Merchandise trade deficit scaled a 61-month peak of $16.6 billion in June, as a higher net oil import bill offset gains from a contraction in gold and precious stone imports, showed official data released on Friday. This could exert further pressure on current account deficit (CAD) that touched 1.9% of GDP in Q4FY18, slightly lower than 2.1% in the previous quarter but much higher than 0.4% a year earlier. Imports grew 21.3% in June, the fastest pace in five months. Exports growth slowed sequentially but still touched a decent 17.6% in June, as a rise in oil prices helped boost outbound shipment value. Even engineering goods, chemicals and pharmaceutical products registered decent expansion.
The fact that even after discounting petroleum and gems and jewellery segments, exports rose a decent 15.1% should comfort policymakers. For the first three months of the current fiscal, non-petroleum and non-gems and jewellery exports grew 13.6% from a year earlier, although overall goods exports rose 14.2% during this period.
A weak rupee after the US Federal Reserve hiked the interest rate by 25 basis points last month might brighten export prospects. The rupee has been hovering around the 68-69-mark against the greenback. But analysts say the key to any improvement in export competitiveness will be how much the currencies of its peers depreciate against the dollar in such a scenario. More importantly, with the US and China having targeted each other’s goods in a fresh escalation of a global trade war, India’s exports, like that of many others, could come under pressure. The World Trade Organisation (WTO) has forecast trade growth at 4.4% for 2018, down from 4.7% in 2017.
The data showed merchandise exports rose to $27.70 billion and imports advanced to $44.30 billion in June. Garments exports continued to drop, although the textile segments witnessed a double-digit expansion. The major drivers of exports (barring petroleum) were engineering goods (14.2%), chemicals (30.3%) and drugs and pharmaceuticals (14.7%). Petroleum exports grew a massive 52.5%, thanks to the price rise. Petroleum imports, too, rose 56.6% in June, driven by an over 60% jump in Brent crude oil prices in the last month from a year earlier. Having grown steadily in recent months after a crackdown against illegal abattoirs in Uttar Pradesh, meat, dairy and poultry product exports again dropped 15.4% in June.
The commerce ministry data showed services exports, too, contracted 7.9% in May to $16.17 billion in May from a rise of 4.3% in the previous month. Services imports dropped 6.5% to $10.21 billion in May from a year earlier, against a 6.2% rise in the previous month.
Aditi Nayar, principal economist with Icra, said: “Similar to the trend in the previous month, the labour-intensive textiles sector recorded a mixed trend with expansion in yarn/fabric/made-ups offset by weakness in ready-made garments. Moreover, the growth in exports of gems and jewellery was subdued at 3% in June 2018.”
High trade deficit in recent months due to an improvement in imports may continue to pressure the CAD. However, the CAD could worsen to $16-17 billion, or around 2.5% of GDP in Q1 FY2019, from $14 billion a year earlier, Icra’s Nayar said. FIEO president Ganesh Kumar Gupta expressed concern over subdued growth in exports by MSMEs in some labour-intensive segments. “These MSME exporters are still feeling the pinch of a liquidity crunch as banks and lending agencies have continuously been tightening their lending norms,” he said.