India's exports grow at fastest pace in 7 months in May; trade deficit widens to 10-month high

Written by Agencies | New Delhi | Updated: Jun 12 2014, 00:39am hrs
ExportsIndian exports rise 12.4 per cent in May to USD 28 billion.
India's exports grew by a double-digit pace for the first time in seven months in May, narrowing the trade deficit and setting the ground for easing of restrictions on gold imports.

Exports last month rose 12.4 per cent to USD 28 billion from a year earlier, while imports fell 11.4 per cent to USD 39.23 billion, the Ministry of Commerce & Industry said.

The twin effect led to the trade deficit narrowing to USD 11.23 billion from USD 19.37 billion a year earlier. The gap, however, was wider than April's USD 10.1 billion and at a 10-month high.

According to the Commerce Ministry's data, gold imports, which had in 2013 led to a widening of the trade deficit and consequently a worsening current account deficit (CAD), fell 72 per cent to USD 2.19 billion.

Encouraged by the trade data, the Commerce Ministry has asked the Finance Ministry to ease gold import restrictions, which were imposed last year to check the widening CAD.

"It is definitely an encouraging sign," Commerce Secretary Rajeev Kher told reporters here. "If this trend sustains then I am sure we are reviving... It seems that they (export products) are now acquiring their natural levels."

Kher said his ministry was in favour of rationalisation of levies and rules related to gold imports. The government increased the import tax on gold to the current level of 10 per cent.

He said the appreciating rupee was not a factor in the double-digit export growth.

"There is a positive spirit and if this trend continues the next month then I will definitely be saying that there is a revival (in global demand). So, I would like to see the next month also," he added.

Asked about the export target for 2014-15, he said: "We are working towards something like USD 1 billion exports on a daily basis."

Exports in May increased to USD 28 billion from USD 24.9 billion in May 2013, helped by healthy growth in engineering, petroleum products and garments.

Sectors that recorded healthy export growth include engineering (22.09 per cent), petroleum products (28.7 per cent), ready-made garments (24.94 per cent), pharma (10 per cent) and chemicals (13.8 per cent).

In the April-May period, exports grew 8.87 per cent to USD 53.63 billion. Imports during the first two months of this financial year dipped 13.16 per cent to USD 74.95 billion, leaving a trade deficit of USD 21.3 billion.

The trade gap in May was the highest since USD 12.2 billion in July 2013.

Oil imports increased 2.5 per cent in May to USD 14.46 billion. Non-oil imports in May dipped 17.9 per cent to USD 24.76 billion.

Curbs on gold imports impacted the export of gems and jewellery, which registered a marginal growth of 1.36 per cent to USD 3.43 billion in May. Outbound iron ore shipments dipped 18.95 per cent to USD 72 million.

On agri exports, in view of a possible deficit in the monsoon, Kher said: "Our approach to agri exports is broadly nuanced by the fact that agri exports as far as possible should be open but clearly they are underlined by the attenuating factors of domestic demand and supply."

He said the government has reviewed the situation and there is no cause of worry for "wheat and rice" at present. The government is also monitoring the prices of onion, milk and pulses on a daily basis.

"Onion and milk are important. We are very, very closely observing the price trend and whenever, if required, an appropriate action will follow," he said.

"We are observing onion and milk prices at wholesale and retail levels and what the trend is over a week and then follow-up will be a decision (if required)," he added.

Onions are costlier by Rs 5 a kg in retail markets in most cities compared with prices last year.

Dairy major Amul increased milk prices in the Delhi-NCR region by Rs 2 a litre on May 9 and is considering raising prices in other parts of the country.

Export growth aided by demand revival in US, Europe: Industry

India Inc today said the pick-up in growth of exports in May was aided by the economic revival in the US and EU, among the country's biggest trade partners.

"Acceleration in export growth is good news. Double-digit rise...reflects our exporters' hard work that has been helped by revival in demand in the US and Europe," Ficci President Sidharth Birla said.

Helped by healthy growth in engineering, petroleum products and garments, exports in May increased 12.4 per cent to USD 28 billion, while imports dipped 11.4 per cent to USD 39.23 billion, the Ministry of Commerce & Industry said.

"This sends out a strong signal that the Indian economy is striding into recovery," Chairman of CII's Export-Import Committee Sanjay Budhia said.

