July trade figures also hints at a moderate recovery in industrial activity
India’s merchandise
trade deficit for the April-July period at USD 13.95 billion has witnessed a
sharp drop of 64.1% from USD 59.42 billion in the corresponding period of the
previous year. In our opinion, the significant improvement in the trade deficit
is primarily on account of continuing weakness in domestic demand, a
considerable decline in global crude oil prices and partly also from the
increasing intent of the government to reduce the dependence of imports from
countries such as China. While it may be difficult to sustain such improved
levels of trade deficit as the economy revives and global commodity prices pick
up, Acuité believes that the shifting global trade dynamics provide a good
opportunity for India to improve on the inherent imbalances in its trade flows.
India’s overall merchandise
exports have witnessed a steady revival in the aftermath of the lockdown
climbing from a low of USD 10.3 billion in April to USD 23.6 billion in July
2020. While the exports volumes are still 10.2% lower as compared to July 2019
on an overall basis, it needs to be noted that the exports of petroleum
products have seen a massive contraction of 51.5% and adjusted for that factor,
the yoy contraction has been only to the extent of 3.5%. While the recovery has
been fairly broad based across product segments, there has been a significant
yoy growth in product segments such as agricultural goods, pharmaceuticals and
engineering goods.
On the other
hand, imports have also risen sharply by 34.8% (month on month) in July at USD
28.5 billion after an unexpected drop in June (USD 21.1 billion). While the
import levels are 28.4% lower than previous July, the deflation in the import
bill needs to be viewed in the context of a significant drop in global crude
prices by 31.6% over the last one year. In our opinion, the sharp revival in
imports on a monthly basis hints at an incipient recovery in industrial demand.
The imports of electronic goods have picked up from USD 3.2 billion in June
2020 to USD 4.8 billion in July 2020 possibly due to higher demand of digital
devices including laptop computers required in a work for home environment. Another
factor which has led to a step up in imports in July is the pent up demand for
gold where arrivals were negligible in the month of April and May 2020.
An analysis of
country wise trade performance shows a ground level impact of the border and
trade conflict with China. India historically, has a huge trade deficit with
China which constitutes almost 50% of its overall trade deficit. But
interestingly, imports from China in June 2020 have contracted by 44% while
exports to the northern neighbour expanded by 78% on a yoy basis. Consequently,
the monthly trade deficit with China has sharply reduced to USD 1.2 billion in
June 2020 as compared to USD 4.7 billion a year earlier. While the
sustainability of the lower trade deficit with China remains to be seen as the
domestic economy continues to revive, it is apparent that the government is
making efforts to discourage low value added and non-critical imports from
China and also other countries as part of the ongoing initiatives on
self-reliance and indigenous production.
Acuité believes
that the global trade dynamics is set to witness a shift with the deterioration
of relationships between China and its major partners such as United States,
Australia and Japan. We expect that most of the world’s developed nations
including those in Europe will make an effort to reduce their dependence on
China, wherever applicable and diversify their supply base for strategic
reasons. This will provide a significant opportunity to Indian exporters in
various sectors such as pharma, chemicals, automotive, textiles, leather and
even agricultural products over the medium term. Such a trend has started to
become visible in June with India’s exports to Australia having grown by 78% and
that to Japan entering expansion phase. While the exports to USA have been
consistently improving over the past few months, even exports to trading nations
such as Singapore has increased by over 36% in June 2020.
India can take
advantage of such shifting trade dynamics by entering into bilateral or
multilateral trade pacts with a wide spectrum of nations that intend to reduce
their large dependence on China. However, initiatives on new trade arrangements
also have to be backed up by investments in indigenous manufacturing
capabilities in close collaboration with the private sector and in line with
the ‘Atma Nirbhar Bharat’ campaign.
Table 1: YoY Growth in India’s Trade
with Major Export Partners
|
Exports
|
Imports
|
||||
|
Apr-20
|
May-20
|
Jun-20
|
Apr-20
|
May-20
|
Jun-20
|
China
|
-20.37
|
48.34
|
78.10
|
-42.97
|
-22.77
|
-43.73
|
USA
|
-64.03
|
-42.12
|
-11.23
|
-57.73
|
-49.65
|
-46.38
|
South Korea
|
-42.59
|
-28.67
|
15.49
|
-45.24
|
-31.38
|
-56.27
|
Japan
|
-59.00
|
-21.67
|
4.46
|
-55.62
|
-20.86
|
-36.59
|
Australia
|
-57.41
|
11.90
|
77.85
|
-40.12
|
-48.33
|
-51.84
|
Singapore
|
-19.50
|
-53.40
|
36.52
|
-62.21
|
-49.56
|
-50.30
|
Source: Ministry of Commerce, Acuité Research
Source: CMIE