Impact of Imports and Exports on Trade Deficit

The trade data for the month of March 2017 had few surprises in store. The exports continued to grow positively for the 6th consecutive month. However, the growth in imports was much faster than expected leading to a slightly higher trade deficit for the month. The sharp rise in imports is slightly surprising considering that the INR has also sharply appreciated during this period and that should have helped the imports taper a wee bit.

How did merchandise exports perform in the month of March 2017?

For the month of March 2017, exports came in at $29.23 billion, a growth of 27.6% over the corresponding March last year. Indian economy ended the full fiscal year 2016-17 with exports of $275 billion. This is slightly worrisome as this is the second year in succession that the total exports have been below the $300 mark. To an extent this weakness can be attributed to the strong rupee. According to economists, the INR is currently overvalued versus the dollar but despite that the INR continues to strengthen versus the dollar. This has made the overvaluation more pronounced. India has shown positive exports growth to the US, EU and Japan. What is gratifying is that India has also shown a positive growth in exports to China to the tune of 7.85%. However, these numbers could have been a lot more impressive if the INR had been a little weaker.

Imports grow much faster than exports for March 2017…

While the 27.6% growth in exports was surely gratifying, the imports grew by nearly 45.25% for the month of March at $39.67 billion. A key driver for higher imports was crude oil. For example, the oil import bill for March 2017 was $9.7 billion, up by over 101% compared to the corresponding period last year. A large part of this rise in imports can be explained by higher prices of crude oil. Between March 2016 and March 2017, the price of crude in the Brent market has moved up from $30/bbl to a high of $56/bbl. The impact on oil imports has been largely on account of higher landed prices of crude with little change in import volumes.

Non-oil imports were up by 33.2% at $29.96 billion. It is estimated that the month of March has seen a sharp rise in the imports of gold due to festival season demand and the withdrawal of the jewellers strike. This multi-fold rise in gold imports has also contributed to the higher import bill. In fact, gold imports have been a constant worry for the RBI and the Finance Ministry as it leads to expending precious foreign exchange resources to fund import of an unproductive asset into India. The RBI has another problem on hand. Currently it is sitting on forex reserves of $365 billion. Currently, on a rolling basis, the forex reserves are sufficient to cover 1-year of imports. But if the current rate of imports is sustained, then the forex reserves may be just about sufficient to cover 75% of imports.

How the trade deficit panned out for the month of March…

For the month of March 2017, the merchandise trade deficit has come in at $10.44 billion. Currently, the rolling annual trade deficit is around $100 billion. But if the current month’s average rate continues then the full year trade deficit could get closer to the $130 billion mark and could worsen if the imports show more traction. That will put further pressure on the INR and also on the external rating of the Indian economy. We come back to the issue of overcoming this problem by giving a push to exports to avoid the trade deficit trap.

Let us also look at the services balance. For the month of February 2017 (services trade is always reported with a 1-month gap and is therefore indicative), exports of services were valued at $13.06 billion while service imports came in at $7.24 billion. While the exports of services have shown a positive growth, the import of services have shown negative growth for the month. That leaves the Indian economy with a surplus of $5.82 billion in services trade. When the surplus on the services account is combined with the deficit on the trade account, India is left with a net trade deficit of $4.62 billion. The effort must be to reduce this net deficit figure to closer to the zero mark.

Agenda for India’s trade…

•    There has to be a greater thrust on exports including letting the rupee weaken against the dollar so that exports become more competitive.

•    Gold imports must be curbed and the government needs to revive ways and means to demonetize the gold within the Indian economy instead of relying on imports of gold. This will ensure that forex reserves are not frittered away on unproductive imports.

•    Oil is something India needs to watch. We have seen our crude oil bill going up by 100% on a YOY basis. This could become a problem if OPEC quotas propel oil prices further up. It could also be a problem if the geopolitical situation in the Middle East and West Asia worsens.

•    Lastly, with software exports likely to falter due to Trump’s policies, India needs to look at alternatives to ensure that the momentum of growth in services exports is maintained.