Weak oil may help trade deficit narrow further this fiscal

India's trade deficit widened to $82.72 billion in the first nine months of this fiscal on higher merchandise imports, which grew by almost 13% during the period to $386.65 billion from $343.34 billion in the corresponding nine months of last fiscal. The overall deficit was higher versus the $69.63 billion figure in the corresponding period of previous fiscal.

So between April and December 2018, the trade deficit increased by $13.09 billion year-on-year or by an average $1.45 billion I in each of the nine months under review. During this period, India's overall exports grew to $396.73 billion or by almost 13.79% but imports were still higher, up 14.63% to $479.46 billion.

Between April and December, merchandise exports jumped 10.18% but import growth was higher at almost 13%. So trade balance in merchandise expanded to (-)$141.2 billion from (-)$120.57 billion year-on-year. But in services, trade balance was positive between April and November at $51.78 billion (data available only till April for services) and this is why the overall deficit figure was lower.

But India's external trade fared better in December, with a 2.44% decline in the country's merchandise imports to $41 billion ($42.03 billion). Analysts have said that this is the first instance of a contraction in merchandise imports for at least 24 months. Coupled with an almost flat export growth at 0.34% to $27.93 billion ($27.83 billion) in merchandise on account of negative growth in sectors such as engineering and gems & jewellery, trade deficit for the month was narrower at $13.8 billion versus $14.2 billion in December 2017. Analysts are now saying that the current account deficit or trade deficit for the entire year would be much lower as a percentage of GDP than thought earlier.

D K Shrivastava, chief economist at EY, told DNA Money that "The trend is encouraging. Had oil prices remained high, India's current account deficit (CAD) would have touched close to 3% of GDP for 2018-19 but now, it should be close to 2.3% or so and this should be sustainable."

He said both imports and exports are very sensitive to global crude price movement. In the earlier part of the year, global prices were high and so the value of imports was also large, pushing up the deficit projections for the full year. Though India exports refined petroleum products, they are a fraction of what India imports and so, changes in global prices of crude have an adverse impact on our earnings.

Data from the government shows oil imports in December were $10.67 billion, which was just a 3.16% increase compared to $10.35 billion in the same month last year as global Brent price ($/bbl) decreased by 12.07 % vis-à-vis December 2017. Contrast this with the growth in oil imports for the April-December period which stood at $108.10 billion versus $75.67 billion in the year-ago period. This meant a growth of almost 43% and the marginal growth in oil imports in December makes it clear that the decline in global crude prices has helped narrow the expected trade deficit significantly.

But the president of the Federation of Indian Export Organisation (FIEO), Ganesh Kumar Gupta, said the latest data yet again show marginal export growth due to uncertain global cues and challenges on the domestic front. "China's exports contracted in December 2018 highlighting fragile global conditions. However, exports during the month were close to $28 billion with a growth of just 0.34%, even when the weakening global economic outlook shows no signs of respite".

Gupta pointed out that some sectors which were witnessing higher growth in previous months are now slowing down. He spoke of the petroleum sector, organic and inorganic chemicals, plastic and linoleum, electronic goods among others. The FIEO president also said that major labour-intensive sectors which export goods like gems and jewellery, engineering, leather and leather products, man-made yarns/fabrics/made-ups, handloom products and commodities including most agri products were now in negative territory.

Data from the Ministry of Commerce showed that 17 out of 30 major product groups were in the negative territory during December 2018, with coffee exports and those of gems and jewellery having suffered the most. Exports of engineering goods, which have a significant share of the export basket, dropped 3.12%. Gems and jewellery were down almost by a fifth while petroleum products' exports rose 13.2%. Coffee exports were down by a third. But the good news was that overall imports were also lower during the month due to lower imports of gold (down by a fourth) and pearls, precious and semi-precious stones (by over 28%).

Gupta was confident that despite current growth trends, exporters will manage to end the fiscal with merchandise exports of $340-350 billion, as long as the government supports them with adequate liquidity.