Trade deficit narrows to 3-mth low, exports contract

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's trade deficit narrowed to a three-month low in May, helped by lower gold imports, bolstering the outlook for its current account balance.

But in a worrying sign, weak global demand as well as persistent domestic bottlenecks led to a sixth straight annual fall in merchandise exports. Exports account for about a fifth of India's $2 trillion economy.

The trade deficit shrank to $10.41 billion last month, its lowest since February, from $10.99 billion in April, data released by the trade ministry showed on Tuesday.

The data comes days after India's current account deficit, the broadest measure of its trade with the rest of the world, narrowed to a one-year-low of 0.2 percent of gross domestic product in the January-March quarter.

Economists at Barclays said an improvement in the trade shortfall will help keep the current account gap in check in the April-June quarter.

"Overall, we think India's external sector is on a strong footing and will remain so in the coming quarters," Barclays said in a note.

India is reaping the benefits of a slump in global commodity prices that helped reduce gold imports by nearly 23 percent from April to $2.4 billion last month.

The slump also brought down the cost of crude imports, which account for nearly a third of India's total imports, by about 41 percent in May from a year earlier to $8.5 billion. But in a sign of a pick-up in oil demand, imports jumped 15 percent from April.

Global crude prices have gained in recent months, but analysts say the upside potential is limited due to ongoing oversupply.

Overall imports in May fell 16.52 percent from a year earlier to $32.75 billion.

Exports, meanwhile, continued to struggle, contracting 20.19 percent year-on-year to $22.35 billion in May.

Growth in goods exports, both in terms of value and volume, has been steadily slowing since 2012, reflecting local bottlenecks that have rendered Indian firms uncompetitive.

A report published by HSBC last month showed that electricity shortages and poor rail, road and port connectivity are compounding the problems Indian exporters are facing amid weak global demand as well as a relatively strong rupee.

"Fall in exports is becoming a trend and it is really worrying," said Anupam Shah, chairman of the Engineering Exporters' body, EEPC India. "Indian exporters need significant (fiscal) stimulus to become competitive."

(Editing by Jacqueline Wong)