in Feb’23 vs USD 13.8bn in the previous month; while on a FYTD23 basis, services surplus grew by a robust 35.5% YoY to USD 125.5bn. Services exports of Rs. 29.15bn reported robust growth (37%) in Feb’23 while the growth in imports (Rs. 14.55bn) picked up further to 12.3% vs 7.6% in Jan’23. As per the RBI data on India’s Balance of payments (BoP), software exports forms ~47% of total services receipts and almost entire services surplus is attributable to software services export.

* Falling crude oil and robust services exports puts India in a beneficial position: Recent developments in the US around the failure of two regional banks have once again given rise to expectation of an imminent recession. The negative reaction in the commodities market, especially crude oil (down to USD 73.7/bbl) should be positive for EM economies including India. Further pickup in Russia’s share (27%) in India’s crude imports indicates India’s beneficial position (Ex. 3). Additionally the recent growth in services exports seems defying gravity and contrary to the narrative that a slowdown in DM economies would moderate the software exports. Considering the above beneficial position, we expect the CAD for FY23 at 2.1% of GDP while for FY24 it should be at 2.6% (Ex. 8).

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