We believe that export growth this year will pick-up as economic recovery in the US gains momentum-Crisil Research

Trade: Rising core imports hint at economy recovery

Merchandise trade deficit narrowed in August to a 4-month low of $10.8 billion due to a15% y-o-y decline in oil imports. Lower oil imports were driven by both a $10/barrel decline in crude oil prices compared to a year ago as well as lower import volumes. Excluding oil, imports in fact grew by nearly 14% in August. The low base benefitting gold imports wore off in August as the decline in gold imports began exactly a year ago as a result of import restrictions. Mirroring domestic economic recovery, core (non-oil non-gold) imports also trended upwards for the fourth consecutive month - and much more sharply this time - growing at 8.2% y-o-y in August, up from 2.8% y-o-y in July. Exports however, grew by only 2.4% y-o-y in August, a sharp slowdown from the average 10% growth witnessed in the last 3 months. With core imports expected to pick up going ahead, the growth momentum in exports needs to rise in coming months to keep the merchandise trade deficit in check.

Imports rose by just 2.1% y-o-y in August down from 4.3% y-o-y growth seen in July. The decline was entirely led by falling oil imports. Non-oil imports grew by 13.8% y-o-y in August led by both higher gold and well as higher core (non-oil non-gold) imports.

Gold imports in August stood at $2 bn as compared to $0.7 bn in August last year when the import restrictions were first put in place, leading to a sharp reduction in gold imports. Although the RBI has partially relaxed some gold import restrictions, fortunately this has not led to a significant rise in gold imports. Since May-end 'star trading houses' have been allowed to resume importing gold and banks have once again been permitted to offer gold metal loans to jewellery manufacturers.

Core or non-oil non-gold imports, an indicator of domestic demand in the economy, continued to grow for the fourth consecutive month in August, signalling a nascent recovery in domestic demand. Prior to that, non-oil non gold imports had been falling every month since August 2013.

The slowdown in exports was driven by a sharp decline in exports of petroleum products (12.9% y-o-y fall), gems & jewellery (10.3% y-o-y fall) and electronic goods (17.7% y-o-y fall). These three sectors together account for nearly 40% of India's merchandise exports. In contrast, exports of ready-made garments, leather products and marine products continued to show robust growth in August.

Despite the recent slowdown, we believe that export growth this year will pick-up as economic recovery in the US gains momentum. India exports around 12.5% of its merchandise exports and 60% of its IT/ITES exports to the US. While exports grow faster, imports of oil, consumption and investment goods are also likely to rise with recovery in GDP growth. Signs of this are already visible in the monthly trade data with growth in non-oil non-gold imports turning positive since May 2014.

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