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Strong domestic demand widens the trade deficit in June

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The trade deficit widened in June, partly due to a rise in non-oil-non-gold (NONG) imports, a key indicator of domestic demand.

“Details within the import bill throws up two interesting developments – higher food imports to augment domestic supplies ahead of potentially weak monsoon rains and firmer urban consumption demand for electronics and transport equipment,” said HSBC India in its comments on India’s foreign trade numbers.

“Notwithstanding lower global commodity prices which come as a boon to a net commodity importer like India, we worry that as economic growth inches up, the external position could weaken, if exports do not pick pace. Continued progress in removing domestic bottlenecks, according to our research, is key for making India’s exports competitive.”

India has an unofficial target of keeping trade deficit below $120 bln per year. Any increase over that number would make it difficult for the country to finance the trade deficit (the gap between the value of goods imported vs goods exported). At present, India meets its goods trade deficit with the help of service exports (IT, BPO, tourism) and remittances (payments by Indians working abroad.)

According to June numbers, annual growth in imports remained negative, largely due to the oil bill.

“However, on a sequential basis we find that imports shot up (+10.4% m-o-m sa) despite much lower gold imports. The increase is only partly explained by higher oil imports, which could prove temporary since prices have corrected in July,” HSBC said.

“Details within the import bill show a notable rise in imports of pulses (+66% y-o-y), oil seeds (+8.2%) and fertilizers (+61.3%). This is a positive indication of supply augmentation ahead of potentially weak monsoon rains. In addition, signs of firm urban consumption were also reflected in strong imports of electronic goods and transport equipment,” it said.

Exports strengthened on a sequential basis, but this was largely led by higher refined oil exports.

“Crude prices falling in July should, however, pull down oil exports going forward. This does not worry us since India is a net commodities importer so the overall impact of lower oil prices can only be beneficial.”

Non-oil exports on the other hand remained largely tepid, with the faint improvement in June attributed squarely to improvement in ‘gems & jewelry’ exports.

“Lacklustre demand in key partner countries and the relative strength of the rupee are the often cited reason for weak export growth. However, our analysis shows that half of the recent slowdown in exports can be explained by domestic bottlenecks, which tend to erode competitiveness,” the financial services firm said.

Anand Rathi Securities pointed out that there was a small recovery in exports.

“Although still in contraction, export growth decelerated to -15.8% in Jun15 (vs. -20.2% the prior month). In absolute terms, exports improved only slightly, to $22.3bn. The lagged effect of low oil prices is visible in the contracted figures. Export of manufacturing goods turned positive, while the rest continued to shrink,” it said.

“Oil imports stabilizing- Since the beginning of CY15, oil imports have been in single digits. For Jun15 the oil import bill came at $8.7bn (firming up from $8.5bn). Oil imports contracted an average 34.8% in the past 11 months,” it added.

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