The trade deficit for India has continued to follow the declining trend since FY12, on the back of falling global oil prices. While the performance of the dollar value of aggregate exports has been softening, mirroring the global slowdown, that of aggregate imports is being curtailed at higher rates on the back of falling oil prices. Oil, holding the top spot amongst importing sectors, also saw a major fall in imports in terms of dollar value as prices had been declining since early 2011. Gems & Jewellery, the second top importing sector has also seen a reduction in its dollar value of imports since FY15.
Trade deficit at its lowest in last five fiscal years as exports see a double-digit contraction over FY15
The total deficit for the country dropped to as low as US$119 billion in FY16, from a level of US$183 billion in FY12 and US$138 billion in FY15. Imports in FY16 dropped to US$381 billion from US$489 billion in FY12 and US$448 billion in FY15. Exports have shown a less dramatic performance, lying at US$262 billion in FY16 from US$306 billion in FY12 and US$310 billion in FY15. In the April to October period during the current fiscal year, trade deficit decreased to US$53 billion from US$78 billion in the comparable period in FY2016. Exports recorded a nearflat growth in April-October in FY2017, 0.2 per cent; this was however a marked improvement over the steep contraction in exports to the tune of 17.1 per cent in the comparable period in FY2016. Imports softened from US$233 billion in April-October in FY2016 to US$209 billion in the same period in FY2017.
The dollar value of aggregate imports in October 2016 stood at US$33.6 billion, as compared to the peak of US$45.3 billion in May 2011 and above US$25.8 billion in April 2016, when they were at the lowest during the period of analysis – April 2011 to October 2016. During the same period, aggregate exports witnessed their highest dollar value at US$30.5 billion in March 2013, and the lowest at US$19.6 billion in November 2015, while in October 2016, exports stood at US$23.2 billion. Trade deficit was at its highest levels at US$20.2 billion in October 2012, during the period of analysis – April 2011 to October 2016, and witnessed a trough at US$4.4 billion in March 2016 earlier this year, while in October 2016, trade deficit levels were to the tune of US$10.4 billion.
Lack of diversification of Indian export basket is plaguing the Indian export performance
The sector-wise pattern in exports has not seen noticeable changes in past three fiscal years. The top three exporting sectors – engineering goods, gems & jewellery and textiles – contribute to over half the dollar value of aggregate exports, while next three – oil, agriculture and drugs & pharmaceuticals – add the next quarter to the tally. This limited diversification of India’s export basket has led to a stagnant trend in export performance, as a dismal performance in these sectors sways the dollar value of aggregate Indian exports. During the last fiscal year, all these six sectors have witnessed a contraction in the dollar value of their exports, with the exception of drugs & pharmaceuticals. However, the drugs & pharmaceuticals sector has also seen a contrac
Engineering goods has been a top exporter since FY14, contributing one fourth of dollar value of aggregate Indian exports. While this proportion has been fairly constant, in FY16, engineering exports saw a contraction to the tune of 14.8 per cent in its dollar value, as compared to a double-digit growth of 13.9 per cent in FY15. This is a major cause of worry as engineering goods comprise a major chunk of aggregate exports. The situation has improved only to a limited extent in the April to October period in the current fiscal. The contraction in that period stood at 1.3 per cent as compared to de-growth of 11.3 per cent in the comparable period in FY16.
Gems & jewellery, contributing around 15 per cent of total dollar value of exports in FY16, witnessed a further contraction to the tune of 4.6 per cent in its dollar value of exports as compared to a de-growth of 0.9 per cent in FY15. In the April to October period in FY17, the sector witnessed dramatic improvement in growth rate to the tune of 14.5 per cent as compared to a negative growth rate of 6.4 per cent in the comparable period in FY16.
Textiles, which contributed around 13 per cent of total dollar value of aggregate exports during FY16, also saw its share diminishing by 2.3 per cent in FY16, as compared to a growth of 5.6 per cent in the previous fiscal year. The growth rate declined further in April to October period of current fiscal year to a negative rate of 4.4 per cent as compared to a contraction of 0.4 per cent in the same period in FY16. Agriculture, contributing to 8 per cent of dollar value of aggregate exports during FY16, saw a contraction of 18.3 per cent in FY16 as compared to a de-growth of 4.8 per cent in 2015. In fact, for eight of the top 10 exporting sectors, growth rates lay in the negative territory. While this was, in some part, a result of the falling demand due to slowdown in global economies, the importance of these commodity groups in the aggregate Indian export basket affected aggregate export growth adversely.
