The trade data released for the month of April has raised a set of serious concerns on the health of India’s trade account. Exports were down by 14% for the month of April to $22 billion. This becomes a little more disconcerting on the back of a 21% fall in exports in the month of March 2015. But, is this really a worry?
Yes, of course, it is…
The current government has been in power for the last 12 months and this is the 5th consecutive month that India has witnessed a fall in exports. The total exports for the fiscal year 2014-15 was just about $310 billion against a modest target of $340 billion, a shortfall of almost 10%. What is more worrying is that this consistent fall in exports has happened at a time when the Indian rupee has been consistently weakening closer to the 65/$ mark. This beats orthodox logic because normally a weak rupee is associated with a surge in exports. What about imports?
Depends on oil and gold…
The Indian import story is largely about oil and gold, as that is where the maximum volatility resides. Oil imports for the month of April were down by 42%. This was partially due to weak oil prices but largely because there has been a general compression in oil demand in India, as also across the world. Non-POL (Petroleum, Oil, Lubricants) imports were up by 12.5%. This may be construed as a signal of demand for capital goods, which is likely to be positive in the medium to long term. But the real villain of the piece could be gold imports. For the month of April 2015, gold imports were up by a whopping 78% to $3.13 billion. This has been a headache for the central banks as precious foreign exchange gets channeled into importing an unproductive asset like gold. The government may be forced to rethink its liberal policy on gold imports, as it had done previously in 2013.
Oil is loose cannon! Prices fell by over 60% since June 2014, but crude has shown a sharp recovery since. If crude prices even stay around current levels, the trade balance could go for a toss.
Forex reserves concerns?
The forex reserve at $350 billion is comfortable and nowhere close to the crisis levels of 1991 or even 2013. But a chunk of the forex reserves are still funded by portfolio investments in debt and equity. These flows are vulnerable to rate differentials. For example, a rate hike in the US could quickly shift flows out of emerging markets including India. That remains the biggest macro risk to India’s trade balance. Falling exports, in spite of a weak rupee; rising gold imports and funding the gap with portfolio flows can be a lethal combination. Better safe than sorry! ©