Published on 16/05/2017 4:21:24 PM | Source: Emkay Global Financial Services Ltd

Trade Review - Sharp rebound in trade activity - Emaky

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Sharp rebound in trade activity

Trade deficit widens for 2nd consecutive month to USD 13.2bn in Apr’17 to reflect improved trade activities emanating from better domestic consumption, global cyclical upturn and recovery in commodity prices. Cyclical recovery in advance economies, especially in Europe and the spill-over effect on Asia have strengthened India’s exports, which expanded by 20% YoY in Apr. Imports grew by 49% in Apr on the back of upsurge in domestic consumption, with more than a third of it contributed by gold and electronic goods. Net balance under capital goods trade turned deficit in Apr, but that could be an aberration as we continue to expected muted investment demand in India. India’s service export surplus for Mar’17 improved to USD 5.9bn; still lower than an earlier average of USD 6.3bn. Q4FY17 BoP position is likely to improve due to better portfolio flows and lower CAD. In FY18 we expect CAD to widen to 1.5-1.8% along tighter global financial conditions


Export growth remained elevated for 3rd consecutive month

Exports grew by 19.8% YoY vs robust 22.5% average growth in Feb-Mar’17, higher growth is partly due to base effect and partly attributable to overall improvement in global trade activities. Somewhat stable to lower crude oil prices in the last couple of months has led to overall shrink in the petroleum deficit, both oil exports & imports contribution to overall trade has decelerated. Non-oil exports have continued to remain elevated at 16.7% YoY in Apr’17, mainly driven by higher exports in engineering goods, gems & jewellery and readymade garments. Agri exports grew by 18.9% YoY, mainly led by increase in rice exports which grew by 23.5% YoY.

Uptick in consumption related exports was observed, we await more data to confirm any improvement in the global consumption activity. Strong growth in engineering goods exports in last 7 months (average 25.6%YoY) is attributable to revival in iron & steel exports and higher transport equipment exports especially ship, boat & floating structure category. Iron and steel exports have particularly increased to Vietnam (490% YoY), Belgium (195%) and Italy (97%). Also, exports of ship, boat & floating structures exports increased significantly to Singapore (130%) and Malaysia (318%).


Higher gold imports largely contributes to the growth in overall imports

Imports grew sharply by 49.1% YoY in Apr’17 contributed by higher commodity prices and higher consumption related imports. 4 amongst the top 5 contributors of imports (Exhibit 5) have reported sharp growth due to lower base in FY16. Growth in gold imports have been really sharp in the last 3 months, in Apr’17 it has increased by 211%. Electronic imports increased by 74.1% YoY, indicating picking up of domestic consumption pace post the demonetization.

Net capital goods export turned deficit to USD611mn in Apr’17 due to sharper increase in engineering goods imports, which might be attributable to lower base in machinery imports. Going forward, we might continue to witness a capital goods surplus with improving global growth particularly in advance economies vs tepid private investment activity in India.


Outlook: Consumption related trade activity to be the driving force

We believe trade activity is likely to be robust in FY18, with exports and imports are estimated to grow at 10% and 12% respectively. Turnaround in trade activity is likely to be more visible from the consumption side accompanied by higher commodity prices. Expected widening in trade deficit with stagnation in net service exports and depressed remittances is likely to widen CAD to 1.5-1.8% in FY18, thereby signifying worsening of external balances. 


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