Part I: India’s import revival needs to be considered with a pinch of salt

After 21 months of abysmal performance, India’s merchandise trade has finally shown one solid quarter of turn-around. Both exports and imports have shown a positive performance over the October-December 2016 period. While this would indicate improvement in demand appetite both internationally as well as domestically, till firmer positive trends show up, the numbers need to be taken with a pinch of salt. Here’s why.

First, consider the growth rate of imports at 0.5% yoy. This is only technically a growth number, with no actual growth actually having taken place. At USD 34.3bn worth of imports in December 2016, the figure is only marginally improved from the USD 34.1bn imports in the corresponding month of the previous year. This is the slowest growth seen in 3 months, with import growth coming in at 8.1% and 10.4% respectively in October and November.

Second, even the growth that has been witnessed, is on account of oil imports; which account for a little over one-fifth of total merchandise imports. Oil imports during the month grew by 14.6% to USD 7.6bn from USD 6.7bn during December 2015. A rise in oil imports indicates quickening economic activity if seen in volume terms. In lieu of volume figures, oil imports can still represent rising demand if oil prices remain unchanged. However, since the start of December 2016, prices of crude oil have remained above the USD 50/bbl mark and are expected to harden further in 2017 as global growth picks up pace. It is thus safe to assume that at least some part of the increase in oil import growth is on account of fuel price increases, though the extent remains unverifiable for now.

Third, non-oil imports actually declined during the month by 3% to USD 26.6bn from USD 27.4bn during December 2015. The small overall increase in imports is thus only on account of increase in oil imports, with non-oil imports dragging back the sum total. This is thus, not good news, since the value of non-oil imports is a more authentic measure of demand conditions in the economy than oil imports, on account of greater price stability. Non-oil imports represents a basket of goods like agricultural products, precious metals and manufactured goods and at present, accounts for 4/5ths of total merchandise imports. Since prices are spread out over multiple goods, the impact of sharp gyrations in prices of one good is unlikely to impact the value of the overall basket as much as in the case of oil imports.

Nevertheless, all is hardly lost. It might be a tepid recovery, but there are underlying signs that suggest that a recovery is indeed possible if there are no more rude shocks to the economy. In the follow up post, factors suggesting potential for real recovery of imports will be discussed.