Merchandise (goods) trade data for May have added more pessimism to India’s trade story. Particularly disappointing were the print headlines on exports. However, a key point highlighted by the data was the decoupling of the dynamics of external and internal demand, which was reflected in the differential growth rate of exports and imports.
Merchandise (goods) trade data for May have added more pessimism to India’s trade story. Particularly disappointing were the print headlines on exports. However, a key point highlighted by the data was the decoupling of the dynamics of external and internal demand, which was reflected in the differential growth rate of exports and imports.
Merchandise exports contracted a strong 10.3% year-on-year (yoy) last month, with a pronounced contraction in some of the low-skill, labor-intensive manufacturing sectors such as ready-made garments, jute and plastic. In contrast, imports of goods contracted at a much lower rate of 6.6% year-on-year.
Merchandise exports contracted a strong 10.3% year-on-year (yoy) last month, with a pronounced contraction in some of the low-skill, labor-intensive manufacturing sectors such as ready-made garments, jute and plastic. In contrast, imports of goods contracted at a much lower rate of 6.6% year-on-year.
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In addition, the growth of the basic basket of imports suggests a resilient domestic demand and a reactivation of capital spending.
It’s no surprise, then, that the goods trade deficit widened to a five-month high of $22 billion in May. Unfortunately, the enlargement trend is likely to continue for some time. Exports could continue to lose momentum for a longer period amid slowing global growth and weak discretionary spending in developed economies. Furthermore, weak exports are widespread, so the stellar performance of just one segment, electronics, may not be enough to balance India’s growing trade balance.
Meanwhile, the outlook for imports is brighter largely due to relatively resilient domestic growth momentum.
This has also been borne out by a number of recent high-frequency indicators, from the Purchasing Managers’ Index to industrial production.
With this dynamic unfolding, broader goods trade and a current account deficit are anticipated for this fiscal year. While this could be worrisome at the margin, such a widening driven by the growth differential does not necessarily signal the end of the external sector.
This growth differential is likely to be replicated through the capital flow channel as well.
India’s growth story with a relatively higher gross domestic product growth rate compared to major Asian economies and benchmark stock indices inching towards new highs bodes well for both foreign direct investment long-term and for portfolio entries.
This will help offset some overall balance of payments concerns, thereby resisting pressures on the Indian rupee. Another breather is the latest pause from the US Federal Reserve.
This comes at a time when the Reserve Bank of India is also holding rates, keeping concerns about the narrowing India-US interest rate differential at bay.
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