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Last Updated : Jan 16, 2018 02:47 PM IST | Source: CNBC-TV18

Trade deficit soars: Here's what experts have to say

In an interview to CNBC-TV18, DK Joshi, Chief Economist at CRISIL and Ananth Narayan, Market Expert shared their views and readings on the trade deficit number.

CNBC TV18 @moneycontrolcom

The trade deficit has hit a 37-month high touching nearly USD 15 billion in December -- a 71 percent spike in gold imports is largely to blame.

In an interview to CNBC-TV18, DK Joshi, Chief Economist at CRISIL and Ananth Narayan, Market Expert shared their views and readings on the trade deficit number.

Joshi said that December imports have gone up due to rise in oil prices.

He further said that labour-intensive industries like textiles, gems and jewellery are not doing so well.

According to him, we will see a better situation with regards to trade deficit in 2018-19.

Talking about exports, he said exports losing competitiveness which needs to be addressed.

Narayan expect exports to recover and gold import spike should hopefully settle hereon.

He said that we saw some impact on exports due to teething issues in goods and services tax (GST).

According to him, current account deficit is heading towards its worst since FY13.

Not a good sign if core flows are negative, said Narayan.

Dollar weakness is here to stay, he added.

Below is the verbatim transcript of the interview.

Latha: Would you start worrying now itself? This is the second or third month that we have gone from USD 13 billion to USD 13.5 billion, USD 14 billion and now, USD 15 billion.

Joshi: Of course, it is going to expand the trade deficit. It already is which will get reflected in the current account deficit also. Now I think the issue with trade has been two-fold. One is the tactical which is that the global recovery in trade, global recovery in growth, we could not benefit from its domestic glitches that did not allow us to take advantage of that. That is still continuing and that is one of the reasons why exports are underperforming compared to our peers and imports are growing because oil prices have gone up. We also export petroleum products but that offsets a part of the effect to the trade deficit, but still we import much more than we export. So clearly that is a pain point.

The other pain point in the data is that the labour intensive segments, if you look at textiles, readymade garments, I think they are not doing well. The gems and jewellery also grew at just 2.3 percent. These are the sectors that generate employment. So the hit is more prominent in the labour intensive side. Now, if I look ahead for 2018-2019, I would see a better situation because at least the domestic glitches would be taken care of. The goods and services tax (GST) issues are getting resolved and exporters probably would not have to face the refund issues the way they faced this year. So clearly, we will be able to take more advantage of the upturn in both, gross domestic product (GDP) growth and the trade growth in the global economy.

Latha: So your short point is that this is a passing problem and that the trade deficit is likely to come down soon? If yes, by when do you think?

Joshi: I think, for two three months, I do see this problem continuing. So this fiscal year is gone. In the next fiscal year you will see a better situation if oil does not move beyond USD 70 per barrel. Having said that, I would like to reemphasise that our trade, our exports are losing competitiveness. That is fairly well established. We have also tried to compute and we find that that is a long term issue that needs to be addressed anyway.

Sonia: That seems to be the biggest disconcerting factor that the slowdown in exports. In fact, year to date, the export growth is just 12-13 percent despite a favourable base. Do you expect a recovery any time soon?

Narayan: I do think exports will probably recover. In fact I am hoping that some of this spike that we have seen in gold imports and precious gem exports is maybe restocking and will show up as exports subsequently. I think things like GST and the teething problems there did cause some problems for exports. Hopefully that will get behind us pretty soon. But the trade deficit trend going close to USD 15 billion is a worrisome sign. And even if exports start to recover, the fact that commodity prices are where they are, does seem to indicate that we are going to see tough times on the trade deficit. Our current account deficit is now heading towards the worst numbers since FY13 and that is not a healthy sign. That is something we have to watch out for.

Latha: At the moment, it is not a problem because the dollar is weak anyway. So any macro weakness we have on the rupee will not result in the rupee crashing or anything like that because the dollar is so weak. A two part question. Can this dollar weakness continue and at what point would you worry about a possible sudden rupee depreciation?

Narayan: You are absolutely right. It has come, while the number is pretty troubling, it has come at a decent time because the dollar itself is as weak as it is right now, the three year low. Euro is at a three year high, yuan is at a three year high. So yes, even today the reaction ought to be muted maybe by Rs 0.10 or so weakening and then probably recovering from there. And let us also remember, the carry trade still favours the rupee. You still earn a lot of return on the rupee side.

So yes, no immediate reaction as such, but there is a growing vulnerability which cannot be denied, if your core flows are negative, if your current account deficit and FDI and FDI in equity put together is negative. And all that is sustaining the rupee is the fumes of a carry trade, that is not a good sign. So, where does dollar go from here? Unfortunately that is a billion dollar question. Things do look pretty soft for the dollar. The momentum is extremely strong and let us not forget we have the threat of a US shut down coming up later. As it is, Europe is talking about the unwinding of the quantitative easing (QE), etc.

So it does look like the dollar weakness is here to stay which should be good news for the rupee. Having said that, I think rupee will underperform other currencies to the extent that euro or yuan or the Asian currencies strengthen against dollar, we will buck that trend which might be good. Second, if do see an external shock including oil going up to USD 80 plus per barrel, that is a huge vulnerability because we are right now living on unhedged open exposures which can see a reversal.
First Published on Jan 16, 2018 10:13 am

tags #Economy

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