This article reviews India’s merchandise trade performance during April-September 2014 on the basis of the data released by the Directorate General of Commercial Intelligence and Statistics (DGCI&S). It also analyses disaggregated commodity-wise and direction-wise details during this period.

Highlights

India’s trade performance improved significantly in Q1 of 2014-15, building on the growth in exports and compression in imports in 2013-14. However, in Q2 of 2014-15 export growth lost momentum with the weakening of activity in major trade partner economies and also due to persistence of supply-side constraints in certain export industries/sectors domestically. Alongside, there was a pick-up in import growth, particularly non-oil non-gold imports, with anecdotal evidence suggesting that imports are substituting for production shortfall in certain sectors within the economy.

I. India’s Merchandise Trade (April-September 2014)

Exports

A sharp rise in exports in May-July 2014 more than outweighed the deceleration characterising subsequent months. Notwithstanding export growth roughly halving in Q2, the overall increase in exports in April- September 2014 was 6.5 per cent, up from 6.3 per cent in April-September 2013 (Chart 1 and Table 1).

Commodity-wise and Destination-wise Exports

Even though the overall export growth was a shade better in April-September 2014 than the corresponding period of 2013-14, it was concentrated in a few major sectors. Growth impulses mainly emanated from four sectors, viz., engineering goods, petroleum products, readymade garments and basic chemicals and pharmaceuticals which accounted for 58 per cent of the total value of exports. Other sectors, viz., gems and jewellery, electronic goods, oil meals and iron ore contributed negatively to export performance (Chart 2 and 3).

Besides the overarching impact of global demand conditions, exports from certain sectors reflected the impact of policy changes domestically and in destination countries as also sector-specific issues. For instance, growth in exports of engineering goods has been the outcome of diversification to new markets. Sri Lanka has emerged as a major export destination for engineering goods during this period. This diversification has helped Indian companies gain resilience in the face of the on-going slowdown, especially in a number of EU markets. Similarly, exports of readymade garments were boosted by a growing labour cost advantage of Indian companies relative to competitors from other emerging markets and developing economies (EMDEs) like China, Bangladesh, Vietnam and Cambodia some of which (e.g., Bangladesh and China) are facing shortages of labour and tightening of domestic labour laws.

On the other hand, export growth in certain sectors was affected by decline in international prices alongside weaker external demand conditions and domestic sector-specific constraints. The decline in cotton yarn exports was due to fall in international prices as well as lower demand from China. With China’s new cotton policy in place with effect from April 2014, Chinese mills have access to cheaper cotton from the domestic market, thereby lowering the international price as well as global demand. The new policy has ended China’s three-year long programme to stockpile domestic cotton to support local growers which had faced elevated domestic prices of cotton/ cotton yarn in China, inducing textile mills to import yarn from other countries. Furthermore, the Chinese authorities have recently decided not to issue additional import quota [other than required under World Trade Organisation (WTO) entry commitments], thereby guiding domestic textile companies to use more Chinese cotton. The sharp decline in international crude oil prices in recent months seems to have adversely impacted exports of petroleum products which accounted for about 22 per cent of total exports in April-September 2014. Exports of iron ore continued to be constrained by domestic supply-side issues, despite partial lifting of the ban on mining activity. The increase in export tax and railway freight charges imposed on iron ore have not only reduced exports but have also caused domestic steel companies to meet shortages by importing from South Africa, Australia and Brazil. Similarly, exports of oil meals seem to have been partly impacted by lower than expected soyabean production that resulted into high cost of soyabean in local markets.

Destination-wise analysis shows that exports to the US, the UAE, China and South Korea gained momentum during April-September 2014 on a y-o-y basis. However, exports to Saudi Arabia, Hong Kong, Singapore and countries in the European Union (except Germany) either decelerated or turned negative (Chart 4). Weaker demand conditions in most of these trade partner countries seem to have weighed on India’s exports.

In terms of share in total exports, the US continues to be the largest market for Indian goods with a share of 13.8 per cent, followed by the UAE (10.5 per cent), Saudi Arabia (4.4 per cent), Hong Kong (4.2 per cent) and China (3.7 per cent). Notwithstanding a decline in exports of gems and jewellery, rise in exports to US was mostly driven by a rise in exports of drugs, marine products and products of iron and steel. As growth in exports to most European countries either decelerated or turned negative, the EU lost its share in India’s exports albeit marginally (Table 2 ).

