Prerna Prabhakar and Bornali Bhandari
Is a merchandise trade surplus of around USD 0.8 billion in June 2020, a first in 18 years since January 2002, a turning point in India’s trade history? The NCAER Quarterly Review of the Economy June 2020 has documented the weakness in India’s international trade position pre-coronavirus and its collapse during the first three months of the current fiscal. However, the June numbers throw an element of surprise.
Placing it in context, merchandise exports and imports’ growth rates have fallen for five consecutive quarters since Q1: 2019-20. The pace of deceleration gathered speed in Q4: 2019-20 and Q1: 2020-21 due to the lockdown associated with the novel coronavirus. Merchandise exports grew at [(-) 12.8%] in Q4: 2019-20 and [(-) 36.6%] in Q1: 2020-21 on a year-on-year (y-o-y) basis. Merchandise imports grew at [(-) 9.8%] in Q4: 2019-20 and [(-) 52.4%] in Q1: 2020-21 on a y-o-y basis. The monthly data shows us that while y-o-y growth of exports and imports decelerated in June 2020 compared to April and May 2020, imports fell at a faster rate than exports. Exports and imports for June 2020 declined by (-) 12.4% and (-) 47.6% respectively on a y-o-y basis resulting in a merchandise trade surplus in June 2020. Overall, there was a trade deficit of USD 9.1 billion in Q1: 2020-21, exhibiting a huge fall by 80.2% on a y-o-y-basis.
We examine the dynamics of exports and imports empirically to see whether there are particular changes in the composition of commodities and direction of trade geographically. From theory, we know that exports demand is a function of foreign income, export prices, foreign prices and exchange rate. Imports demand is a function of domestic income, price of imports, domestic inflation and exchange rate.
Non-petroleum and non-gem & jewellery exports grew at (-) 3.5% on a y-o-y basis in June 2020 and non-oil and non-gold at (-) 41.4%. As Figure 1 shows that negative growth rates were almost similar in April 2020, and then there is a large divergence since May.
The major components of India’s exports in June 2020 (DGCIS website) included engineering goods, drugs and pharmaceuticals, organic & inorganic chemicals, petroleum products, gems & jewellery.
The positive y-o-y growth of organic & inorganic chemicals exports (19.06%) and drugs & pharmaceuticals (9.89%) arrested the slide in overall exports in June 2020. Negative drivers of exports were RMG of all textiles (-34.84%) and engineering goods (-7.5%). The role played by drugs and pharmaceuticals in arresting the slide of exports in times of pandemic was a positive signal.
In contrast, in the case of imports, all the key components of imports – gold; petroleum, crude & products; electronic goods and; machinery, electrical & non-electrical saw double-digit fall in June 2020 on a y-o-y basis.
Source: Ministry of Commerce and Industry website.
Role of China
The reduced imports of machinery and electronic goods can be attributed to a disruption of the global supply chain dominated by China. Imports from China accounted for 13.8% of India’s total imports in FY 2019-20, making its share the largest. India’s import basket of Chinese goods is dominated by electrical machinery and electronic goods, constituting about 29.3% of total Chinese imports to India. However, with the pandemic hitting the Chinese economy in November 2019, overall Chinese imports shrunk by 7.2% (y-o-y basis) during FY 2019-20, becoming the worst hit amongst India’s top 5 importers. This trend is also mirrored in the electrical machinery imports declining by 7.4% in FY 2019-20 on a y-o-y basis.
Though the figures for India’s imports from China for April 2020 have shown improvement over the March 2020 figures, it is still quite low in comparison to last year’s value. This slight improvement is also reflected in recently released figures for China’s overall trade, wherein China’s exports and imports showed positive y-o-y growth – exports surged by 0.5% and imports rose by 2.7%. However, as China’s exports pick up slowly compared to its imports (largely driven by pharmaceutical goods), the return to normal with regard to India’s imports from China may take longer, and hence paints a favourable trade balance picture.
Overall, we find that growth of exports to North-east Asia and ASEAN countries was higher in June 2020 on a y-o-y basis versus June 2019 (DGCIS website). Trade with remaining regions is lower but there is no major change in the order of importance of regions. In the case of imports, trade with all regions is lower in June 2020 versus June 2019 (DGCIS website).
The NCAER QRE June 20 Update simulated that the combination of aggregate demand and supply would in all likelihood result in negative output with elevated inflation. Indian consumer inflation was 6.1% in June 2020. The rupee has depreciated against the dollar. The RBI’s Consumer Confidence Index has fallen from 115.2 in March 2020 to 97.9 in May 2020 showing muted sentiments. The IMF World Economic Outlook June 2020 had forecasted 0.3% retail inflation for Advanced Economies, 4.4% for Emerging Market and Developing Economies and (-) 4.9% growth for world output. The rupee has depreciated against the dollar.
Fall in income and depreciating exchange rate would have a dampening impact on imports demand while rising domestic inflation should have reverse impact. The deep fall in imports reflects the impact of the former variables.
Fall in income and relative lower inflation abroad should have a dampening impact on exports demand. We see the reverse because of a particular reason i.e. demand for Indian pharmaceuticals, organics and chemicals and other food products has resulted in upward demand for Indian exports. This is inelastic demand with India playing to its comparative advantage in a world afflicted by the pandemic. While these effects may help India sustain its exports momentum and therefore trade surplus for a while but whether it translates to an overall growth engine for the Indian economy remains to be seen.
Prerna Prabhakar, Associate Fellow, NCAER
Bornali Bhandari, Senior Fellow, NCAER.
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