Five reasons why we shouldn't celebrate trade deficit numbers

While the reduction in September trade deficit figures is commendable, this trend is unlikely to continue

Government officials have patted themselves on their back on a better-than-expected set of trade deficit numbers. They need to be proud to bring the trade deficit to a 30-month low. Analysts too have given the thumbs up to these numbers and are, in fact, going a step further by revising their current account deficit (CAD) number more optimistically than those of the government’s own estimate.
 
The trade deficit for the month of September 2013 stood at $6.8 billion as compared to $10.9 billion in August 2013. Exports grew by 11.2 per cent while imports fell by 18.1 per cent in September 2013.

 
Now for the details. We take a look at five reasons why the trade deficit numbers are not to be celebrated over.

1.  The fall in trade deficit is largely on account of fall in imports of non-oil and non-gold products. Non-oil imports have fallen by 24.2 per cent on a YoY basis as compared to a 5.9 per cent fall in oil imports. This is a bad sign as it signifies a slowdown in overall business activity in the country.

2.  Gold imports have been strangulated by the government to control CAD. This has contributed significantly in bringing down the trade deficit and CAD. As a result physical imports have fallen from 162 tonne in May 2013 to a trickle of only 2 tonne in August and September each. In dollar terms gold imports have fallen from a peak of $7.5 billion in May 2013 to only $0.7 billion in September. Contribution of gold to imports has fallen from a high of 15.4 per cent to only 2 per cent of total imports. However, some relaxation in gold imports and festival season has seen a pick-up in gold imports since September end. Going forward we can see contribution of gold as a percent of total imports increasing, contributing negatively to the trade deficit number.

3.  On a year-on-year basis oil imports have fallen by only 5.9 per cent but on a month-on-month basis it has come down by nearly 12.5 per cent. In value terms, imports have come down from $15.1 billion to $13.2 billion, signaling a sharp slowdown. Diesel consumption has been reported to have come down by 3 per cent. Now that’s no reason to party.

4.  Exports growth at 11.2 per cent is commendable since it comes on the back of a 9.5 per cent growth in July and 13 per cent in August. Currency depreciation needs to be given more credit than any pick-up in demand. IIP numbers show that textiles and leather production also picked up. Since both these products work on thin margins globally, even a slight change in currency rates can swing the fortunes of the sector. Rupee depreciation has immensely helped the sector which is also reflected in the buoyant mood of the respective trade councils. The rupee has strengthened by over 10 per cent from the second half of August and first half of September. Part of the benefit for exports has evaporated which can affect exports growth going forward, as captured by the fall in PMI new export orders in September as pointed out by Citi in its report on the numbers.

5.  A US shutdown and closing of liquidity tap by the US is likely to impact not only the financial world but also manufacturing globally. In such a scenario maintaining export growth as has been seen over the last three months will be a tough task.