A confluence of factors, including weak global demand, a sharp drop in global commodity prices and appreciation of the real effective exchange rate will slow down India’s growth in fiscal year 2016, notes Macquarie.
Tanvee Gupta Jain of Macquarie in a July 16, 2015 research note “India Insight” argues that India’s current account deficit will remain manageable in FY 16.
Stable trade deficit in June
Jain notes India’s monthly trade deficit stood at $10.8 billion (6.2% of GDP annualized) in June compared to $10.4 billion in May.
However, the analyst points out that on a three-month trailing basis, India’s trade deficit narrowed to 6.2% of GDP annualized in the June quarter, compared to 6.9% of GDP annualized seen in the March quarter.
Delving deeper into the exports segment, Jain notes goods exports continued to drop by 15.8% YoY compared with -20% YoY rate logged in May. Providing more insight into the decline, he points out that most of the decline in exports during June was led by petroleum products, engineering goods, rice and other cereals.
The following graphs capture India’s recent goods export growth:
Jain notes although goods exports (in dollar terms) remained sluggish, some improvement was seen in the exports of manufactured goods led by ready-made garments, gems & jewellery and drugs & pharmaceuticals.
Focusing on the imports segment, the Macquarie analyst notes goods imports are off 13.4% YoY.
Providing a breakdown of commodity composition, Jain highlights that oil remained sluggish, declining by 35% YoY, though it picked up sequentially on the rebound in global crude oil prices during June:
Jain points out that India’s gold imports remained weak at $2 billion in June, while non-oil non-gold import growth picked up by 3.2% YoY led by components including fertilizers, crude & manufactured, electronic goods, pulses and machinery and electrical & non-electrical:
The following graphs set forth India’s exports and imports by country:
Low capacity utilization delays capex recovery
Jain also points out that weak exports and sluggish domestic demand are the key reasons for low capacity utilization in the manufacturing sector, and also note that this is delaying a capex-led growth recovery in India:
Of note, policy efforts including stepping up of infrastructure investments, faster implementation of reforms and addressing of supply-side issues could greatly improve India’s export competitiveness over the medium term.
Jain anticipates India’s current account deficit will be at 1.2% of GDP in FY 16 compared to the 1.3% of GDP logged in FY 15. He notes this is well below the sustainable limit of 2% of GDP and would facilitate keeping external stability risk in check.
Keep in mind these estimates are based on the assumption that global crude oil prices will average $58 / bbl in FY 16, while gold imports will remain reasonable in FY 16 given contained inflation and positive real deposit rates available to Indian households.