Recognising the issues constraining exports from various sectors, several measures were announced by the Government in the Union Budget, 2014-15 (Box).

Imports

After recording a decline for twelve successive months, India’s imports have begun to pick up since June 2014. As a result, India’s imports grew by 1.6 per cent during April-September 2014 as against a contraction of 2.5 per cent in the corresponding period last year.

Box: Recent Policy Measures relating to India’s Foreign Trade

In order to boost India’s trade, various measures were proposed in the Union Budget 2014-15, which are set out below:

• Recognising the active role of States in providing good infrastructure and full facilitation for promoting exports, the Government proposed Export Promotion Mission to bring all stakeholders under one umbrella.

• To encourage exports of readymade garments, it was proposed to increase the duty free entitlement for import of trimmings, embellishments and other specified items from 3 per cent to 5 per cent of the value of their exports.

• The basic customs duty was proposed to be reduced on the following items:

• Fatty acids, crude palm stearin, RBD (Refined Bleached Deoderised) and other palm stearin, specified industrial grade crude oils from 7.5 per cent to Nil for manufacture of soaps and oleo-chemicals;

• Crude glycerine from 12.5 per cent to 7.5 per cent and crude glycerine used in the manufacture of soaps from 12.5 per cent to Nil;

• Steel grade limestone and steel grade dolomite from 5 per cent to 2.5 per cent;

• Battery waste and battery scrap from 10 per cent to 5 per cent;

• Coal tar pitch from 10 per cent to 5 per cent;

• Specified inputs for manufacture of spandex yarn from 5 per cent to zero;

• To encourage new investment and capacity addition in the chemicals and petrochemicals sector, the basic customs duty was reduced on the following import items:

• Reformate from 10 per cent to 2.5 per cent;

• Ethane, propane, ethylene, propylene, butadiene and ortho-xylene from 5 per cent to 2.5 per cent;

• Methyl alcohol and denatured ethyl alcohol from 7.5 per cent to 5 per cent;

• Crude naphthalene from 10 per cent to 5 per cent.

• To prevent misuse and avoid assessment disputes, the basic customs duty on semi-processed, half cut or broken diamonds, cut and polished diamonds and coloured gemstones was proposed to be rationalised at 2.5 per cent.

• To encourage exports, pre-forms of precious and semi-precious stones were proposed to be fully exempted from basic customs duty.

• To boost domestic electronics industry, it was also proposed to (i) impose basic customs duty at 10 per cent on specified telecommunication products that are outside the purview of the Information Technology Agreement, (ii) exempt all inputs/ components used in the manufacture of personal computers from 4 per cent special additional duty (SAD), (iii) impose education cess on imported electronic products to provide parity between domestically produced goods and imported goods, (iv) exempt 4 per cent SAD on PVC sheet and ribbon used for the manufacture of smart cards.

• To boost domestic stainless steel industry, it was proposed to increase the basic customs duty on imported flat-rolled products of stainless steel from 5 per cent to 7.5 per cent.

• To maximise the utilisation of solar power, specified inputs for use in the manufacture of EVA (Ethylene Vinyl Acetate) sheets and back sheets; flat copper wire for the manufacture of PV ribbons were proposed to be exempted from basic customs duty. Further, a concessional basic customs duty of 5 per cent was extended to machinery and equipment required for setting up of a project for solar energy production.

• The basic customs duty was reduced from 10 per cent to 5 per cent on forged steel rings used in the manufacture of bearings of wind operated electricity generators.

• The SAD of 4 per cent was exempted for imports of parts and raw materials required for the manufacture of wind operated generators.

• A concessional basic customs duty of 5 per cent was prescribed on machinery and equipment which are used for setting up of compressed biogas plants (Bio-CNG).

• To conserve domestic natural resources, the Budget proposed to increase the export duty on bauxite from 10 per cent to 20 per cent.

In addition, the basic customs duty was proposed to be rationalised for imports in various sectors.

• On May 21, 2014, the Reserve Bank modified the guidelines for import of gold by the nominated banks/agencies/entities. As per the revised guidelines, Star Trading Houses/Premier Trading Houses (STH/PTH), registered as nominated agencies by the Director General of Foreign Trade (DGFT), were allowed to import gold under 20:80 scheme subject to certain conditions.