Drugs & pharmaceuticals industry, unlike all the rest, was expanding its dollar value of exports till FY16. The absence of product patents, till its revision in 2005, had helped India build the capacity to manufacture generic drugs, resulting in high export growth figures. April to October period in FY17 however saw a negative growth rate to the tune of 2.1 per cent in this sector on account of a steep fall in prices. This happened because of growing consolidation of the distribution business in the world’s largest markets, especially the US, while the supply side of generic drugs remains competitive. Also drug multinationals have pressured governments into tightening the norms to discourage bulk exports from abroad, sounding bad news for the Indian pharmaceuticals industry.
Iron-ore exports, that were large because of demand from China, have been slowing down in each fiscal year since FY14 due to slowdown in China. Increasing domestic demand of crude and petroleum within the country has reduced the exports in the oil sector as well, in each fiscal year since FY14. Although handicraft exports have been performing consistently well since FY14, their meager contribution of 0.7 per cent, during FY16, fails to make a dent in the aggregate export basket.
The dollar value imports in Oil and Gems & Jewellery sectors continues to contract
During FY16, the top three importing sectors – oil, gems & jewellery and electronic goods – contributed to a little less than half the total dollar value of aggregate imports, while the next three sectors – machinery, chemicals and base metals – added the next quarter to the tally. While the list of top ten importing sectors has not seen major inclusions or exclusions over last three fiscal years, the proportions have seen noticeable changes. The proportion of oil in the dollar value of aggregate imports has declined from 36 per cent in FY14 to 22 per cent in FY16. Electronic goods comprised 11 per cent of the dollar value of aggregate imports in FY16 as compared to 7 per cent in FY14.
The observation that – while oil has seen a large decline in proportion of imports, the change has been not so dramatic for other sectors – reflects that the decline in the dollar value of aggregate imports as a denominator is in tandem with the decline in dollar value of imports of oil. In other words, oil has been a near sole contributor to curtailing of imports and trade deficit. While the dollar value of aggregate imports contracted by 15.0 per cent in FY16 and that of all other sectors with the exception of oil contracted by only 3.8 per cent in the same fiscal year, oil imports alone witnessed contraction to the tune of 40.0 per cent in dollar value during FY16. It is noteworthy, however, as prices have been correcting, imports have contracted only 15.4 per cent in the April to October period of FY17 as compared to a contraction of 41.9 per cent in the comparable period in FY16.
Gems & jewellery, which contributed to as much as 15 per cent to the total dollar value of imports in FY16, saw a contraction in imports of 9.8 per cent in dollar value as compared to a growth of 7.6 per cent in the previous fiscal year. In the April to October period of the current fiscal, imports contracted further to the tune of 20.4 per cent as compared to a negative growth rate of 6.4 per cent in the comparable period in FY16.
Six of the top ten importing sectors witnessed a contraction in the dollar value of imports. In the April to October period of the current fiscal as many as nine of the ten sectors witnessed a contraction in imports. Growth in the dollar value of import of electronic goods softened in FY16 and stood at 9.8 per cent as compared to 15.5 per cent in FY15. In the April to October period of FY17, contraction of 1.8 per cent was witnessed however, as compared to a growth rate of 9.5 per cent in similar period in previous fiscal. Machinery saw a contraction to the tune of 5.4 per cent in FY16 as compared to a growth of 8.6 per cent in FY15. The downward trend is persistent as the sector saw a contraction of 15.0 per cent in April to October period of FY17 as compared to 1.3 per cent growth in comparable period in FY16. Chemicals witnessed a higher growth of 3.0 per cent in FY16 as compared to a growth of 1.9 per cent a year ago. In the April to October period of FY17 however, the sector slipped into negative territory and contracted by 2.0 per cent as compared to a 2.2 per cent growth in April to October period in FY16. Base metals, which constituted 6 per cent of the aggregate imports in FY16 in terms of dollar value, saw a contraction of 8.6 per cent in FY16 in its dollar value of imports as compared to a growth of 25.1 per cent in FY15 as prices of base metals corrected. The trend persists as the sector saw a contraction of 17.2 per cent in April to October period of FY17 as compared to 3.1 per cent de-growth in comparable period in FY16.
