Export curbs, higher energy prices may spike trade deficit further in FY23

A combination of factors like the export curbs imposed by the government on agricultural commodities and metals, and a continued rise in the prices of crude oil, natural gas and coal is likely to worsen the country’s trade deficit in the current fiscal (FY23).

The country's trade deficit hit a record high of $190.7 billion in the last fiscal year (FY22), up 85.8 per cent year-on-year (YoY) from $102.6 billion, surpassing the previous high of $190.3 billion in FY13. The country's imports were up 55.3 per cent YoY to $612.6 billion last fiscal.

“While the prices of India’s key imports such as crude oil, natural gas, thermal coal and fertiliser remain high, the export of agriculture commodities and industrial metals could decline due to a mix of export restrictions and lower prices,” says Dhananjay Sinha, managing director (MD) and chief strategist, JM Institutional Equity.  

Last month, the government banned the export of wheat, and put severe restrictions on sugar export. The government followed it up by imposing an export duty of 15 per cent on steel in a bid to discourage its exports and lower prices in the domestic market.

The buzz in the market is that the government may put export restrictions on rice and cotton as well in the coming weeks if inflation remains high. Restricted commodities such as wheat, sugar and iron were the key drivers of merchandise exports in FY22.

According to India Ratings & Research India, merchandise imports are expected to grow to $182.9 billion in first quarter of the fiscal year from $168.1 billion in the last quarter of the last fiscal (Q4FY22). In the same period, exports are expected to inch up to $112.5 billion from $11.3 billion in Q4FY22. As a result, the trade deficit is expected to grow to $70.4 billion in Q1FY23 from $56.8 billion in the fourth quarter of FY22.

"This is due to normalisation of domestic economic activities, steep levels of commodity prices and inflated freight and transportation costs," writes Sunil Kumar Sinha, principal economist at India Ratings & Research.
 

Iron and steel were India's third-biggest export commodity in FY22 at nearly $23 billion, up 88.9 per cent YoY. It accounted for 5.4 per cent of the total merchandise exports in FY22 and 8.3 per cent India's overall merchandise exports last fiscal. India’s total exports were up 44.6 per cent YoY last fiscal year.

The exports of petroleum products ($68.6 billion) and gems & jewellery ($39.3 billion) exceeded the exports of iron & steel, but India remains a net import of both crude oil and precious stones and precious metals. In contrast, India is a net exporter of steel.

Similarly, sugar exports were up 61.6 per cent YoY to $5.1 billion in FY22 while exports of cereals including wheat and rice were up 27.4 per cent to $12.9 billion last fiscal. Other big export drivers were non-ferrous metals such as aluminium, copper and zinc, up 75.7 per cent YoY to nearly $14 billion and cotton up 70.7 per cent YoY to $10.8 billion in FY22.

Revenues from the export of industrial metals would also take a hit from a decline in metal prices. The China steel futures are down 3.1 per cent since the beginning of 2022 and down 13.4 per cent from March-2022 highs. Similarly, London Metal Exchange Index (LMEX) is up just 3 per cent year-to-date (YTD) and down 10.4 per cent from its March high. LMEX tracks the prices of non-ferrous metals such as aluminium, copper, zinc and lead among others.

On the import side, crude oil & pet coke, coal and natural gas were three biggest commodity imports worth nearly $195 billion in FY22 up 52 per cent YoY. India also imported $19.4 billion worth of edible oils & fats in FY22 up 71.2 per cent while fertilisers imports were up 85.7 per cent to $12.8 billion last fiscal.

The price of crude oil is up 59 per cent since the beginning of 2022 while Australia's Newcastle coal futures are up 133 per cent YTD and US Natural Gas futures are up 120 per cent since the beginning of the year. Similarly, fertiliser prices are up nearly 30 per cent since the beginning of the year according to the World Bank.

Similarly, there has been a global rally in the prices of key edible oils. The rally in these commodities will result in a further rise in India's overall import bill in FY23 leading to a rise in the trade deficit and worsening of the overall current account deficit.