What is in the details?
Trade deficit remained largely stable in June: Monthly trade deficit stood atUS$10.8bn (6.2% of GDP annualized) in June compared to US$10.4bnregistered in May. However, on a three month trailing basis, trade deficitnarrowed to 6.2% of GDP annualised in June quarter compared to 6.9% ofGDP annualised registered in March quarter.
Goods exports (in dollar terms) remained sluggish – commodity exportsdown, manufactured exports improve: Goods exports continued to declineby 15.8%YoY compared with -20%YoY registered in May. Looking at thebreak down, most of the decline in exports during June was led by petroleumproducts (-53%YoY), engineering goods (-5.6%YoY), rice and other cereals.
However, some improvement was seen in the exports of manufactured goodsled by readymade garments (+11%YoY), gems & jewellery (+6.4%YoY) anddrugs & pharmaceuticals (+10.8%YoY) etc.
Goods imports (in dollar terms) remained weak, some rebound in non-oilnon-gold imports is positive: Goods imports also continued to decline by13.4%YoY (vs. -16.5%YoY in May). In terms of commodity composition,(a) oil imports remained sluggish, declining by 35%YoY (vs. -41%YoY inMay) though it picked up sequentially on some rebound in global crude oilprices during that month, (b) gold imports remained weak at US$2bn in June(-37%YoY%) and (c) non-oil non-gold import growth an indicator of domesticdemand, picked up by 3.2%YoY (vs. -3.5%YoY in May) led by componentsincluding fertilisers, crude & manufactured, electronic goods, pulses andmachinery, electrical & non-electrical etc amongst others.
Outlook.
Weak external demand to drag growth in FY16: We believe this sluggishexport performance over the past few months seems to be driven byconfluence of factors, including: (a) weak global demand and low tradeintensity, (b) a sharp fall in global commodity prices resulting in adverse termsof trade for commodity-related exports, (c) appreciation of the real effectiveexchange rate resulting in low export competitiveness, and (d) powershortages led by supply side bottlenecks. Indeed, weak exports and sluggishdomestic demand are one of the key reasons for low capacity utilisation in themanufacturing sector hence delayed capex led growth recovery. We believepolicy efforts including stepping up of infrastructure investments, fasterimplementation of reforms and addressing of supply-side issues will all help inimproving India’s export competitiveness in the medium-term.
Current account deficit (CAD) to remain manageable in FY16: We expectIndia’s CAD at 1.2% of GDP in FY16 compared to 1.3% of GDP registered inFY15. This is well below the sustainable limit of 2% of GDP, and would helpkeep external stability risk in check. It needs to be noted that we haveassumed global crude oil prices to average US$58/bbl in FY16 in line with ourglobal oil team forecasts. We have also assumed gold imports to remainreasonable in FY16 on contained inflation and positive real deposit ratesavailable to households. However, risk to our forecasts stems frommovements in global commodity prices (mainly oil) and/or surprises in theglobal growth recovery.