Markets
The India trade story is gloomy, but there may be a silver lining
Summary
The growth in the core import basket suggests resilient domestic demand and revival in capital spending.
The merchandise (goods) trade data for May has added more gloom to India’s trade story. Particularly disappointing were the headline prints on exports. Nevertheless, one key point the data underscored was the decoupling of the external and domestic demand dynamics, reflecting in the differential pace of export and import growth.
Goods exports contracted by a sharp 10.3% year on year (y-o-y) last month, with the contraction pronounced in some of the labour-intensive low-skill manufacturing sectors like readymade garments, jute and plastic. In contrast, the goods imports contracted at a much smaller rate of 6.6% y-o-y.
Further, the growth in the core import basket suggests resilient domestic demand and revival in capital spending.
No wonder then, that goods trade deficit widened to a five-month high of $22 billion in May. Unfortunately, the widening trend looks likely to continue for some time. Exports could continue to lose momentum for a longer period amid slowing global growth and weakness in discretionary spending in developed economies. What is more, weakness in exports is broad-ba-sed, so stellar performa-nce by just one segm-ent—electronics—may not be enough to balance India’s widening trade balance.
Meanwhile, import outlook is more promising largely due to relatively resilient domestic growth momentum.
This has also been corroborated by a slew of recent high-frequency indicators from purchasing managers’ index to industrial production.
With these dynamics playing out, a wider goods trade and current account deficit for this financial year is on the cards. While this could be worrying at the margin, a widening of this sort driven by the growth differential may not necessarily indicate doom for the external sector.
This growth differential will also likely play through the capital flows channel.
The India growth story with a relatively higher gross domestic product growth rate compared to key Asian economies and benchmark equity indices inching to new highs, bodes well for both long-term foreign direct investments and portfolio inflows.
This will help offset some concerns on the overall balance of payment, thus resisting pressures on the Indian rupee. Another breather is the latest pause by the US Federal Reserve.
This comes at a time when Reserve Bank of India is also holding on rates, thus keeping concerns over narrowing India US interest rate differential at bay.
