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Event update: India Economy - Foreign trade data indicative of continuing feeble growth

India goods trade data corroborates the declining trend in contribution of external trade to domestic growth. May 2019 data shows muted 3.9% yoy (USD26.3bn) export growth contributing to the 6-month average of 3%. Export volume growth remains modest at 1.3% (6-month average). The combination of weak domestic environment as well as global impulses also led to imports growth moderation; imports grew at 4.3% yoy (USD41.4bn) in May 2019. Importantly, non-oil-non-gold imports contracted 1.3% yoy, denoting feeble domestic consumption and lackluster investment activities. We highlight that trade activities have decelerated notably since Nov 2018, attributable to intensifying global trade conflicts centered between the US and China and gradually percolating to other nations, including India. The counterbalancing comfort however comes from oil price correction and continuing positive global portfolio flows in response to softening of US yields. These two factors have prevented weakening pressure on INR/USD despite sharp deceleration in growth and rise in trade deficit (USD15bn, average for April-May-19). Going forward, we see potential countercyclical fiscal expansion, which could further widen deficits, eventually leading to weakening of INR/USD, which we estimate at 72-73 over the next 6 months.

Headline export growth though shows sequential improvement, absolute growth levels remain muted: Overall merchandise exports grew 3.9% yoy in May 2019 versus 0.5% yoy growth in Apr 2019. Interestingly, the improved growth comes on a strong base (May 2018 growth at 20% yoy), driven by oil-related exports as well as growth in other categories. While there is improvement in growth, overall growth levels are relatively muted. Moreover, our deeper analysis indicates that underlying trends are hardly encouraging.

The 6-month moving average (6mma) trend for both exports volume and value seems sideways with weak absolute growth: As EXIM related series tend to be volatile, we look at moving averages to understand them better. 6mma exports stood at 3.7% yoy, exhibiting sideways trend (Exhibit 2). Exports volume growth data comes with few weeks of lag, but available data is not encouraging at the moment. FY19 exports volume growth stood at 1.3% yoy, while Apr 2019 exports grew at 8% yoy on a low base (11% yoy decline in Apr 2018, Exhibit 3). Going forward, we believe any durable improvement in the two indicators would mean strength in underlying trends.

Oil-related products still drive import growth: Merchandise imports grew at 4.3% yoy, primarily driven by oil-related imports. Excluding petroleum-related products and gold, imports fell 1.3% yoy in May 2019. Ex-gold and oil, imports mildly improved on 6mma series, but overall absolute movement continued to see a declining trajectory (Exhibit 5).

Consumption-related imports took a hit post 2018, but we expect a recovery, as fiscal stimulus should support consumption: Our analysis of granular commodity-wise import data indicates that consumption-related imports took a hit in the latter part of 2018, at a time when the Indian economy was hit by a slowdown. This caused the share of consumption-related imports to slide to 12% in FY19 compared with 16% in FY18 (Exhibit 7, 8). While May 2019 data for all sub-categories is not available yet, the consumption share of overall merchandise imports in Apr 2019 stood at 11%. The decline in ex-oil and gold imports in May 2019 indicates that the slump in consumption-related imports should have sustained. We believe that the fiscal support to consumption (PM Kisan and tax rationalization) should help in reviving this trend in FY20E.

Export growth could face pressure from slowdown in global trade: Global trade protectionism is hardly showing signs of de-escalation. Hence, we expect global trade to come off in CY20/FY20, which could have a direct bearing on India’s export manufacturers. Though policy support could help Indian exporters in navigating these tough times, presently, there is no such push available. Moreover, with India recently announcing retaliatory tariffs on 29 US high-value products (imported by India, details ), we expect this segment of the economy to be subdued in FY20.

Merchandise trade deficit may continue to see upward pressure: As we expect fiscal consumption to fuel growth in merchandise imports, while exports to face stress from protectionist trade wars, India’s trade balance could see upward pressure in FY20. ​