'Trade and IIP data point to subdued economy'

Moody's Analytics pegs trade deficit at $15 bn in September against $11 bn in August, IIP growth at 1% in August against 2.6% in July

Even as the government is celebrating a fall in imports for its positive impact on the current account deficit, Moody’s Analytics, the research wing of Moody's Group, on Monday said it reflected subdued economic performance. It added industrial production numbers for July snapped two months of contraction trend, but still signalled lacklustre economic performance.

The Index of Industrial Production (IIP) data for August is slated to come later this week, while merchandise trade numbers are scheduled to be released early next week. Moody's Analytics predicted IIP to grow by one per cent in August, sharply lower than 2.6 per cent in July. "Production rebounded in July following two months in negative territory, but the underlying trend for India’s manufacturing sector remains weak," the research firm said.

Demand is still soft and the supply side remains constrained by weak infrastructure and complicated taxes and regulations, it said. “Industrial output will not recover until confidence returns,”Moody's Analytics said.

On trade numbers, Moody's research arm said while exports had begun to rise in recent months, helped by the weaker rupee and the steady improvement in the European and US economies, imports remain weak, reflecting the soft domestic economy.

“This has helped narrow the trade deficit, but it still suggests that the Indian economy is under performing,” Moody's Analytics said. Industrial production grew at a four-month-high rate of 2.6 per cent in July, but much of the expansion was on account of the capital goods sector, boosted to the extent of 1.6 per cent by high growth seen in electrical equipment.

The numbers come as a relief also because this expansion has been after two straight months of contraction. The country’s gross domestic product growth had slipped to a four-year low of 4.4 per cent in the first quarter of 2013-14.

Merchandise exports grew 13 per cent to $26.1 billion in August compared with $23.1 billion in the same month last year. Month-on-month, this is a second straight month that exports saw double-digit growth, due to improved demand in the US, Europe, Africa and the Asia-Pacific.Imports in August contracted 0.7 per cent to $37.1 billion from $37.3 billion in August 2012. Trade deficit, which is part of the wider current account deficit (CAD), declined almost 23 per cent at $10.91 billion in August against $14.17 billion in the corresponding year-ago month. Moody’s Analytics pegged trade deficit at $15 billion for September.

Commerce and industry minister Anand Sharma had said the import contraction was due to a number of steps taken to curb gold import. The government had, among other things, raised the tariff on gold to 10 per cent in August from the earlier eight per cent. Gold import in August came down to $0.65 billion compared to $2.2 billion in July this year.

However, the country’s import bill remained under pressure on account of a rise in crude oil by 17.9 per cent to $15.1 billion in August against $12.8 billion in the same month in FY13. Total oil import during April-August rose to $69.7 billion, up 5.6 per cent from $66 billion in the corresponding period of 2012-13.

Total export during April-August was $124.4 billion against $119.8 billion earlier, up 3.9 per cent. Total import rose 1.7 per cent to $197.8 billion over the $194.4 billion during the corresponding period of FY1. As such, trade deficit narrowed marginally to $73.4 billion in the first five months of the current financial year from $74.6 billion in the corresponding period of previous fiscal. Current account deficit, which includes trade deficit, rose to 4.8 per cent of GDP in the first quarter of the current financial year against four per cent in the corresponding period of the previous financial year.

However, the remaining quarters of the year are expected to narrow current account deficit which would help government meet its target of cutting it to $70 billion in FY '14 (estimated 3.7% of GDP) against $88 billion (4.8 % of GDP) in the previous financial year.