The monthly performance of major sectors, in the first two quarters of FY17, apart from oil and gems & jewellery which are on a clear declining trend, has been mixed. Electronic goods and chemicals have seen a somewhat sustained level of imports during April 2016 to October 2016. Imports in machinery, base metals, ores & minerals, transport equipment and agriculture have softened during the same period – the first two quarters of FY17.
Aftermath: Rising oil prices sound warning bells for India
Export performance has become a cause for serious concern especially as out of top ten sectors – which comprised around 90 per cent of dollar value of aggregate exports during FY16– eight have registered a contraction in dollar value of exports. While momentarily, imports seem to provide some cushion to the widening Industrial output contracted in October 2016, declining by 1.9 per cent as compared to 0.7 per cent in the previous month. Mining and manufacturing segments remained a cause for concern with capital goods continuing to weigh on the headline print. Consumer goods recorded a contraction as well during the month.
The Manufacturing sector growth once again slips into negative territory
The manufacturing sector, which has the highest weight among all the industrial output sub-sectors, once again slipped into the negative territory — contracting by 2.4 deficit, it is important to note that the OPEC decision on 30th November 2016 to reduce oil production has sent oil prices into a rally resulting in apprehensions about the continuation of the gains accrued from low oil prices. A potential ban on gold import will help ease the situation and reduce imports to some extent; gold prices have already been falling since July 2016. The best course would be to take preventive actions as soon as possible, before the trade deficit plunges into a wide gap again. These would include diversification of exports basket, lobbying for better prices for agricultural products in the international markets, curtailing oil consumption by promoting renewable energy devices and encouraging further not just the Make in India initiative but also focusing on use of indigenous raw materials and exporting finished products as compared to semifinished produce so as to fetch best prices especially in industries like electronic goods, agriculture and gems & jewellery. recent weakness in IIP has already shown up in lower than expected GDP growth in Q2FY17. On a cumulative basis, factory output in April-October 2016 contracted by 0.3 per cent compared to 4.8 per cent growth in the same period a year-ago.
Manufacturing sector growth once again slips into negative territory
The manufacturing sector, which has the highest weight among all the industrial output sub-sectors, once again slipped into the negative territory — contracting by 2.4 deficit, it is important to note that the OPEC decision on 30th November 2016 to reduce oil production has sent oil prices into a rally resulting in apprehensions about the continuation of the gains accrued from low oil prices. A potential ban on gold import will help ease the situation and reduce imports to some extent; gold prices have already been falling since July 2016. The best course would be to take preventive actions as soon as possible, before the trade deficit plunges into a wide gap again. These would include diversification of exports basket, lobbying for better prices for agricultural products in the international markets, curtailing oil consumption by promoting renewable energy devices and encouraging further not just the Make in India initiative but also focusing on use of indigenous raw materials and exporting finished products as compared to semifinished produce so as to fetch best prices especially in industries like electronic goods, agriculture and gems & jewellery. recent weakness in IIP has already shown up in lower than expected GDP growth in Q2FY17. On a cumulative basis, factory output in April-October 2016 contracted by 0.3 per cent compared to 4.8 per cent growth in the same period a year-ago. per cent in October 2016 as compared to 0.9 per cent growth in September 2016. In terms of industries, 12 out of the 22 industry groups (as per 2- digit NIC-2004) in the manufacturing sector showed negative growth during October 2016 as compared to the corresponding month of the previous year. For the April-October 2016 Industrial Output Contracts Once Again ECONOMY MATTERS 22 DOMESTIC TRENDS period, the sector’s output contracted by 1.0 per cent, as against a growth of 5.1 per cent in the same period a year ago. Mining & quarrying sector continued to remain in the negative territory for the third consecutive month, declining by 1.1 per cent in October 2016, while electricity sector posted an anemic growth of 1.1 per cent in the reporting month as compared to 2.4 per cent in the previous month.
