Notwithstanding the deceleration in growth in Mar’18, the overall value of trade at US$72bn reached a 3.5 year high. Growth in exports and imports moderated to (0.7)% yoy and 7.1% yoy, respectively even as trade deficit widened to US$13.7bn. During the month, Capital Goods and commodity-oriented sectors gained momentum while consumption-oriented sectors witnessed slackness. The decline in Gems & Jewellery and Ready-made Garment exports is expected to reverse in FY19 due to better demand conditions. The escalation of global trade protectionism poses risk to India’s trade. Net services exports moderated to US$5.6bn in Feb’18, but services imports gained traction. CAD/GDP in Q4FY18 is expected at 1.8-2.0% vs 2.0% in Q3FY18, implying full year FY18 CAD/GDP at 1.9%.
Exports growth declines on higher base in March
Exports witnessed a decline of 0.7% yoy in Mar’18, but it is partly due to higher base of 27.9% yoy growth in Mar’17. GST-related glitches have impacted exports, as witnessed in Gems & Jewellery exports, which has declined by 4.0% in FY18. With the recent emergence of large bank fraud cases, this sector might remain somewhat subdued in the near term. However, improving global consumption growth, especially in the US (which accounts for ~24% of India’s Gems & Jewellery exports) might revive the sector in FY19. Although Engineering Goods exports grew by 2.6% yoy in Mar’18, the overall growth of this sector has remained strong at 17.1% during FY18. A substantial increase in the exports of Ferrous & Non-Ferrous Metals (mainly to China and the US), Machinery exports (mainly to the US and Germany) and Iron & Steel exports contributed to the overall increase in the sector’s robust performance. Agri exports grew by 5.9% yoy on account of higher rice exports, which rose by 20.9% yoy. Exports of Readymade Garments continued to decline, falling by 17.8% yoy in Mar’18 (average decline during Oct-Mar’18 stood at ~15.6% yoy). The decline was primarily due to GST woes and currency appreciation. Non-oil exports growth further moderated to 1.2% yoy from a recent high of 28.2% yoy in Nov’17.
Concentrated growth in imports Imports
growth further decelerated to 7.1% yoy in Mar’18, which was again mainly due to base effect. Overall imports rose to a 3.5 year high. Growth in imports was skewed and concentrated, as imports of Crude & Petroleum Products, Machinery and Coal contributed entirely to the headline growth. Gold imports contributed largely to the overall decline in imports (shaved off 4.2pps of overall imports growth). Petroleum Products grew by 21.6% yoy, Capital Goods imports expanded by 30.8% yoy and Coal imports swelled by 44.7% yoy. We believe that commodity-centric and exports-oriented imports witnessed a sharp rise in FY18. Enhanced government spending on the Rural sector and higher commodity prices are likely to keep imports elevated. Net Capital Goods exports remained in deficit for the 12th consecutive month, with the shortfall of US$0.6bn vs a surplus of US$1.2bn in Mar’17, due to a relatively sharper expansion in Capital Goods imports (30.8% yoy growth vs 2.6% yoy growth in Capital Goods exports).
Outlook: CAD to widen to 1.9% in FY18
Amid rising instances of trade protectionism in the US and China, it is pertinent to note that India has had also resorted to a fair bit of protectionism in the last 10 years. Apart from the sobering impact on growth, protectionism can lead to higher inflation. Overall, we expect India’s trade deficit to remain elevated in the backdrop of higher commodity prices, recovery in domestic demand conditions and mounting trade restrictions. Trade deficit in FY19E is likely to swell further to 2.5% of GDP from 1.9% in FY18.
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