The jump in core imports and PMI data suggests some signs of a pickup in domestic activity in January, although it could also be inventory restocking.
By Sonal Varma & Aurodeep Nandi
India’s merchandise trade deficit widened unexpectedly to a seven-month high of $15.2 bn vs $11.3 bn in December (see graphic), above expectations (Consensus: $11 bn, Nomura: $9.7 bn). Much of the spike was due to import growth outperformance, which improved to -0.8% year-on-year (y-o-y) in January vs -8.8% in December (Nomura: -12%). Oil import growth rose to 15.3% y-o-y vs -0.8% in December, partly reflecting the low base, but also possibly due to the lagged effects of higher oil prices in Q4 2019. Core import (imports ex-oil, gold) growth also improved to -4.7% y-o-y vs -12.2% in December, signalling incrementally stronger demand conditions in January. Our price-volume analysis also showed a smaller contraction in core import volumes (-8.4% y-o-y, 3-mma vs -10.1% in December) and prices (see graphic).
Within imports, there was an improvement in consumer goods’ growth (though still in contractionary territory), and stable growth in agricommodities, and a sharp turnaround in non-agri commodities (driven by higher oil import growth). By contrast, contraction in investment goods’ imports deepened in January. Exports contracted by 1.7% y-o-y in January vs -1.6% in December, below expectations (Nomura: 1.5%). Our price-volume analysis shows that core export (non-oil) volumes contracted by 2.7% y-o-y (3-mma basis) in January vs -2.8% in December, and price pressures also eased (2.3% vs 3.9% in December).
The jump in core imports and PMI data suggests some signs of a pickup in domestic activity in January, although it could also be inventory restocking. Given the continued slump in investment goods’ import growth, and the continued contraction in consumer goods, it is too early to conclude that the improvement in imports is due to durable domestic demand. Disappointing export growth shows that India was clearly not benefiting from the export stabilisation witnessed in the rest of Asia before the COVID-19 outbreak—possibly because it was more tech-oriented. The weak rupee has also not helped revive export growth much. We remain cautious on the export and import outlook, especially given the virus outbreak, though the full impact may not be reflected in the February data. In the case of imports, we foresee negative supply-side shocks from China, which accounts for ~14% of India’s imports, and affects imports of electrical machinery & equipment, nuclear reactors & boilers, organic chemicals, plastic articles, and fertilisers. The sharp correction in oil prices should also slowly begin reflecting in the import growth statistics. As for exports, while China accounts for relatively smaller proportion of the demand for Indian goods, the overall global growth risks will weigh on export growth. On balance, we envisage a smaller trade deficit in the coming months due to expectations of a sharper fall in import growth vs export growth.
Edited excerpts from Nomura’s First Insights (February 14, 2020)
Authors are Research Analysts, Asia Economics, Nomura. Views are personal