The trade numbers for the month of March 2017 and for the full financial year were announced on 13th April. The export definitely continued their trend of positive growth for the sixth month in succession. However the worry is more on the imports front, which saw a much faster growth. That put additional pressure on the trade deficit…
What we can decipher from the monthly and annual trade numbers…
- The total exports for the month of March 2017 came in 28% higher at $29.23 billion. That takes the full year exports to the $275 billion mark. That is slightly disappointing because exports are almost flat when compared to the previous fiscal and substantially down when compared with the years before that. To an extent, the slowdown in global trade has been responsible for weak full-year exports, but the global trade now seems to be recovering and India needs to ensure that exports pick up in tandem.
- India showed positive export growth to the US, Europe, China and Japan. In fact, the rising trade deficit with China has been one of the concerns for India and pick-up in exports to China is a welcome move. The big challenge is in keeping the INR slightly weaker. However, the INR has strengthened over the last couple of months from Rs.68/$ to Rs.64.5/$. That has substantially blunted the edge for exporters since a strong currency is not conducive to growth in exports. For the Make in India campaign to be successful, the INR must be allowed to genuinely find its level from a trade perspective. Currently, the INR is more influenced by capital inflows which have kept the rupee buoyant.
- The problem for the balance of trade was that the imports grew faster at a rate of 45% to $39.67 billion. The big contributor to higher imports was the higher oil prices. Between March 2016 and March 2017, the price of Brent Crude has moved up from $30/bbl to $56/bbl. With the OPEC almost agreeable to extend its supply quota cuts, the oil prices could hover closer to $60/bbl. For the month of March, oil imports were up by 101% at $9.8 billion and that increase was almost entirely explained by the rise in the landed cost of crude oil. With a 75% dependence on imported oil, India’s vulnerability to global oil price movements is huge.
- It was not just oil imports but the larger component of non-oil imports were also up by 33% to $30 billion. A large part of the rise in imports was contributed by gold which grew exponentially during the month of March due to year end festival demand from jewellers. The strike by jewellers had kept gold imports subdued for long and that situation changed in March. This is an area of concern because gold is an unproductive asset and building up your trade deficit for the sake of gold imports can be counterproductive.
- An important way of looking at imports is the number of months of forex cover that the RBI has. When imports were weak, the forex chest was sufficient to cover 12 months of imports which was a very comfortable situation. However, if the current run of imports continue then the forex chest may be sufficient may only be sufficient to cover about 9-10 months of exports. Forex reserves have not been building up over the last one year as the RBI has made repeated attempts to stead the INR through intervention.
- The trade deficit for the month of March 2017 came in at $10.44 billion and it will leave the full year deficit at around $100 billion. With imports rising faster than the rise in exports, there is a distinct pressure that trade deficit is coming under. Also the current run of monthly trade deficits could take the full-year deficit to closer to $130 billion next year putting pressure on the external ratings.
- The trade deficit needs to be looked at in terms of the overall effective deficit after considering the deficit/surplus in the services account too. Services data is normally reported with a 1-month lag but then the data is largely indicative. For the month of March 2017, trade deficit stood at $10.44 billion while the services surplus stood at $5.82 billion. That resulted in a net deficit of $4.62 billion. While this surely reduces the pressure, the effort must be take this net figure closer to zero to reduce the pressure on the external ratings of India.
With global trade picking up, there is a clear tilt in favour of a pick-up in imports. That is not great news as the trade deficit will continue to widen. The bigger challenge for the government is to let the INR find its true value. Going by the Real Effective Exchange Rate (REER) formula, the INR needs to substantially weaken from current levels. That is the only way exports can get a big push to make the trade deficit situation more comfortable.
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