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Trade deficit for May 2021 falls to 8-month low of $6.3bn

* Trade deficit for May 2021 falls to 8-month low of $6.3bn:

India’s trade deficit for May 2021 fell to 8-month low of $6.28bn, more than halving from $15bn in Apr 2021 but doubling from $3.15bn twelve months ago. In year-on-year terms, faster growth in imports (74% y/y) compared to exports (69% y/y) led to the increase in trade deficit. However, in sequential terms, imports fell 15.7% while exports increased 5.4% leading to narrowing of trade deficit. The sharp double-digit growth in imports and exports in the past 2-3 months is because of low base effect. However, in value terms while imports are slowly reverting to their pre-pandemic mean, exports have surpassed pre-pandemic monthly average. This reflects faster growth in global growth compared to domestic growth.

* Out of total deficit of $6.3bn, oil deficit accounts for $4.2bn:

Typically, in ‘normal’ months, oil and non-oil items contribute equally to trade deficit. During Oct 2020 to May 2021, the share of oil and non-oil deficits in total trade deficit was broadly equal. However, in May 2021, oil deficit at $4.2bn accounted for 67% of total trade deficit while non-oil deficit came in at just $2.14bn or 34% of total deficit. This further highlights weak domestic demand for non-oil import items.

* Petroleum, engineering products, jewellery items drive exports:

In absolute terms, exports in May 2021 came in at $32.3bn, up from $19bn in May 2020, an increase of $13.2bn. Out of this, three categories viz. petroleum (28%), engineering products (23%), and gems & jewellery (14%) collectively accounted for 65% of the increase. Textiles accounted for another 10%, taking the contribution by top 4 categories to 75%. This data is interesting as it shows that all three categories of exports– commodities, investment and consumption items are driving export growth. However, in case of petroleum and engineering goods, rising prices of oil and metals seem to be driving the growth instead of just higher volume growth.

* Core exports grow 46%; labour-intensive exports grow 152% in May 2021:

Core exports (excluding petroleum and gems & jewellery) grew 46.5% in May 2021, much slower than the growth in total exports. This underlines the large role played by petroleum and jewellery exports in boosting total export growth. Core exports in May 2021 stood at $23.9bn. Labour-intensive exports (leather+ gems & jewellery+ textiles) grew 152% to $6.04bn, mainly driven by strong growth in jewellery exports.

* Petroleum, gems & jewellery account for half of imports growth; NONG import growth at 53%:

In absolute terms, imports increased to $38.5bn in May 2021 from $22.2bn twelve months ago i.e. an increase of $16.4bn. Out of this, petroleum ($6bn) and gems & jewellery ($2bn) accounted for half of the increase. Excluding these two items, non-oil non-gold (NONG) imports growth came in at 53%, full 20 percentage points slower than total imports growth. This again underlines the fact that real demand in the domestic economy is weak.

* Capital goods imports grow 31% on low base; gold imports fall to $679mn:

Imports of capital goods (base metals+ machinery+ transport+ project goods) grew 31% in May 202, albeit on a low base of -28% growth twelve months ago. Capital goods imports are likely to record good growth in the coming months as the base is low for the next 6-8 months. However, this growth in capital goods imports is more likely to be just normalisation instead of indication of genuine pick up in investment activity. Gold imports came in at $679mn ($76mn in May 2020, $6.2bn in Apr 2021) as lockdowns of varying degrees in several states and restocking of jewellers during Feb-Apr 2021 weighed on retail demand for the precious metal.

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