External Trade - Deficit widens on slowing exports - Edelweiss

Trade deficit widened sharply in July to ~USD15.5bn compared to an unusual low of ~USD10bn in June, largely due to a sharp fall in exports and rise in non-oil imports. Still, the trade deficit during Apr-Jul 2012 stood lower at ~USD55bn compared to USD61bn in the same period last year. Slowing exports reflect a challenging external environment, and forward looking exports orders index (in the PMI data) suggests that this would continue. Imports which jumped up in July might not sustain the pace given the faltering domestic demand and slowing gold imports although a rebound in prices will keep oil imports sticky. On balance, trade deficit would remain wide in coming months (although lower than last year).

Exports weakening sharply

Exports in July came at ~USD22bn, much below its normal range of ~USD25bn seen in recent months. On a trend basis (after seasonal adjustments), exports growth has declined sharply during the past few months. This is not a surprise given the frail external environment and softening global commodity prices. Notably, it was a spike in commodity prices that accelerated exports in H1FY12.

Over the coming quarters in FY13, external demand scenario is likely to be weak. Infact, HSBC manufacturing PMI of July and Aug shows an outright contraction in new export orders. However, a sharp depreciation in INR, both on a nominal and REER basis, is likely to lend crucial support to export growth.

Imports showing signs of slowdown

Imports in July came in at ~USD38bn, but not far from the average of ~USD40bn seen over the last few months. Importantly, on a trend basis, imports seem to be slowing although the pace of the slowdown is relatively lower than exports. Within imports, weakness seems to be concentrated on non-oil items. Frail growth in non-oil imports in a weakening economy is a normal phenomenon and accordingly, this weakness is expected to continue until the economy recovers. In addition, a decline in gold imports is further helping the reduction in non-oil imports. However, oil imports are expected to see an uptick as crude oil prices have shot up sharply last month on account of geo-political issues. All in all, imports are likely to lower in coming months on account of fall in non-oil imports.

Trade deficit widens

In July, trade deficit came in much higher at ~USD15.5bn compared to normal range of ~USD13-14bn in recent months and ~USD10bn in June, mainly due to a decline in exports. Meanwhile, oil imports showed no signs of softness.

Over the course of the year, growth in exports is expected to remain frail on the back of a weak external demand. However, a comparative fall in non-oil imports due to the growth slowdown and weaker gold demand would mean that trade deficit (as % of GDP) could narrow in FY13 as compared to FY12.

Source : Equity Bulls

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