The plunge in goods trade underlines the strong external headwinds the country faces due to a worsening global trade war.
Merchandise exports shrank 6.6% year-on-year in September to $26 billion, the third contraction in six months, reflecting the impact of not just external headwinds but also subdued domestic manufacturing. However, goods trade deficit hit a seven-month low of of $10.86 billion in September, as imports plunged by almost 13.9%, mirroring a collapse in domestic consumption, even ahead of the festive season.
The data released by the commerce ministry on Tuesday showed the trade slowdown was rather broad-based — exports of 23 out of 30 key items contracted, while imports of as many as 25 of the 30 products dropped. The decline in goods trade is the latest in a series of crucial indicators — industrial output shrank the most in 81 months in August; non-food credit growth hit just 8.7% in the fortnight through September 27, the first single-digit rise since December 2017 — that reinforced fears of a protracted slowdown of the economy after its disconcerting 5% expansion in the June quarter.
Surprisingly, gold imports continued to contract at a time when jewellers usually replenish inventory to cater for the festive demand in and around Diwali, partly due to persisting rural distress and elevated prices of the precious metal that had kept buyers at bay. Gold imports shrank 50.8% in September, against a massive fall of 62.5% in August.
However, thanks to the import contraction, trade deficit in the September quarter dropped to nearly $38 billion from $46 billion in April-June. This will ease pressure on the country’s current account balance, deficit in which had worsened sequentially to 2% of GDP in the June quarter from 0.7% in January-March, although it was still lower than 2.3% in the first quarter of FY19.
What is particularly worrisome is that core exports (non-oil and non-gems and jewellery) dropped 4.2% in September and 0.5% this fiscal. Similarly, the persistent contraction in non-oil and non-bullion imports (8.9% in September and 6.2% in the first half of this fiscal) compounds concerns of a domestic consumption slowdown.
A 21% year-on-year fall in brent crude prices has contributed to a slide in both exports and imports of petroleum, according to a senior government official.
With this, overall goods exports in the first half of this fiscal contracted 2.4% to $159.6 billion, while imports shrank 7% to $243.3 billion.
However, policy-makers can draw some comfort from the fact that services exports grew at a decent pace of 10.4% in August to $18.24 billion, although imports rose at a sharper rate of 16% to $12 billion, showed the latest data.
The plunge in goods trade underlines the strong external headwinds the country faces due to a worsening global trade war. The US’ withdrawal earlier this fiscal of the zero-duty trade benefits for annual Indian exports of around $5.6 billion under the so-called generalised system of preference may have dented exports, although the impact might have been marginal, said analysts.
Having grown at 9% in FY19, India’s merchandise export has fallen this fiscal. Citing persistent risks from a global trade war, the World Trade Organization (WTO) recently cut its global trade growth forecast for this year to the weakest level in a decade. The volume of merchandise trade, the WTO said, would increase by only 1.2% this year and 2.7% next year, after a 3% advance in 2018. This has weighed on the prospects of Indian exports as well.
Sharad Kumar Saraf, president of FIEO, said: “The softening of commodity prices (including crude), US-China trade war, Brexit and developments in Iran, Turkey and other gulf nations has further aggravated the problem of the world economy.” He said domestic issues such as access to and cost of credit still remained a problem area for MSMEs as well as merchant exporters. He urged the government to quickly address any issue in interest equalisation support to all farm exports, benefits on sales to foreign tourists and quick GST refund.
Aditi Nayar, principal economist at Icra, said with a lower-than-expected trade deficit in September, current account deficit could halve to $8-9 billion in Q2FY20 from around $19 billion a year earlier, “driven by moderate crude prices, subdued gold imports and sluggish domestic demand”.