Credit Suisse
India: Current Account Deficit Obfuscates Oil Outstandings To Iran, Export Growth Unsustainable
As per the RBI, India's current account deficit fell to an estimated 2.5% of GDP in the March 2011 quarter, from 3.1% in 9MFY11. Driving this is a cut in trade deficit due to (1) a fall in implied oil import volume (Fig 1) and (2) a rise in exports.
● We note that implied Indian oil import volumes have fallen sharply. This 26% YoY fall seems to be an accounting flaw, partly due to non-payments to Iran. If we take last year's volumes on this year's oil price, CAD would increase by US$14 bn (0.8% of GDP).
● Exports started picking up from Nov 2010. We now have a split. The increase – at least in Nov-10 – was limited to a few sectors : metals (50%), transport equipment (likely auto parts, 20%) and cotton + yarn (15%) are together 85% of the incremental growth, but only 25% of total exports.
● Agri exports (mainly cotton), while small, helped the recent surge. Cotton prices in Nov-10 were up only 50% YoY to c.US$120/lb.
In subsequent months, they rose to US$200/lb, and may have played a larger role in export growth till March 2011. They are now down to ~$150. Exports may continue to be strong, but the Nov-10 split does not provide confidence in sustainability. In the absence of trade support, despite a record US$76 bn in fund inflows in FY11 (equity+debt), the Rupee has been weak (except against the USD). This creates a worrying circularity for investors.
Assessing sustenance of the fall in trade deficit
India's current account deficit fell to an estimated 2.5% of GDP in Mar-11 quarter, from 3.1% in 9MFY11. This has been led primarily by reduction in the trade deficit. This, in turn, has been caused by (1) a fall in implied oil import volume and a rise in exports. Oil import value was flat YoY in the March 2011 quarter despite a sharp increase in oil prices, implying that volumes fell 25%.
Simultaneously, FY11 exports were significantly higher than prior peaks, and at US$246 bn – much higher than the trade ministry's target of US$200 bn. YoY exports growth is back to pre-crisis levels.
The pick-up occurred from 3Q11 onwards, in particular from Nov 2010. We attempt to assess sustainability with the Nov 2010 split.
Two-thirds of India's exports are manufactured products, which remain flat since March 2010. There has been a spike in agri exports – both cotton and yarn exports have benefited from relaxed export limits and a sharp increase in prices globally.We note that 97% of the incremental YoY growth in exports in November 2010 came from sectors accounting for only one-third of exports. Of these, commodity exports are 65% of incremental exports.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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