Forget about imports, focus on exports of goods and services
For the month of September 2018, the trade deficit came in sharply lower at $13.98 billion compared to an average run rate of $18 billion in the previous two months. While that immediately led to strength in the rupee, one needs to scratch the surface and check if the trend is really sustainable. First, a look at the key highlights of the trade data for the month of September.
Trade deficit slackens
That was the big news in September. The trade deficit fell from $18 billion to $13.98 billion. Prima facie, this should be positive for the value of the rupee because it means lesser pressure on the rupee. A monthly trade deficit of $18 billion would have meant a full year deficit in excess of $200 billion. That would have been more than 50% of the RBI reserves. A lower run rate on the monthly trade deficit will reduce some of the pressure on the rupee. For the month of September, total exports were 9.7% up in rupee terms but about 2% lower in dollar terms. So while the weaker rupee did give a push to exports that has hardly made any dent in dollar terms. We may probably get to see the export dividends of the weak rupee only after the rupee stabilizes to an extent. However, cumulative value of exports for the first six months of the fiscal are up by 12.5% in dollar terms and that is definitely the impact of a weak rupee showing. The next few months will be critical for sustenance of this trend.
Imports are still higher
The Indian economy appears to have two concerns on the imports front. On a YOY basis, the imports for September were up by 24% in rupee terms although the dollar growth in imports was much lower at 10.5% due to dollar strength. But the devil lies in the details. Imports of petroleum products were up by 33.6% on a YOY basis and that is a major drag on the rupee and on the trade deficit. Apart from the growth in volumes, sharply higher prices this year have also taken its toll on oil imports. The bigger concern is over gold imports. For the month of September, gold imports were up by 51.5% despite weak demand from jewelers. Gold being an unproductive asset is a worry as it utilizes precious foreign exchange without contributing to productivity.
Good news from services
The real beneficiary of the weak dollar appears to be services. For the first 6 months, India reported a services surplus of $38.3 billion as against a goods trade deficit of $94.3 billion. That reduces the overall deficit for the first six months to just about $56 billion which looks a lot more manageable. Like in the past, the Indian government should put its biggest thrust on pushing the export of services. That is where the alpha has historically come for India and that is where the alpha is likely to come even in the foreseeable future!