Capital goods continue to remain a key drag on the overall IIP
According to use-based classification, capital goods continued to remain a key drag on the overall IIP. Capital goods witnessed the twelfth straight month of contraction in the month of October 2016. The sector posted a contraction of 25.9 per cent in October as compared to a decline of 21.6 per cent in the previous month. Within this sector, rubber insulated cables was the major laggard. The continued decline in the output of the capital goods sector has raised doubts about the recovery of investment cycle in the country. To be sure, industrial production excluding the output of the capital goods sector stood at 1.9 per cent during the month as compared to 4.3 per cent in the previous month. Going forward, capital expenditure by the Government will be crucial to support recovery in this segment.
Consumer goods growth also contracts during the month
Consumer goods growth entered the negative territory for the first time in 6 months in October 2016. Within this category, consumer durables witnessed a sharp slowdown at 0.2 per cent as compared to double-digit growth of 13.9 per cent in September 2016. Consumer non-durables contracted by 3.0 per cent as compared to 0.1 per cent growth evidenced in the previous month. This segment has been depressed for most of the year. While better monsoon and pay panel awards were expected to aid this sector, the recent demonetisation move of the government is anticipated to bring subdued gains for this sector.
In contrast, core sector output improves for the second consecutive month in October 2016
The output of eight core infrastructure industries improved to 6.6 per cent in October 2016 on a year-onyear basis as compared to 5.0 per cent in September 2016, thanks to a sharp rise in refinery production and a pick-up in cement production. The cumulative output rose to 4.9 per cent in April-October 2016 over the corresponding period of last year. The index measures the output in eight infrastructure sectors – steel, cement, coal, refinery products, natural gas, crude oil, fertilisers and electricity generation. It has a 38 per cent weight in the Index of Industrial Production (IIP).
Cement output quickened to 6.2 per cent in October 2016 compared with a 5.5 per cent rise in September 2016. Refinery products output expanded sharply to 15.1 per cent in October 2016 as compared to 9.3 per cent in the previous month. The same three sectors continued to contract in October 2016 as in August and September 2016 – coal, crude oil and natural gas.
Inflation Ebbing Down Slowly
Wholesale Price Index (WPI) based inflation continued its downward trajectory as it slowed down to 3.2 per cent in November 2016 as compared to 3.4 per cent in the previous month mainly due to a squeeze in cash availability which in turn impacted prices of perishable commodities. CPI inflation too edged lower to 3.6 per cent in November 2016 from 4.2 per cent previously on the back of lower food prices even as core inflation remained sticky. CPI food inflation cooled further to 2.6 per cent from 3.7 per cent previously. Within this segment, vegetables inflation and pulses led the steepest fall in November 2016 as compared to October 2016. Pulses inflation fell to 0.2 per cent as compared to 4.1 per cent in the previous month. Government measures to address structural issues in pulses have cooled down prices in this segment. While concerns in pulses inflation have lessened off-late, recent areas of concerns like sugar and cereals still remain. To be sure, inflation in sugar has continued to remain in double-digits for 8 consecutive months. Meanwhile, CPI core inflation stood unchanged at 4.9 per cent.
Retail inflation for November 2016 is presently within RBI’s comfort zone wherein CPI is within the 4 per cent level with a two-percentage point-band on either side. The moderate inflation scenario has rightly facilitated the RBI decision to retain the accommodative policy stance in the recent Monetary Policy. CII expects the WPI inflation for November 2016 to also follow the trail of CPI inflation so that the overall inflation trajectory continues to remain benign.
Food and non-food articles inflation pulls down inflation in primary articles
Amongst the WPI sub-categories, inflation in primary articles eased sharply to 1.1 per cent in November 2016 as against 3.3 per cent growth posted in October 2016. Within primary articles, inflation in both food and nonfood sub categories witnessed a moderation in output during the reporting month. For instance, primary food inflation slowed to 1.5 per cent (as compared to 4.3 per cent in October 2016) while non-food inflation stood at -0.1 per cent (as compared to 1.1 per cent in October 2016). The main reason behind the deceleration in primary food inflation was the steep fall in vegetable prices which dropped to -24.1 per cent in November 2016 against -9.97 per cent increase in October 2016. . However, inflation in mineral category quickened to 1.2 per cent during the reporting month as compared to a contraction during the previous month.
