Trade Data

Exports flatter but trade deficit remains a major worry

After a disappointing first 6 months of the current fiscal, the trade data for November finally showed a semblance of recovery. Of course, imports were higher but exports grew much faster. However, the trade deficit continues to be at elevated levels and that remains a major worry for the government. Here are the key takeaways from the trade data for November

Export flatter on the upside

Exports at $26.2 billion were nearly 30% higher than the level touched in November 2016. That is a sharp change from the negative growth in exports witnessed in October. Of course, one can argue that November 2016 was a tepid month due to the impact of demonetization. However, what is really important is that Indian exports have shown a sharp growth despite worries over GST and exporter refunds to the tune of $7.7 billion stuck up. The 3 key product export groups of gems & jewelry, petroleum products and engineering goods all showed over 30-40% growth in the month of November. Of course, imports at $40 billion were up by 19.6% and that is still a worry in absolute terms. Oil imports were the major factor which is hardly surprising considering that crude oil prices are up by 35% on a YOY basis. The good news is that the sharp increase in gold imports since the start of the current fiscal year finally appears to be tapering down! But imports are a worry!

Trade Deficit is widening…

The trade deficit at $13.8 billion for November 2017 continues to be on the higher side. At the current rate of imports, we could end the year with imports of close to $500 billion. With the current Forex reserves at around $400 billion, we may see total import cover of less than 10 months. That is lower than the kind of import cover that other BRICS nations are enjoying. The net deficit (after adjusting for the services surplus) is well above $8 billion, which means we could end the year with a net deficit in excess of $100 billion. Through the last fiscal the monthly trade deficit was under $10 billion and the net deficit was substantially lower. That comfort zone does not exist any longer. That makes the economy a lot more vulnerable to oil prices shocks.

Exports hold the key…

On the imports front, while gold imports may be controllable, there is not much choice on the crude oil front. Oil prices are likely to remain buoyant till the Saudi Aramco IPO and that means the trade deficit will remain under pressure. Strong FDI flows have kept the INR strong and that has been a big boost for imports over exports. That is a situation that the RBI needs to correct. The INR is already overvalued in REER terms. A weaker rupee will help INR attain a more acceptable level and push exports. That could be the real solution! ©

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