Trade Deficit May Widen Amid Global Volatility

The sequential decline in exports resulted in a widening of the trade deficit in January.

The trade deficit, or gap between imports and exports, rose to $ 22.9 billion in January from $ 21.94 billion a month earlier.

The higher deficit was mainly due to a sequential export decline, while imports stayed steady. Gold imports fell to a six-month low of $2.7 billion, as gold prices surged in January. Both, oil imports and oil exports, declined sequentially.

The core deficit rose to a five-month high of $13.4 billion, with core imports rising on the month while core exports fell. However, core export growth remains healthy and higher than that of core imports on a three-month moving average basis, reflecting better global demand. Major export categories continued to see healthy YoY growth. Within core imports, Electronic Goods, and Electrical and Non-electrical Machinery registered strong YoY growth.

The services trade surplus for January rose to a record high. Exports rose by 5 per cent on a monthly basis, with imports rising by 2 per cent. Services exports are likely to be robust for the current fiscal, with growth having picked up again after a slowdown led by non-software services, which continues to see healthy growth while software services exports grow at a mid-single-digit rate.

As per Trade Secretary Sunil Barthwal, "India's merchandise, and services exports are doing extremely well. Electronics goods are driving exports, followed by drugs, pharmaceuticals, and rice."

Emkay maintains FY25 CAD/GDP at 0.9 per cent, with possible downside risk due to better-than-expected net services exports growth. Oil imports are likely to rise only 4 per cent in the current fiscal, despite the recent uptick in Brent prices. Non-oil exports have also shown healthy growth thus far, led by Electronics amid the continued smartphone export boom.

Analysts expect this to rise 5 per cent. With non-oil imports expected to rise at a lower rate, goods trade deficit/GDP should track at 7.1 per cent from 6.9 per cent a year ago. Separately, the still robust services exports, including IT Services, and the solid emerging space of GCC-led business consulting and financial services will continue to help prop up the current account.

Growth in non-IT Services should remain strong in the fiscal as well, even as IT Services exports growth could moderate to a mid-single-digit and remittances may be flat. With capital flows in equities turning negative in the fiscal, while index-led debt flows remain healthy, BoP could move to a mild deficit. FDI flows will stay tricky, but India remains the top global greenfield project destination, no matter if the flows were slower a year ago, and may see flows improve.

Overall, experts see financing needs being manageable, while the external environment is volatile, with various push-and-pull factors likely to play out over the rest of the year. For the next fiscal, analysts expect CAD/GDP to widen to 1.1-1.2 per cent, with the goods trade deficit widening to 7.2 per cent of GDP amid tariff-led upheaval in global trade.