Fuel inflation accelerates; upward risks in sight
In contrast, inflation in the fuel group of WPI accelerated to 7.2 per cent in November 2016 from 6.2 per cent in the previous month. Inflation in both, petrol and diesel group, quickened to 5.5 per cent (from 3.6 per cent in October 2016) and 19.5 per cent (19.3 per cent in October 2016) respectively in October 2016. Going forward, with the Organization of the Petroleum Exporting Countries (OPEC) announcing an agreement in November 2016 to cut back on output in an attempt to lift global prices back up, we can expect some upward pressure on global crude oil prices. This in turn will push up domestic fuel inflation as well. Crude oil prices recently hit an 18-month high of US$56.44 per barrel.
Non-food manufacturing inflation remains sticky
Similarly, Inflation in the manufactured group quickened to 3.0 per cent in November 2016 as compared to 2.7 per cent posted in the previous month. Manufacturing food inflation, which had moved to double-digits in July 2016 marginally increased to 10.7 per cent in the reporting month from 10.5 per cent in the previous month. Meanwhile, manufacturing non-food inflation (popularly called as core inflation and a proxy for demand- side pressures in the economy) remained sticky at 1.4 per cent in November 2016 as compared to 1.0 per cent in October 2016. With core inflation recording an increase after a prolonged period of deflation, there are indications that demand is returning to the economy. However, the recent demonetisation move of the government is expected to curb some demand pressures.
RBI Keeps Policy Rates Unchanged, Maintains an Accommodative Stance
In a surprise move, the Reserve Bank of India (RBI) maintained status-quo and kept all the policy rates unchanged in its fifth third bi-monthly monetary policy review held on December 7th, 2016. The Central Bank, while flagging uncertainties from the recent demonetization move, noted that it will wait and watch to see how these factors pan out. However, the decision of the Monetary Policy Committee (MPC) was in consonance with the objective of containing consumer price index (CPI) inflation at 5 per cent by Q4FY17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth. The repo rate remains unchanged at 6.25 per cent while reverse repo rate and Marginal Standing Facility (MSF) rate currently stand unchanged at 5.75 per cent and 6.75 per cent respectively.
RBI takes notes of a gradual but steady growth recovery
On the growth front, the Central Bank highlighted that the output of real Gross Value Added (GVA) in Q2 of 2016-17 turned out to be lower than projected on account of a deeper than expected slowdown in industrial activity. Investment spending still remains in the negative territory. Moreover, the growth outlook of the third quarter was clouded by the still unfolding effects of the withdrawal of the high denomination legal tender. In view of latter, RBI noted that the downside risks to growth in the near-term have risen which could travel through two major channels: (a) short-run disruptions in economic activity in cash-intensive sectors such as retail trade, hotels & restaurants and transportation, and in the unorganised sector; (b) aggregate demand compression associated with adverse wealth effects. Hence, it pared its GVA growth forecast for 2016-17 from 7.6 per cent to 7.1 per cent, with evenly balanced risks.
However, the Central Bank sounds a cautious note on inflation
On the inflation front, RBI added that the downside to inflation has increased since the last policy, but risks remain as the impact of rising global oil prices and rupee depreciation on imported inflation and the effect of the 7th Pay Commission payouts on consumer demand will be visible soon. Going forward, inflation in categories such as housing, transport, trade in household goods and consumer services — including ‘eating out’ which relies mostly on cash transactions- will most likely see a downward pressure in the coming months. Consequently, as per the RBI, the withdrawal of high denomination legal tender could result in a possible temporary reduction in inflation of the order of 10-15 basis points in Q3FY17. Taking these factors into account, headline inflation is projected at 5 per cent in Q4 of 2016-17 with risks tilted to the upside but lower than in the October policy review.
