Trade deficit data shows GST pain in labour market

Sustained weakness in exports from labour-intensive sectors a concern

India’s trade deficit in October widened sharply to $14 billion (near 3-year high) from $9 billion in September impacted by weaker exports and rise in oil and gold imports. On trend basis – 3MMA (monthly data is volatile), the key highlights were:

  1. a) non-oil exports growth moderated a bit to 9 per cent from 11 per cent previously, with acute weakness seen in some labour-intensive industries – textiles, leather and gems/jewellery;
  2. b) growth in non-oil/non-gold imports is holding up at mid-teens on trend basis led by imports of metals, coal and chemicals. Part of this could be import substitution as domestic demand remains soft; and
  3. c) agriculture imports have slowed suggesting that import duty hikes in few agri-commodities in recent months may be taking effect. Going ahead, exports momentum needs to be tracked closely.

While global trade is holding up and therefore should help India’s trade, sustained weakness in exports from labour-intensive sectors remains a concern.

October trade deficit widens sharply

Trade deficit for October was $14 billion, near 3-year high (vs. $9 billion in September). The widening of trade deficit compared to previous month was due to higher gold imports to $2.9 billion (vs. $1.7 billion in September), higher oil imports to $9.3 billion (vs $8.2 billion average of past three months) and slowdown in exports.

However, a notable point is that the agri-balance seems to be improving owing to lower imports in edible oils, pulses – perhaps suggesting that import duty hikes are working.

Exports moderate with weakness in labour-intensive sectors

Exports growth slowed from 26 per cent in September to -1 per cent in October. Given that Diwali was earlier this year, it is better to analyse the data on 3MMA (trend basis). On this basis, overall exports slowed from 13.5 per cent in September to 11.5 per cent in October (vs. peak of22 per cent in April). Non-oil exports also slowed to 9 per cent (vs. 11 per cent in September and peak of 19 per cent in April).

But, the concern is pronounced weakness in labour-intensive sectors such as leather, readymade garments and gems & jewellery, which are growing 3 per cent, -4 per cent, -14 per cent, respectively. This may have perhaps been due to GST-led production hassles rather than weak global demand.

If it persists, it could further slacken labour market which in turn could weigh on domestic consumption. With regards to imports, both gold and oil imports have risen. Non-oil and non-gold imports, on trend basis, continue to maintain healthy growth rate of 15% plus, despite subdued domestic demand.

Exports growth should improve

Going ahead, we expect export momentum to improve as global trade and industrial activity are still holding up. In case exports momentum fades, especially in labour-intensive sectors, it could adversely impact consumption. As for imports, the recent rise in oil prices could keep imports at elevated levels.

We estimate trade balance to remain contained at $11-12 billion ($12 billion a month average in H1FY18).

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