Ecoscope: Lower imports help trade deficit narrow to five-year low

COPE

Lower imports help trade deficit narrow to five-year low

Total trade contracted at fastest pace in almost half a century in 2015-16



18 April 2016

The Economy Observer

India’s merchandise trade deficit narrowed to five-year lowest level in March 2016, primarily driven by unexpectedly

sharp decline in imports.

India’s exports contracted for 16 consecutive month in March 2016. Although oil exports declined at the lowest pace

in 15 months, sharper decline in ‘engineering goods’ and ‘readymade garments’ led to a significant fall in exports.

Merchandise imports, on the other hand, contracted at the fastest pace in four months. The broad-based fall in imports

reflect weak domestic demand.

A look at long-term historical trend shows India’s total trade (exports + imports) declined at the fastest pace in the past

48 years in 2015-16. Total trade fell to ~31% of GDP, the lowest in a decade.

Going forward, weak global demand will keep exports growth subdued in FY17. Moreover, feeble domestic demand will

limit imports’ growth, which will keep trade deficit in check.



I. Lower imports help trade deficit narrow to five-year lowest level



India’s exports declined for 16

consecutive month…:

In line with weak global

demand, India’s merchandise exports contracted 5.5% YoY in March 2016,

marking its 16

consecutive fall

(Exhibit 2-3).

A look at details show exports of

‘engineering goods’ and ‘readymade garments’ fell at a faster rate, while

exports of ‘gems & jewelery’ and ‘drugs & pharmaceuticals’ continued to grow

(albeit at slower pace).

…while imports declined unexpectedly…:

Although exports contraction was

expected, ~22% decline in imports in March was unexpected. Lower oil and gold

imports were the key driver of sharp fall in imports; however, non-oil non-

valuable imports also shrank 2%, faster than in the previous month

(Exhibit 4-5).

…which helped narrow trade deficit to five-year lowest level:

As a result of

faster contraction in imports, merchandise trade deficit narrowed to USD5.1b

(Exhibit 1),

marking smallest deficit in five years. Notably, oil deficit has

narrowed sharply in the past two years, non-oil non-valuable deficit has

contributed more to the deficit

(Exhibit 6).

II. India’s trade fell at fastest pace in almost half a century in 2015-16



Total trade fell to lowest level in a decade in 2015-16:

India’s total trade

(exports + imports) declined ~15% in 2015-16, marking its worst fall in the past

48 years

(Exhibit 7).

It also implies that total trade fell from its peak of 43.6% of

GDP five years ago to ~31% last year, marking the lowest level in a decade.

Expect trade to remain subdued in FY17:

Going forward, we expect foreign

trade to remain subdued on account of weak global demand and modest

domestic recovery. Accordingly, trade deficit will be in check in FY17.

Nikhil Gupta

(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405

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