Markets
Goods trade hits a bad patch at the outset of FY24
Summary
In April, merchandise exports continued to remain muted, declining by a sharp 12.7% year on year (y-o-y). But in a double whammy, imports nosedived, too, contracting by 14.1% y-o-y.
India’s merchandise trade trajectory has been bumpy for a while. Amid this, FY24 has begun on a sombre note. In April, merchandise exports continued to remain muted, declining by a sharp 12.7% year on year (y-o-y). But in a double whammy, imports nosedived, too, contracting by 14.1% y-o-y.
The steady fall in India’s exports remains in focus as global demand slows. However, the import side of the story and its recent plunge warrants some discussion, too. To put things in perspective, headline imports were below $50 billion for the first time in nearly two years.
Understandably, a moderation in global crude oil prices supported a drop in India’s oil imports. Plus, seasonal factors, elevated prices and higher import duties triggered a nearly 42% y-o-y fall in gold shipments. However, excluding oil and gold, non-oil, non-gold (NoNG) imports—a demand-driven basket—has also been on a downtrend.
Falling NoNG imports in value terms is to some extent a reflection of easing price pressures across the board amid moderating commodity prices and softening global inflation. For instance, commodity related imports such as coal, coke and briquettes; and metal ores, saw a sharp slide in April.
“Moving forward, a slowing global economy implies commodity prices will trend lower on average compared with the previous year," said Rahul Bajoria, chief economist at Barclays. Notwithstanding this, the broad-based nature of the import slowdown and deep contraction in components unrelated to the commodity cycle shows that some demand dynamics are at play as well.
Core consumption imports such as electronics, fertilizers and medicinal items also slipped last month, triggering worries over an early sign of slowing domestic economic momentum. “Historical analysis shows that exports fall far more than imports, so this print is a potential harbinger of slowing domestic demand," said Emkay Global Financial Services in a 15 May report.
In this gloom, a silver lining within the import basket is relative resilience in some of the capital expenditure (capex) related imports such as electrical and non-electrical machinery and machine tools. This fuels hopes that nascent recovery in India’s capex cycle is holding ground and could provide much needed support to economic growth.
There are some bright spots too. For instance, contracting imports paint an optimistic story for India’s external sector dynamics. Evidently, a drop in headline imports resulted in a large narrowing in trade deficit from an average of $22.3 billion in 2022 to a 20-month low of $15.2 billion in April. This was despite a simultaneous contraction in exports. This trend, if sustained, could keep India’s current account deficit under check, overall balance of payments in surplus and also contain the rupee’s fall against the dollar. Barclays expects the goods deficit to decline this fiscal year, as import values fall much more than exports, both weighed down by weak external demand and, to a lesser extent, lower domestic demand.
Second, a steady decline in NoNG imports signals some weakening in domestic aggregate demand and indicates that transmission of RBI monetary policy tightening, which began last year, is taking effect. With domestic demand moderating and inflation measured via consumer price index at a comfortable 18-month low of 4.7% in April, an end to central bank’s monetary tightening may be on cards. Remember, in April meeting, RBI governor Shaktikanta Das said that the status quo is a tactical measure and not a pivot. But slowing domestic demand, intensifying global macro-economic headwinds and dovish tone of US Federal Reserve suggest that RBI’s policy pivot may be near and pause could be for long.
