Is India Losing Momentum as It Enters 3Q17?

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Part 3
Is India Losing Momentum as It Enters 3Q17? PART 3 OF 6

Behind India’s Increasing Trade Deficit in May

India’s trade balance

The trade balance in India (INDA) stayed in negative territory in May 2017. The trade gap stood at ~$13.8 billion in May, representing an increase of 120.7% on a YoY (year-over-year) basis.

The trade performance of any country is usually measured in terms of its import, exports, trade balance, total trade, and growth. India’s reliance on trade is less than that of emerging market peers Brazil (EWZ) and China (FXI). But its import dependence has risen over the past few decades.

Behind India’s Increasing Trade Deficit in May

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Trade balance in May 2017

At ~$13.8 billion, India’s trade gap widened in May 2017 but remained above market expectations of ~$12.5 billion. This was the highest shortfall since November 2014, mainly due to a surge in gold imports.

Imports stood at ~$37.9 billion, representing a massive 33.1% YoY rise. The rise in imports resulted from a 236.7% increase in gold imports and a 29.54% rise in oil imports in May 2017, as compared to May 2016.

Exports in May 2017 stood at $24.01 billion, or 8.3% higher than in May 2016.

Growth in imports

This higher growth in imports has resulted from increased demand for crude oil (USO), gold (GLD), and silver (SLV) in India in 2017. Imports of oil, petroleum products, gold, and silver accounted for more than 45% of India’s total imports as of May 2017.

Notably, India has high trade deficits with China, Saudi Arab, Iraq, Switzerland, and Kuwait as of May 2017.

The impact of persistent trade deficits

Global protectionist policies and the high trade deficit in India are expected to create pressure on the Indian rupee (INDA). This pressure, in turn, is likely to impact the cost competitive businesses, which rely heavily on imported raw materials in India (SCIF) (SMIN).

At the same time, the relatively inelastic nature of demand and the rise in the global prices of commodities (USO) are expected to increase import bills, and increased imports are further expected to affect the fiscal balance in India (INDA) (INDL).

Now let’s look at inflation in India over the past year.


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