India Insight:Trade deficit narrows marginally in August

Monthly trade deficit narrows marginally to US$7.7bn (4.3% of GDPannualized) in August: This compares to US$7.8bn (4.4% of GDPannualized) registered in July. On a 3-month trailing basis, trade deficitwidened to 4.4% of GDP annualised in August (vs. 4% of GDP annualised inJuly).

Goods exports (in dollar terms) continued to decline: Goods exportsdeclined 0.3% YoY (vs -6.8% YoY in July). Looking at the breakdown, thebulk of the decline in exports during August was led by petroleum products (-14% YoY in August) and cotton yarn fabrics (-13.8% YoY) etc amongstothers. However, some rebound was seen in the exports of gems & jewelleryand engineering goods (+7.6% YoY and +4.2% YoY in August).

Goods imports (in dollar terms) remained in red, largely led by slowinggold and oil imports: Goods imports declined 14.1% YoY (vs -19% YoY inJuly). In terms of commodity composition, (a) oil imports declined 8.5% YoY inAugust on sluggish global crude oil prices, (b) gold imports remainedlacklustre at US$1.1bn, similar to last month’s level but down 77% YoY, and(c) non-oil non-gold import growth, an indicator of domestic demand,continued to decline 1.5% YoY (vs -9.9% YoY in July). Looking at thebreakdown, while some rebound was seen in imports of peals and preciousstones and electronic goods, most of the other categories including iron &steel, fertilizers and transport equipment saw a decline in imports.

Outlook

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 deterioration in India’s export performance is drivenby a confluence of factors, including: (a) sluggish global commodity prices, (b)slowdown in 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 recovery. An improvement in global growthenvironment and continued progress on structural reforms will be key forboosting exports in the medium term.

Current account deficit (CAD) to remain manageable; no concerns onexternal stability yet: Despite building in sluggish exports, we still expectIndia’s CAD to remain manageable below 1% of GDP in FY17 as imports willalso remain contained on sluggish global commodity prices, still weakdomestic demand and delayed growth recovery. Note we have assumed (a)global crude oil prices to average ~US$50/bbl in FY17, and (b) gold imports toremain reasonable on contained inflation and positive real deposit ratesavailable to households to arrive at these forecasts. To be sure, we have builtin some pick-up in gold imports over the coming months on festive seasondemand. While a narrowing CAD has lessened India’s external capitalrequirement, we believe policymakers should continue to focus on increasingthe share of stable and non-debt creating FDI flows in total capital flows tohelp increase the productive capacity of the economy.