While there was optimism on export growth, some expressed caution about its sustainability.

"We expect the positive trend to continue provided we reduce transaction costs. Hopefully, the problems relating to power shortages in most parts of India would not come in the way, especially of manufacturers," Chairman of engineering exporters' body EEPC India Anupam Shah said.

The pick-up in export growth in May benefits from a benign base effect and is unlikely to prove sustainable over the coming months, said Aditi Nayar, senior economist at rating agency ICRA, an associate of Moody's Investors Service.

"With monsoon-related concerns clouding efforts to contain inflation, competitiveness of Indian exports would be eroded if the rupee appreciates on the back of healthy foreign institutional investor inflows," she said.

Federation of Indian Export Organisations President M Rafeeque Ahmed said the rise in exports seems to be the beginning of an upward growth backed by better global trade forecast for 2014 and 2015.

Assocham Secretary General D S Rawat said keeping the trade deficit, which rose to a 10-month high of USD 11.23 billion in May, within sustainable limits is fraught with challenges.

"Fall in imports of capital goods owing to India's lower investment activity in the recent past has helped the cause of the trade balance. However, as domestic investment activity picks up, import of capital goods too would see a jump," he said.

COMMENTARY

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI:

"Trade deficit is marginally higher than our expectation. Likely up by festival related gold demand and also oil demand. A key positive is export growth both in sequential and annualised terms.

"Going forward, we expect some widening of trade deficit on the back of gold demand picking up on expectation of a reduction in import duties. However, the extent of trade gap is unlikely to be worrisome as we expect exports to maintain good performance. We expect exports to grow by 7.3 percent and imports by 8 percent in 2014/15. Trade deficit is pegged at $164 billion.

"The forthcoming foreign trade policy, with emphasis on services exports as well as deepening of international economic relations by the new government, will have a strong positive impact on India's trade performance.

"Services have outpaced merchandise exports performance globally. As such, India being an inherent service excellence centre should stand to gain with sharper focus in foreign trade policy."

UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI:

"Seasonally, trade balance tends to worsen in the April-June quarter compared to the previous quarter. The pick up in imports was not only led by oil, but also by non-oil, non-gold imports, signalling stability in domestic demand. Also, export growth is encouraging. Curbs on gold imports may be removed or eased during the budget."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI:

"The May trade deficit widened to $11 billion and this was the third month in succession when trade deficit stayed in double digits as imports, especially oil, increased.

"Nevertheless, the trend is not worrying and we remain comfortable with our 2014/15 trade deficit forecast at $155 billion. The encouraging takeaway from today's data is the double-digit growth in exports. Exports either contracted or grew in low single digits during November-April 2014.

"With better economic activity especially in the U.S. and Europe, Indian exports are likely to stay on a reasonably better footing this time. Unless global growth disappoints, risks to trade deficit remains contained even if gold import restrictions are relaxed further."

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:

"Apart from base effects marginally boosting the May export growth on year terms, the trend remains supportive. But the bigger variable to watch is import growth as the sharp correction in non-oil imports last year was not by virtue of structural changes, but engineered by trade restrictions on gold imports and the weak domestic environment.

With a turnaround expected in the capex (capital expenditure) cycle, demand for imported capital and engineering goods are bound to rise, until the domestic manufacturing base can adjust. This might offset any anticipated rationalisation in fuel imports.

By extension, we see scope for the CAD (current account deficit) to re-widen to above 2.5 percent in FY15 from -1.7 percent last year. Nonetheless, this should not be a cause for concern as funding needs will be well-cushioned by flows attracted to the revival in growth on a rebound in domestic drivers.

A tail risk here is the direction of the U.S. rates, with an earlier-than expected push to hike rates likely to revive uncertainties for the emerging markets space, including India."

BACKGROUND

- India's current account deficit narrowed to $1.2 billion, or 0.2 percent of gross domestic product, in the January-March quarter, data released by the central bank showed last month, falling for the third straight quarter on the back of a sharp fall in gold imports.

- The current account deficit, which touched a record high of $87.8 billion in the 2012/13 fiscal year, eased to $32.4 billion in 2013/14 after a government crackdown on gold imports.

- The trade deficit in the January-March period fell to $30.7 billion from $45.6 billion a year earlier, while the capital and financial account surplus fell sharply to $2 billion versus $17.8 billion a year ago.