July trade deficit numbers; continue to disappoint…

The trade data for the month of July 2015 continues to disappoint. The saga of falling exports started in the month of December 2014, and July 2015 marks the 8 consecutive month of fall in exports. For the month of July 2015, exports came in at $23.1 billion, a fall of 10.3% from the corresponding period last year. Exports for the month of July were only marginally better than the figure in June 2015. Imports too continued to fall 10.3% for the month of July 2015 to a level of $35.9 billion. This leaves the trade deficit for the month of July 2015 at $12.8 billion. This deficit is a cause of worry because it is $1.9 billion higher than the deficit figure we saw in June 2015. This data point is not too encouraging as far as the rupee / dollar parity is concerned.

Breaking up the exports performance…

A large part of the fall in exports could be attributed to weak global demand and weak commodity prices. Not only oil, but most primary and secondary commodities have seen a fall in global prices. India is not alone. Even China witnessed an 8% fall in exports as a result of the combination of weak commodity prices and weak global demand. If one looks at the specific export basket that contributed to the contraction, it comprised of petroleum products, iron ore and oilseeds. Segments like drugs, pharmaceuticals, tea and jute actually saw an expansion in export performance. The moral of the story seems to be linked to the global economic slowdown and weak commodity prices. However, 8 successive months of negative export growth cannot be wished away and calls for urgent action from the government in terms of export incentives, countervailing duties, special export packages etc which can reverse this trend.

Breaking up the components of imports…

For a country that imports almost 70% of its crude oil requirement, India has benefited by falling imports. The crude oil import bill was up by 10% at $9.5 billion but that is more because we are referring to a period when oil prices were strong. In the last couple of weeks, we have seen oil prices dip sharply below the $45 / barrel mark. The effect of this sharp correction in oil prices should be visible in trade numbers for the month of August and September. The only area of concern was that gold imports were sharply up by 50% to $3 billion for the month of July 2015. This is roughly twice the average imports we have seen in the months since the restrictions on gold imports were removed. This could be attributed to the festival season, but rising gold imports are always a concern because it results in precious foreign exchange being utilized to pay for unproductive gold imports.

What are the focus areas for the government?

There are three key economic data points that will be of interest to the government of India. Consistent fall in imports is likely to result in a sharp fall in the current account deficit (CAD). This is a positive development. Export growth continues to be a major area of concern for India and the government needs to move rapidly on this front. The final question is what does this mean for the value of the rupee? While the current deficit is coming down, the fact that trade deficit is rising will continue to put pressure on the rupee. We cannot ignore global factors. As China tries to weaken the Yuan to boost exports, a strong dollar will continue to put pressure on the currency. India needs to be prepared for a weaker rupee going ahead.

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