India Insight:Export growth rebounds in September

Monthly trade deficit widens to US$8.3bn (4.7% of GDP annualized) inSept-16: This compares to US$7.7bn (4.3% of GDP annualized) registered inAugust. On a 3-month trailing basis, trade deficit remained largely stable at4.4% of GDP annualised in Sept vs the previous month.

Goods export growth (in dollar terms) moves into positive territory:Goods export growth was up +4.6%YoY (vs. -0.3%YoY in Aug) partly on baseeffect. Looking at the break down, bulk of the pick-up in exports during themonth of Sept was largely led by gems & jewellery (+22%YoY) and rest byengineering goods (+6.5%YoY), ready-made garments, iron ore etc amongstothers.

Goods imports (in dollar terms) pick up sequentially (MoM) but declineon a YoY basis: Goods imports were up +6.9%MoM but declined 2.5% on aYoY basis (vs. -14.1%YoY in Aug) largely on adverse base effect. In terms ofcommodity composition, (a) oil imports were up 3.1%YoY in Sept on somerebound in global crude oil prices, (b) gold imports also picked up toUS$1.8bn (vs. US$1.1bn in Aug), and (c) non-oil non-gold import growth anindicator of domestic demand, improved sequentially (+5.6%MoM) butcontinued to decline by 3.5%YoY (vs. -1.5%YoY in Aug). Looking at thebreakdown the trend was mixed - while some rebound was seen in imports ofpeals & precious stones, raw cotton and vegetable oil, a decline was seen inother categories including fertilizers, iron & steel, transport equipment etc.

Outlook.

Global growth environment and structural reforms key for exports: Whilesome pick-up was seen in India’s export growth in Sept, the key is for thistrend to sustain. This is so because exports have been a drag on overall GDPgrowth over the past couple of years. This weak export performance seems tohave been driven by a confluence of factors, including: (a) sluggish globalcommodity prices, (b) slowdown in global demand, (c) low exportdiversification, and (d) structural bottlenecks related to infrastructuralconstraints, rigid labour laws holding back large-scale production, proceduralbottlenecks and government regulations. We believe weak exports andsluggish domestic demand are some of the key reasons for low capacityutilisation in the manufacturing sector, thus delaying a capex-led growthrecovery. An improvement in global growth environment and continuedprogress on structural reforms will be key for boosting exports.

Current account deficit (CAD) to remain manageable: We expect India’sCAD to remain manageable at ~0.8% of GDP in FY17. Note we haveassumed (a) global crude oil prices to average ~US$50/bbl in FY17 and (b)gold imports to remain reasonable on contained inflation and positive realdeposit rates available to households to arrive at these forecasts. To be sure,we have built in some pick-up in gold imports over the coming months onfestive season demand. While narrowing CAD has lessened India’s externalcapital requirement, we believe policymakers should continue to focus onincreasing the share of stable and non-debt-creating FDI flows in total capitalflows to help increase the productive capacity of the economy. On currencyoutlook, we expect USD/INR to average ~67.8 in FY17 and trade in the rangeof 66.5–68.5 over the next few months.