Trade Data Raises Concerns on the Imports Front

The trade data for the month of April announced on May 15^th presented a mixed bag for the Indian economy. While exports have growth a tad faster, the bigger worry is on the growth of imports. The trade deficit for the month has also widened very sharply and that will have a bearing on the forex reserves as a measure of import cover. Here are some of the key takeaways from the trade data for the month of April 2017, which also happens to be the first month of the new fiscal year 2017-18.

Exports growth hints at a pick-up in global trade…

The World Trade Organization (WTO) has already indicated that there are signals of a meaningful pick-up in world trade. For the month of April 2017, India’s merchandise exports grew by 19.77% to a level of $24.64 billion. Key export sectors like Gems & Jewellery and other non-oil exports reported a 17% growth over last year. For India it is quite surprising that the exports have picked up despite a strong INR. Remember, the INR has strengthened from 69/$ to a level of 64/$ over the last couple of months. The fact that exports have grown despite a strong rupee shows the impact of de-bottlenecking and a pick-up in export volumes in the month of April. Among the major economies, US witnessed a growth of 4.74% in exports while Japan saw a growth of 13.3% in exports. The green-shoots of a recovery in world trade appear to be visible during the month of April, although the trend will have to be ratified by more granular data.

Imports take a big leap up for the month of April 2017…

What could be a slight worry for policymakers and the RBI will be the sharp rise in imports. In fact, imports for the month of April 2017 were up by 49% on a YOY basis at $37.88 crore. The big contribution came from oil imports which went up by 30.12% to $7.36 billion. This sharp increase was driven more by a sharp spike in the price of Brent Crude. Between April last year and April this year, the price of Brent Crude has moved up from $35/bbl to $51/bbl largely explaining this increase on a point-to-point basis. But the real pain for the trade data came from non-oil imports, which were up by 54.5% at $30.53 billion. Ironically, a large part of this non-oil import bill growth came from gold imports, which picked up after jewellers withdrew their strike and started stocking up ahead of the festival season. Sharply higher gold imports is a worry for the Commerce Ministry and the RBI as it results in precious forex reserves being used up for unproductive gold imports.

Trade in Services were also a tad disappointing for the month of April 2017…

Trade in services is normally reported with a lag of 1 month but despite a lag of one month, the data is fairly indicative. For the month of March 2017, the exports of services were up by 8.57% at $14.18 billion. The import of services, which entails payments for services from abroad, went up sharply by 14.26% to a level of $8.27 billion. A major component of export of services is accounted for by software exports. With the US tech spending being lacklustre and the US tightening the US H1-B visa regulations the growth in export of services has been stifled.

Getting an overall picture of the deficit on the trade account…

On the merchandise trade front, the total exports were to the tune of $24.64 billion while imports for the month of April were at $37.88 billion. This resulted in a net merchandise trade deficit of ($13.24 billion). This is nearly 30% higher than the trade deficit for the month of March and could put pressure to get higher flows to bridge this gap. On the services trade front the exports of services stood at $14.18 billion while imports stood at $8.27 billion. That leaves a services trade surplus of $5.91 billion. When the deficit in the merchandise trade account is adjusted with the surplus on the services trade account, we are left with a net trade deficit of ($7.34 billion). This figure had gone to a healthy level of zero a couple of years back.

There is a larger worry on the forex reserves front. The health of the economy is judged by how many months of import cover the RBI has in terms of total imports. At the current import run rate of $37.88 billion per month, we may end the current fiscal year with total imports of around $450 billion. That will be close to the peak imports that India has achieved about 4 years back. The worry is that the current level of forex reserves at $375 billion will be just about enough to cover 10 months of imports. When compared to other BRICS nations, this will put India at a relative disadvantage. That is something the Commerce Ministry needs to seriously mull over.