Why India’s trade surplus is a warning signal

The RBI has released India’s balance of payments data for the fourth quarter (January-March) of 2019-20. It shows that during this quarter, India has managed a small current account surplus which is around 0.1 per cent of the GDP. Breakup of the data show that the surplus in the current account is largely driven by a lower trade deficit. This trend has continued and data from the Commerce Ministry show that for the months of April and May 2020, India’s trade balance has improved further and has turned positive after many months.

This is a rare occurrence because since 1976-77, there has not been a single year when India did not incur a substantial merchandise trade deficit. A high trade deficit tends to pose a concern for both the government and the RBI. Thanks to the surplus on account of invisibles, emanating mainly out of services exports and remittances, India’s substantial trade deficit turns into a moderate current account deficit (comprising both merchandise trade and invisibles).

But why do we always tend to have a trade deficit? Tautologically, our inability to export more and import less can be held responsible. Our lack of export dynamism in comparison with our East Asian neighbours is well-known. On the other hand, large imports of oil, gold, and electronics have chronically inflated our import bills. Thus, any news of a reduction in trade deficit is often greeted with an expectation that it may represent some dynamism of the Indian economy. Is such exuberance connected with a reduction in trade deficit always justified? Current trends in international trade raise some serious questions.

Recently released trade data from WTO show that the Covid crisis has had a severe impact on international trade. As the world went into a lockdown, it severely affected economic activities everywhere. Estimates by the WTO suggest that for the second quarter of 2020 — a period when the lockdown was in place — the global trade is likely to suffer a year‑on‑year drop of around 18.5 per cent. This is one of the steepest falls in international trade on record. Along with the lockdown, the WTO attributes this decline to the growing geopolitical and trade tensions.

India’s trade also suffered. India’s merchandise trade (exports plus imports) has gone down from around $66 billion (average of January and February 2020) to $27.48 billion in April before recovering to around $41.25 billion in May (see Table).

India’s trade data

In comparison, India’s total merchandise trade in May 2019 was $75.25 billion, implying around a 45 per cent decline in May 2020 compared to the same month last year. Merchandise exports declined by around 36.3 per cent, but merchandise imports suffered a more significant decline and shrunk by more than 51 per cent. Though the numbers in May 2020 show an improvement in trade performance compared to April 2020, it is possible that some of the increases in May are due to the release of held-up consignments at the ports.

The impact on trade in services, however, is much less severe. After all, services trade in India is dominated by IT/ITES exports, that are less susceptible to disruptions in logistics. The average trade in services for January and February 2020 was around $33 billion. The corresponding figures for April and May are $28.3 and $24.2 billion, respectively. Compared to the same month last year, services exports declined by 13.7 per cent, and services imports declined by 26.12 per cent.

Given that the Covid-19 crisis has led to an almost complete shutdown of some major service sectors like airlines, hospitality, and travel and tourism, this relatively moderate decline in services trade is a relief. However, unlike merchandise trade, India’s trade in services shows a decrease in May compared to April.

Warning sign

Overall, India’s trade balance in April and May 2020 have turned positive. Some sections are lauding this ‘achievement’ of India. However, as the Table shows, this improvement in trade balance has been driven mainly by a sharper decline in imports. This is a warning sign for the economy as the decline in imports, especially in merchandise goods, points towards a contraction of demand in the real economy.

A look at the details behind the import contraction suggests that the decline in imports in May 2020 was led by mainly by a sharp decline in imports of gold (-98.4 per cent), petroleum goods (-72 per cent), coal (-44.9 per cent), electronics (-40.3 per cent) and machineries (-34.4 per cent). While declining petroleum prices and rising gold prices have affected the import patterns, the sharp decline in imports of fuel and machinery do indicate a severe demand slowdown in the economy.

Covid-19 is going to have a heavy toll on the economy. The foreign trade numbers give us an early warning of the impending slowdown. The World Economic Outlook of the International Monetary Fund, released on June 24, has indicated that India’s GDP is projected to contract by 4.5 per cent during 2020; if this turns into a reality, then this is going to be the second most severe contraction in post-Independence India. We are keeping our fingers crossed.

The writers are Professors, Economics group, at IIM Calcutta

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