Decline in IT exports, a setback to funding trade and current acct deficit

IT services are India’s single biggest export and a key source of foreign exchange. But there has been a sharp decline in the IT industry’s ability to fund India’s fast-growing merchandise trade deficit and current account deficit.

The net export of IT services funded just 30 per cent of India’s merchandise trade deficit in July, down sharply from 68 per cent in the year-ago period.

In the past 10 years, the net export of IT services, on average, has funded 57.5 per cent of India’s merchandise trade deficit.

The country’s net IT services export was $9 billion in July this year, up 20 per cent from $7.5 billion a year ago. In comparison, the merchandise trade deficit was up 173.4 per cent to $30 billion in July this year, from $11 billion a year ago.

Net export is gross export minus gross import. When the value of imports exceeds the value of exports, the country runs a trade deficit as has been the case with India’s goods or merchandise trade.

The long-term trade is even more clear in the annualised or the trailing 12-month data. In the 12 months ended July this year, the net export of IT services amounted to $101.1 billion, up 9.9 per cent from $92 billion during the 12 months ended July 2021. During the same period, the merchandise trade deficit more than doubled to $258.7 billion in July this year, from $127 billion in July this year. As a result, the net IT export funded 39.1 per cent of India’s trade deficit during the 12 months ended July 2022, down from 72.3 per cent a year ago.

Relatively slow growth in IT services exports has made India ever more dependent on capital inflows and worker remittances to fund its trade and the overall current account deficit (CAD). This translates into volatility in the external sector and puts pressure on the rupee. Business Standard