July’s provisional trade data should trigger early warning signals among policymakers, as the first year-on-year contraction in exports in 17 months, albeit marginal, and a 44% jump in imports, sharply widened the trade deficit to a third successive monthly record. The export performance is of concern, reflecting a slowdown in overseas demand for Indian merchandise, the competitive advantage gained by the rupee’s sizeable depreciation against the U.S. dollar notwithstanding. While the Commerce Ministry has sought to explain away the 0.8% slide in last month’s exports as largely being a result of inflation-control curbs, the Ministry’s preliminary disaggregated data suggest several key sectors including engineering goods, gems and jewellery, garments and yarn and textiles, and drugs and pharmaceuticals, which were mostly outside the purview of those measures, also suffered contractions. And viewed on a sequential basis, the slide in exports from June’s level is a disconcerting 12.2%. Engineering goods, which at more than 26% represented the largest share of merchandise shipped overseas in July, contracted 2.5% from a year earlier and also shrank 2.9% sequentially. Even granting that the Government’s introduction in late May of a stiff export tax on a range of steel products, with a view to boosting their domestic availability and cooling price gains, was likely to have constrained exports of this segment of engineering goods, the contraction in the broad category points to a clear slowdown in demand in the advanced economies.
The latest S&P Global PMI data from the U.S. and the eurozone for economic activity in July is also far from reassuring. As per the PMI data, output across Europe’s major economies sharing the euro as common currency shrank for the first time since February 2021 as a worsening manufacturing downturn combined with a slowdown in the service sector to drag the composite index into contraction territory. The U.S. economy, which has now contracted for two successive quarters putting it on the edge of a recession, saw manufacturing PMI post its lowest reading in two years as output and new orders declined in July. Given that the U.S. and the eurozone combined consumed almost a third of India’s goods exports in the last fiscal year, the prospect of July’s export slowdown deepening as demand in these markets weakens appears increasingly more likely. Imports continued to expand at a robust clip, driven largely by the expanding domestic demand for essentials including crude oil, coal, edible oils and electronic items. Coal and coke alone exceeded $5.1 billion. The augury from the trade data is that the external sector faces increasing vulnerability as the burgeoning trade deficit is set to swell the current account deficit, adding pressure on the rupee at a time when portfolio investments from overseas have been negative, and foreign direct investment has been significantly weaker.
