Trade deficit likely to reduce with the fall in oil price

Impact: Export (Negative) Trade Balance (Negative)

Brief: Merchandized exports have posted 17.86% in October as against a negative growth of -1.32% during the same month the previous year. Imports remain high with 17.6% growth during the reference period, despite a strong base. The higher growth in imports is on account of cheaper Indian rupee as volatile oil price mounts pressure. Moreover, capacity expansion in various sectors has increased imports of capital goods, further adding to the import bills.

The October number shows that India’s export has regained its lost trajectory. The merchandized exports have posted 17.86% in October, which was (-) 1.16% in the previous month. The double digit growth in exports in October is however a result of favorable base effect (de-growth of (-) 1.32% in October, 2017). On these line, a negative growth in September was also a result of a strong base, as exports posted a surprising expansion of 25.8%, same time last year. Therefore, growth numbers in last two months gives a skeptical picture of export performance as base factor has undermined these figures.

Imports, on the other hand, remain high with 17.6% growth during the reference period, which was 7.6% a year earlier. The higher growth in imports is on account of cheaper value of Indian rupee when oil price is highly volatile. Moreover, capacity expansion in various sectors has increased imports of capital goods, further adding to the import bill. It is noted that Indian government has increased import duties on 19 non-essential commodities to keep the current account deficit in check.

Due to higher imports, the monthly trade deficit has remained at a high level of $17.13 billion. The trade deficit remains high despite a double digit growth in exports. This indicates that performance of exports is not healthy as compared to imports. The worsening trade deficit figure also supports our argument of poor performance of exports. Additionally, weaker growth in exports despite a cheaper value of rupee is indicative of a strong domestic demand. Having said that, a positive news for the trade balance has come with the softening oil prices, which have reached a year low in recent week; the Rupee is thereby strengthening. The containment of the import bill will therefore depend on the extent to which non-oil imports are controlled - a seemingly difficult trade off in the current expansionary environment.   

Performance of Exports and Imports (YoY growth):

Source: Ministry of Commerce, GoI, Acuité Research

  Export Import Trade Deficit ($ bln)
  Overall Petro Manufacturing Overall Crude oil Non-crude oil
FY15 -1.51 -10.66 0.80 -0.27 -16.43 9.11 137.5
FY16 -15.45 -46.11 -8.61 -15.01 -40.10 -3.84 118.2
FY17 5.13 3.37 5.37 0.99 5.28 -0.19 108.5
FY18 10.03 18.55 8.93 20.97 24.98 19.79 161.5
FY18 (YTD) 8.59 14.45 9.99 23.91 19.23 25.25 87.9
FY19 (YTD) 13.33 42.02 8.93 16.46 50.48 7.17 112.2
Oct-17 -1.32 13.66 -3.34 7.61 27.92 2.19 14.1
Sep-18 -2.16 26.75 -6.16 10.44 33.53 4.11 14.0
Oct-18 17.86 49.39 13.03 17.62 52.63 6.05 17.1
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