India’s external position resilient despite pessimistic global trade outlook
Global trade is projected to end the year 5 per cent down compared to 2022’s record levels, shrinking by about $1.5 trillion to below $31 trillion, according to UNCTAD’s latest Global Trade Update.
The outlook for 2024 remains “highly uncertain and generally pessimistic”, UNCTAD says in the Global Trade Update released on December 11, citing factors like ongoing geopolitical tensions, escalating debt, and widespread economic fragility.
Other elements weighing on trade include lower demand in developed countries, less trade in East Asia, an uptick in trade-restrictive measures, commodity price volatility and lengthening supply chains, particularly between China and the United States.
The report shows that global trade patterns are increasingly influenced by geopolitics, with countries showing preferences for politically aligned trade partners, a trend termed “friend-shoring”.
The trend has become more pronounced since late 2022. Meanwhile, the geographical proximity in international trade — nearshoring or far-shoring — has remained relatively stable.
The report also highlights a marked increase in trade concentration.
“There has been an overall decrease in the diversification of trade partners, indicating a concentration of global trade within major trade relationships,” it says.
The Global Trade Update notes a significant uptick in 2023 in trade-restrictive measures, especially non-tariff measures (NTMs).
It says the increase is driven by a resurgence of industrial policies and the pressing need for countries to fulfill climate commitments. These factors have prompted countries to favor policies that support domestic industries and reduce reliance on foreign supply chains.
India’s current account deficit stood at $8.3bn (1 per cent of GDP) in Q2FY24, lower than $9.2bn (1.1 per cent of GDP) recorded in the first quarter of the current fiscal as well as $30.9bn in the same quarter last year, driven by lower goods trade deficit and expansion in services surplus, says Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
The lower CAD for the period over last year has been supported by a fall in trade deficit in the quarter to $61bn compared to $78bn in Q2FY23.
Private transfers remained robust, as per the report. Remittance by Indians employed overseas amounted to $28.1bn in the quarter, being the major contributor to the credit of current account.
FPI flows while remaining positive came down in Q2FY24 compared to the previous quarter on the back of a rise in US yields and higher uncertainty. FDI flows turned negative for the first time since Q2FY20.
India’s external position remains resilient, the report said: The current account deficit for the first half of FY24 stood at 1 per cent of the GDP compared to 2.9 per cent of GDP recorded in H1FY23.
With the trade deficit narrowing and service surplus remaining steady, the current account deficit for the entire fiscal is expected to be around 1.5 per cent to 2 per cent of GDP.
India is expected to receive record remittances during the fiscal, higher than $110 billion recorded in 2022-23.
While an expansion in services surplus has supported the current account, the expanded trade deficit from October 2023 and November 2023 accompanied by weak portfolio flows in the first half of Q3FY24 will result in a higher deficit in the coming quarter, it added.