India Insight:Trade deficit widens in June but CAD to remain manageable

Trade deficit widens to US$8.1bn in June (highest this CYTD): Themonthly trade deficit widened to US$8.1bn (4.6% of GDP annualized) in Junecompared to US$6.3bn (3.6% of GDP annualized) registered in May as anincrease in imports was higher than exports. On a 3-month trailing basis, thetrade deficit widened to 3.6% of GDP annualised in June (vs. 2.9% of GDPannualised in May).

Growth in goods exports (in dollar terms), reaching positive territory inJune on favourable base effect and pick up in non-commodity exports:Growth in goods exports turned positive for the first time in the last 18-months, at +1.3%YoY (vs. -0.8%YoY registered in May). Looking at the breakdown, while petroleum products continued to decline (-11%YoY in June), animprovement was seen in non-commodity exports including organic &inorganic chemicals (+14%YoY), handicrafts (+92%YoY), engineering &electronic goods, amongst others, in the month of June.

The decline in goods imports (in dollar terms) narrowed: Goods importsdeclined by 7.3%YoY (vs. -13.2%YoY in May). In terms of commoditycomposition, (a) oil imports increased to US$7.3bn (vs. US$5.9bn in May) onhigher global crude oil prices, (b) gold imports slowed to US$1.2bn (vs.

US$1.5bn in May), and (c) non-oil, non-gold imports – an indicator ofdomestic demand – saw a slower pace of decline (-1.1%YoY vs. -3.5%YoY inMay) led by an increase in imports of electronic goods and transportequipment, amongst others.

Global growth environment and structural reforms key for exports:India’s exports have been a drag on overall GDP growth over the past coupleof years. We believe this sluggish export performance is driven by aconfluence of factors, including: (a) a sharp fall in global commodity prices, (b)weak global demand, (c) low export diversification, and (d) structuralbottlenecks related to infrastructural constraints, rigid labour laws holdingback large-scale production, procedural bottlenecks and governmentregulations. We believe weak exports and sluggish domestic demand aresome of the key reasons for low capacity utilisation in the manufacturingsector, thus delaying a capex-led growth recovery. An improvement in theglobal growth environment and domestic structural reforms will be key forexport recovery going forward.

Current account deficit (CAD) to remain manageable: Despite building insluggish exports, we still expect India’s CAD to remain manageable around1% of GDP in FY17 as imports will also remain contained on sluggish globalcommodity prices, weak domestic demand and delayed growth recovery.

Note we have assumed (a) global crude oil prices average ~US$50/bbl inFY17, and (b) gold imports remain reasonable on contained inflation andpositive real deposit rates available to households to arrive at these forecasts.

This should also help keep external stability risk in check.