Demonetisation impact felt on liquidity conditions
The policy acknowledged the surge in systemic liquidity as a result of the move to replace specified bank notes. However, this is likely to be seen as transitory and the objective of moving liquidity towards neutrality remains in place. A slew of steps were taken by the RBI to manage the excess liquidity entering the banking system post the demonetisation move announced by the government on 8th November, 2016. To be sure, the currency in circulation plunged by Rs 7.4 trillion up to December 2, 2016; consequently, net of replacements, deposits surged into the banking system, leading to a massive increase in its excess reserves. The Reserve Bank scaled up its liquidity operations through variable rate reverse repo auctions of a wide range of tenors from overnight to 91 days, absorbing liquidity (net) of Rs 5.2 trillion. From the fortnight beginning November 26, an incremental Cash Reserve Ratio (CRR) of 100 per cent was applied on the increase in Net Demand and Time Liabilities (NDTL) between September 16, 2016 and November 11, 2016 as a temporary measure to drain excess liquidity from the system.
RBI’s decision to maintain a status-quo in policy rates is reflective of the primacy given to restraining inflationary expectations in the monetary policy discourse even while maintaining an accommodative stance. The recent global developments have also persuaded the RBI to maintain the status quo. With banks now flush with liquidity post de-monetisation, CII hopes that lending activity can be facilitated at a time when credit to industry is at a six- year low. Employment-intensive sectors such as the auto, consumer durables and housing industry and the SME sector, which are presently facing cash crunch, need to be revived quickly.
Current Account Deficit Widens in 2QFY17
Current account deficit (CAD) for the second quarter of the current fiscal (2QFY17) stood slightly higher at US$3.4 billion or 0.6 per cent of GDP as compared to US$0.3 billion or 0.1 per cent of GDP in the previous quarter mainly due to higher trade deficit and lower invisibles. However, in the same quarter last year, CAD stood sharply higher at US$8.5 billion which translates into 1.7 per cent of GDP. The contraction in CAD on a year-on-year (y-o-y) basis could be primarily attributable to a lower trade deficit (US$25.6 billion) brought about by a larger decline in merchandise imports relative to exports. However, rising crude oil prices may put some pressure on trade deficit going forward. Crude prices reached an 18-month high at US$56.44 per barrel on 12th December, 2016 after members of the Organization of the Petroleum Exporting Countries (OPEC) and oil producers outside the group led by Russia agreed to reduce output. On a cumulative basis, the CAD narrowed to 0.3 per cent of GDP in H1 of 2016-17 from 1.5 per cent in H1 of 2015-16 on the back of the contraction in the trade deficit.
Invisible related flows lower in 2QFY17
Invisibles related flows were lower at US$22.2 billion in 2QFY17 as compared to US$29.2 billion in the same quarter last year. Component wise, net services receipts moderated on y-o-y basis, primarily owing to the fall in earnings from software, financial services and charges for intellectual property rights. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to US$15.2 billion, having declined by 10.7 per cent from their level a year ago.
Higher direct foreign investment cushions capital account
Net capital account increased sharply to US$12.7 billion in 2QFY17 as compared to US$7.6 billion in the same quarter last year mainly on account of higher net foreign investment. The net foreign investments were fired up by a healthy jump in foreign direct investment (FDI) component during the quarter. Meanwhile, port-folio flows witnessed an inflow of US$6.1 billion as compared to an outflow to the tune of US$3.4 billion in the same quarter in the previous year. Buoyant IPO market domestically and ample liquidity globally supported portfolio related flows during the quarter.Robust foreign investment and lower current account deficit supported BoP to remain in positive territory. In Q2 of 2016-17, foreign exchange reserves (on BoP basis) increased by US$8.5 billion as against a decline of US$0.9 billion in Q2 of last year
We expect CAD to come below 1 per cent of GDP in FY17. The key risk to the outlook is volatility in portfolio related flows and deceleration in remittance related inflows. From a longer term perspective, although the external sector performance remains favorable, the sustainability of the same is still doubtful in view of the global headwinds like uncertainty from Trump presidency, Italy referendum etc. still hovering over the horizon. Sustaining the positive momentum of exports performance will be crucial in this regard.