Commodity-wise and Destination-wise Imports

Commodity-wise analysis shows that POL imports, accounting for nearly 35 per cent of total imports, increased modestly during April-September 2014. Although the international crude oil prices (Indian basket) were higher during April-July 2014 (y-on-y basis), the subsequent softening in prices helped stem POL import growth (Table 3 ). In quantum terms, there has been a marginal growth in POL imports. Although gold imports surged in the second quarter, overall gold imports in the first half of 2014-15 continued to be lower than in the corresponding period last year. In quantum terms, gold imports stood at 365 tonnes during April-September 2014, about 20 per cent lower than the level during April-September 2013.

Even though the increase in non-oil non-gold imports appears to be indicative of gradual recovery in the domestic economy, supply-side bottlenecks in certain sectors may also have induced substitution through imports. In particular, import demand for basic and intermediate goods including iron and steel, nonferrous metals, metaliferrous ores and other minerals, artificial resins, plastic materials and electronic components has picked up in April-September 2014.

Higher imports of iron and steel may also be an indicator of an improving outlook for domestic construction and manufacturing sectors. On the other hand, India’s coal imports largely reflect domestic supply-side bottlenecks in the wake of legal rulings on coal block allocation and also growing needs of thermal-based power plants. The rise in imports of electronic goods is reportedly due to an inverted duty structure as certain finished electronic goods carry lower import duty than components and raw materials. This is leveraged by domestic companies to import finished goods rather than manufacturing them domestically. In contrast, imports of capital goods (viz., machine tools, machinery, project goods and transport equipment) either remained subdued or declined, with growth in domestic production of capital goods strengthening. On the whole, the major contributors to import growth during April-September 2014 were POL, vegetable oil, electronic goods, chemical, artificial resins and iron and steel (Charts 5 and 6).

The direction of trade shows that there were lower imports from the EU, the US, Switzerland, Iraq, Kuwait, Saudi Arabia and the UAE. The sharp decline in imports from oil exporting countries was largely due to fall in international oil prices in August and September 2014. The decline in imports from Switzerland by 17.1 per cent was mainly due to contraction in gold imports. In contrast, the imports from China increased by 14.5 per cent as against a decline of 3.7 per cent in April- September 2013, largely driven by surge in imports of telecom instruments, making it the largest source country for India followed by Saudi Arabia, the UAE, the US and Switzerland (Table 4 ).

Trade Deficit

Despite the import growth turning modestly positive India’s trade deficit narrowed in April-September 2014 as compared with the corresponding period of 2013-14 reflecting some improvement in export performance.

II. Global Trade Scenario

Economic activity across major economies grew at a slower than anticipated pace in the first half of 2014, with world growth projected to remain stagnant at 3.3 per cent in 2014. In particular, growth in major emerging markets and developing economies (EMDEs) is likely to remain constrained (Chart 7). As per the International Monetary Fund’s (IMF) projections, the growth in export volume of EMDEs will decelerate from 4.7 per cent in 2013 to 4.4 per cent in 2014. Nevertheless, the growth in world export volume is projected to be higher on the back of exports from advanced economies (Chart 8).

Key commodity prices have softened so far in 2014 (Chart 9). Even though escalation of geopolitical tensions led to a temporary upward pressure on international prices of crude oil in mid-2014, the recent fall reflects strengthening of the US dollar, increased supplies by both organisation of the petroleum exporting countries (OPEC) and non-OPEC countries and weakening demand from major EMDEs and the euro area. According to the US Energy Information Administration, September 2014, it also reflected the impact of moderation in demand due to seasonal decline in refinery runs and the seasonal increase in crude oil exports from Saudi Arabia. Similarly, metal prices have traded softly so far in 2014. In particular, international prices of iron ore declined further in 2014, reflecting the expansion of low cost supply, particularly Australia and Brazil, and also lower demand in China. Softening food prices benefitted from weather-induced improvement in global supply condition. Going forward, the prices of key commodities are projected to moderate further in 2015, amidst a still weak global outlook.

III. Outlook

The narrowing of India’s trade deficit in April- September 2014 augured well for India’s overall balance of payments. However, the deceleration in export growth in recent months has heightened downside risks in a difficult international trading environment. On the import side, further softening of international prices of key commodities may help contain the level of imports, although the rising gold imports may offset this advantage and turnout to be the key determinant of overall imports. Besides this, the upturn in non-oil non-gold imports since May 2014 may gather momentum as domestic activity gains traction.

* Prepared in the Division of International Trade and Finance, Department of Economic and Policy Research, Reserve Bank of India, Mumbai. The previous issue of the article was published in the Reserve Bank Bulletin, October 2014.