Demand revival? Trade deficit touches 25-month peak in December

Demand revival? Trade deficit touches 25-month peak in December

Exports in December dropped to $26.89 billion from $27.11 billion a year before.Exports in December dropped to $26.89 billion from $27.11 billion a year before.

A contraction in merchandise exports narrowed to 0.8% year-on-year in December 2020, as compared to 8.7% in the previous month, according to a preliminary estimate released by the commerce ministry on Saturday. But imports rose at a faster pace of 7.6% in December, the first increase since February, driving up trade deficit to a 25-month high of $15.7 billion.

The rise in imports signals a possible revival of domestic demand, which was battered by the Covid-19 pandemic, as businesses go through a ‘reset’ phase following the unlock.

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However, some amount of pent-up demand for raw materials may also have contributed to the rise in imports, analysts say, preferring to wait longer to pronounce any sustained demand recovery. Nevertheless, if inbound shipments continue to rise, import-sensitive exports, too, will get a boost, but it will also mark a return to the usual high trade deficit trend.

The outbound shipment of core products (goods excluding petroleum and gems and jewellery), which reflect the economy’s competitiveness, grew 5.2% in December, against a 0.4% fall in the previous month. Similarly, core imports rose 8.4% last month, compared with a 1.7% fall in November.

Exports in December dropped to $26.89 billion from $27.11 billion a year before. Imports rose to $42.60 billion last month from $39.59 billion a year earlier.

Already, hit by the pandemic, exports have witnessed a roller-coaster ride this fiscal. Having risen by 6% in September, the first expansion since February, outbound shipments faltered by 5.1% in October and 8.7% in November before the contraction narrowed again in December.

Core exports have accelerated at a quicker rate than that of overall merchandise exports month after month since May 2019, according to an FE analysis, based on the data from the Directorate General of Commercial Intelligence and Statistics.

Aditi Nayar, principal economist with ICRA, said: “The recovery in imports reinforces our expectation that the current account surplus will deflate to sub-$5 billion in the second half of this fiscal.”

The expansion in non-oil exports is enthusing in light of the curbs imposed by major trading partners following the resurgence of Covid-19 cases, Nayar said. Higher imports “signals a strengthening of the domestic growth impulses, pent-up demand for imported items as well as a rise in commodity prices’, she added.

The commodities that witnessed substantial rise in exports in December included certain cereals (262.6%), oil meals (192.6%), iron ore (69.3%) and cereal preparations and miscellaneous processed item (45.4%).

Already, presenting a less gloomy picture, the World Trade Organization in October expected global merchandise trade to fall by 9.2% in 2020 from the year before, compared with the 12.9% drop projected in April last year. This will augur well for India’s trade as well.

Highlighting that traditional and labour-intensive sectors have passed the most challenging times, Sharad Kumar Saraf, president of the exporters’ body FIEO, said both Christmas and New Year sales have shown positive trends. “Going ahead, we expect our inventories to be liquidated, adding further to the overall demand,” Saraf said.

Mahesh Desai, chairman of the engineering goods exporters’ body EEPC, said: “While the domestic economy is showing sure signs of a bounce-back, there is still a rough sail for exports in the global market. This is despite roll out of Covid 19 vaccine in several parts of the world.”

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