Just-in-time drop in oil prices set to douse big CAD flare-up

India's trade deficit continued to widen, increasing by almost a fourth or 23.72% in eight months between April and November this year compared to the same period last fiscal, as merchandise exports plateaued in November and imports grew by over 4%. Government data showed the overall trade deficit stood at $76.19 billion ($61.58 billion) in this eight-month period, up by $14.61 billion or an average monthly increase of $1.82 billion in the value of what India imported and exported this fiscal. As for services (latest data available only for October 2018), exports stood at $16.82 billion (Rs 123,812.71 crore). This was an increase of 2.65% in dollar terms from September. And imports of services stood at $10.10 billion (Rs 74,361.26 crore), 1.54% up in dollar terms from September.

So will India's overall Current Account Deficit (CAD) continue to spike this year? The CAD had widened to a five year high of 2.9% in the July-September quarter this fiscal against just 1.1% of the GDP in the same quarter of 2017-18. In fact, CAD had been increasing quarter on quarter, from 1.9% in Q4 of last fiscal to 2.4% in the April-June this year before settling at 2.9% in the September quarter. This is when some analysts began predicting that for the full year, CAD could even touch 2.9% of GDP.

But here's the good news: softer global crude prices should help in the latter half of the year and CAD may be contained at 2.5% of GDP. This will still be much higher than the CAD seen in the last fiscal but a significant relief from the dire predictions of its inching far higher.

D K Shrivastava, principal economist at EY, told DNA Money, "The picture should improve in the latter half of the year. Prices of global crude have come down so imbalance between exports and imports should come down too. Earlier estimates had put CAD this fiscal reaching 2.9%, but because of the expected improvement in crude prices in the second half it should improve to 2.5%. India has been following ongoing policies to boost exports, but global developments have been constraining our CAD."

And ratings agency Crisil has also said that CAD could average 2.6% of GDP this fiscal. D K Joshi, Chief Economist at Crisil, said, "Going forward, the recent drop in oil prices should alleviate the pressure on CAD through slower import growth. However, a rebound in oil prices from current levels cannot be ruled out, especially after the production cut announced by OPEC and Russia. Further, export growth faces risks from slowing global GDP growth and risks to trade growth, given escalating trade wars. With these factors weighing in, we expect CAD to average 2.6% of GDP in fiscal 2019 compared with 1.9% of GDP in fiscal 2018."

As per latest data, merchandise exports in November were up 11.66% in rupee terms to Rs 190,429.46 crore (Rs 170,541.01 crore). In dollar terms, though, the growth was a mere 0.8% to $26.5 billion ($26.29 billion). Maximum export growth was seen in petroleum products (42.68%), followed by electronic goods (37.07%). Merchandise exports in non-petroleum and non-Gems and Jewellery slowed to $18.57 billion ($ 19.32 billion) or by 3.93%. During the April-November period, exports of these items fetched $156.55 billion ($143.77 billion), an increase of 8.89%.

But merchandise imports grew by 4.31% in dollar terms and 15.55% in rupee terms in November at $43.17 billion and Rs 310,215.46 crore against $41.39 billion and Rs 268,467.53 crore in November 2017. Cumulative value of imports in April-November $345.64 billion (Rs 24,07,273.87 crore) against $301.31 billion (Rs 19,44,355.48 crore). So imports registered growth of 14.71% in dollar terms and 23.81% in rupee terms. And overall exports (merchandise plus services) between April and November were $351.99 billion, up 15.48% over the same period last year. Overall imports were $428.18 billion, up 16.86%.

Ganesh Kumar Gupta, president, Federation of Indian Exporters Organisation (FIEO) said November data show marginal growth in exports due to high base effect as exports grew by over 30% in November 2017. Gupta also said high growth was mainly seen in the petroleum sector with organic and inorganic chemicals, plastic, linoleum, drugs, pharmaceuticals and electronic goods also showing signs of revival. "All major labour-intensive sectors of exports like gems & jewellery, engineering, leather and leather products, man-made yarns/fabs/made-ups, handloom products, commodities including most agri products, are now in negative territory. However, on the imports front, the growth in November was just 4.31%, the lowest in recent times. The declining trend of crude oil prices and appreciating Rupee may further provide some respite on this front".

The FIEO chief reiterated his demand for urgent support from the government, including augmenting the flow of credit and interest equalisation for merchant exporters.