The real worry could be the compression in exports and imports
A cursory glance at the trade deficit numbers could actually be gratifying for the reader. Merchandise trade deficit at $9.7 billion is well within control. But that may not be the real narrative alt all. What the Indian economy must worry about is the downstream impact.
Exports see tepid growth
Exports for March at $21.41 billion were 35% lower than last year. That is not just about the lockdown but also the prolonged impact of a global slowdown. Iron ore was the only sector to show positive export growth. Most of the other sectors including engineering goods and G&J saw deep cuts in March. Apart from the supply chain disruption happening in China, global demand conditions have also considerably gone down. Even the agri products, where India had an edge, have done badly.
Imports lagged too
It was not just exports but even imports that fell by 29% for March. The big driver was oil, which fell by 15% on the back of lower crude prices. Even gold imports were lower due to the sharply higher prices of gold. Even electrical machinery and electronic goods saw a sharp tapering of imports as the local demand from consumers and business was extremely weak. The lockdown has only worsened matters. Overall, the import levels are at the lowest possible level in a very long time.
Good news for the CAD
One positive outcome of the weak trade numbers could be the positive impact on the current account deficit. Rating agencies are already expecting India to shift to current account surplus in FY21. That is not hard to fathom. If you write off the merchandise deficit against the services surplus, you are left with just about $2 billion of net deficit in March. That can be more than compensated by NRI remittances, which are expected to go up sharply as the global situation is expected to worsen. In the midst of falling rates globally, the attractive yields on Indian bank deposits could lead to a surge in remittances. The result is likely to be a trade surplus to the tune of 1-1.5% of GDP.
But, real problem is deeper
But a 30% compression in overall trade is never good news for a young and growing economy like India. It would mean a huge compression in jobs, income levels and spending power. The FIEO has estimated that the trade plunge itself may cost India close to 15 million jobs. FIEO has also cautioned that unless the government comes out with a rescue package for exporters and importers on a priority basis, we could see a sharp fall in income levels and also rising instances of defaults. India’s trade as a share of GDP has been low historically. A structural slowdown is the last thing that India would want!