Trade data raises some questions for Indian macros…

| Published on Dec 26th 2016 | Comment(s) 0
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India’s trade numbers announced for the month of November have been largely in line with expectations. While the Trade deficit at $13 billion for the month of November is definitely at a 2-year high it is in line with previous cycles. However, there are some key components of the trade data that India needs to seriously look into. Here are 10 key takeaways from the trade data for the month of November 2016 released by the Ministry of Commerce.

 

10 Key Takeaways from the Trade Data for November 2016…

 

  • Exports for the month of November 2016 came in at $20 billion, which was marginally higher by 2.29% compared to the year-ago period. The exports growth in rupee terms was 4.63% and the differential can be largely explained by the weaker INR versus the dollar.

 

  • Non-petroleum exports for the month of November 2016 grew by 2.1% to $17.6 billion as the core exports segments like Gems & Jewellery actually saw a negative growth. It must be said that the demonetization led liquidity shortfall has also resulted in weak exports performance. Exports to the US market were almost flat while exports to Japan were up by 9.8% on the back of a strong Yen which boosted exports. Exports to the EU were marginally down but the real worry was on exports to China which was down by -10.15%.

 

  • Imports for the month of November were sharply higher by 10.4% at $33.02 billion, largely led by a 26% spurt in gold imports. Gold imports remain a worry for India’s balance sheet because precious forex resources are being utilized for unproductive imports. Back in 2013, the government had curbed gold imports through stringent export commitments. The focus must be on curbing gold imports and focus on the gold demonetization plan that had not exactly taken off in a big way last year.

 

  • The trade deficit for the month of November 2016 came in at $13 billion; a two-year high. The cumulative trade deficit for the first 8 months comes in at $66 billion, which effectively means that India may end the fiscal year 2016-17 with a trade deficit of over $110 billion. The bigger challenge will be the forex cover. For the first 8 months, the cumulative value of imports has come in at $241 billion. So we may end the year with total imports of around $375-$385 billion. The forex reserves cover of imports will fall below 12 months, which will be a concern for the external value of the INR.

 

  • The components of imports have also shown an up-tick. Oil imports are up by 5.9% at $6.8 billion, largely on the back of higher landed cost of crude. With the OPEC deal, most analysts are already talking about $60/bbl for crude. This will be a challenge for India as crude import dependency is nearly 75% in the Indian macro context. The bigger worry, of course, is the 11.7% rise in non-oil imports largely led by the 26% growth in gold imports.

 

  • Exports of services for the month of October 2016 (service trade is reported with a 1-month time lag) came in at $13.1 billion, which was down by 4.8% compared to last year. This segment is largely dominated by software exports out of India.

 

  • Imports of services for October 2016 came in at $7.68 billion, down by 7.5% on a YOY basis. This leaves a net surplus of $5.42 billion on the services account. The overall deficit considering merchandise goods and services stands at ($-7.59 billion).

 

  • A deficit of $-7.59 billion is a big shift from the situation some 4-5 months back when the surplus on the services account was largely covering the deficit on the trade merchandise account. As this net deficit grows it puts pressure on the current account deficit as well as the external value of the rupee.

 

  • The real challenge for the Indian government will be on the Current Account Deficit (CAD) front. As the net deficit (services + goods) has increased steadily, the CAD has also expanded. In fact, for the Jul-Sep quarter, the CAD has grown to 0.6% of GDP as compared to just 0.1% of GDP in the first quarter of the current fiscal year. With the crisis of 2013 still fresh in public memory, the CAD figure is something that needs to be watched.

 

  • Demonetization has created a piquant situation for India Inc. On the one hand, exports of goods and services are being constrained because of the liquidity shortfall created in the economy. On the other hand as oil prices are moving up, India seems to be importing inflation from other countries. This is a major challenge for the government as the effects of demonetization could last well beyond December 30th.

 

In a nutshell, the trade data has raised some serious questions. Demonetization may have provided a trigger to do a rethink.




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