March Trade Data

Trade Deficit narrows, but is it sustainable?

The March Trade data announced during the week had some major positive indications. The exports showed a positive trend on a month-on-month basis while imports of gold were down. Trade deficit came down substantially to a little above $5 billion and is almost entirely compensated by the surplus on the services side. Some of the key takeaways from the trade data were as follows…

Improvement in exports…

 The fall in trade exports in the month of March was just about 5.47%. This compares favorably with the full year export decline of 15.85%, indicating an increase in exports in a month-on-month basis. This 5.47% fall in exports compares favorably with other major trading nations like the US, China, EU and Japan, which have seen reduction in exports in this range.

Imports have fallen too…

Imports for the month of March fell sharply by 21.56% and this sharp fall in imports compared to exports makes the terms of trade largely in India’s favor. Imports for the full year were at $379 billion, substantially lower than the full year imports of $448 billion in the previous fiscal. With a forex chest of $365 billion, India’s forex reserves now cover almost 100% of its full year imports. Of course, this may change with a rise in oil prices, but this 12 months import coverage positions India favorably vis-à-vis other BRICS nations. The big reason for the fall in imports was a lower oil bill. Oil imports for the month of March 2016 were 35% lower than the previous year and this was largely responsible for the sharp fall in imports during the month. Among the non-oil imports, gold imports were sharply down during the month. This is critical as the government has been particular not to use up precious forex reserves to import unproductive gold. Of course, silver imports have gone up but that is on an extremely insignificant base and hence not too relevant.

What about services gap?

Of course, the services data is not exactly comparable as it lags the trade data by 1 month, but it is largely representative. For the first time, the trade deficit is almost entirely being compensated by the surplus on the services front. Of course, services exports also had a negative growth of 1.94% and that is something the government will want to focus on. In an era of rising oil prices, the government will be looking at services to make up for the trade shortfall.

The big worry for India is what happens if oil prices start rising again. While it is not an immediate danger, the focus should be on more aggressive export promotion as well as cutting down on unproductive items like gold imports. ©

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