What India’s Imports Say About The State Of The Economy
A rare trade surplus reported by India for the month of June has sparked a debate about the weakness in domestic demand. While a fall in gold imports and moderate oil imports played a role, sharp weakness in inbound shipments of capital goods points to sluggish industrial demand.
A break-up of trade data for first six months of the year suggests that imports of industrial goods have seen little pick-up after the sharp fall in shipments starting the month of March. Both in term of year-on-year contraction and the level of imports, demand for key industrial items remain depressed.
Among the top ten imports by value:
- Imports of machinery in June were 50% below the levels seen in January.
- Coal and coke imports were at 55% of the value imported in January.
- Non-ferrous metal imports in June were at 47% of import value in January, while ferrous metal imports rebounded to 55% of what was seen at the start of the year.
- Transport equipment imports were at a quarter of the level seen at the start of the year.
India’s overall non-oil, non-gold import bill stood at $15.6 billion in June, about 59% of the $26.59 billion seen in January.
Industrial goods imports remains in deep contraction on a year-on-year basis too.
- Non-ferrous metals along with iron and steel imports were 52% and 56% lower respectively, compared to a year ago.
- Machinery and transport equipment imports were 42% and 40% lower respectively.
- Imports of coal, coke and briquettes were nearly 56% lower than a year ago.
Compared to a year ago, total non-oil, non-gold imports were lower by 41%.
The contraction in industrial inputs reflects that production activity may not have improved despite easing of lockdown restrictions in June, said a research note by Indranil Pan and Gaura Sen Gupta, economists at IDFC First Bank. Even on annual basis too, capital goods imports saw a sharper contraction in June at 42.1%, compared to a contraction of 33.6% in May, reflecting weakness in industrial activity, they wrote.
Arun Singh, global chief economist at Dun & Bradstreet, said the sharper weakness in industrial imports is to be expected.
Typically, industrial demand is greater than consumer demand, when firms have negative inventory, said Arun Singh, global chief economist at Dun & Bradstreet. When firms continue to hold retail inventory, industrial demand will remain lower than consumer demand. At a time when existing capacity utilisation is low, firms continue to service consumer demand using existing capacity, he explained.
Singh also cautioned that while imports have traditionally been considered a surrogate for demand estimation, the supply side disruptions in April and May were quite severe, though conditions eased in June. The supply side disruptions, accompanied with the calls for localisation, may prompt a gradual shift to sourcing locally, he said.
Consumer Goods Imports
The trends across consumer items in the top ten imports are divergent.
- For instance, electronic good imports have rebounded in June to 70% of the levels seen in January.
- However, imports of pearls, precious and semi-precious stones are still at only 43% of the level of imports at the start of the year.
- Gold imports have also remained depressed. At $609 million in June, gold imports are 38% below the levels seen in January. Higher prices of gold suggest that volume of imports would be even lower compared to what was seen in January. Volume data for imports is available only till April.
Lower income, job losses and rising cases of coronavirus have stymied consumer demand, said Singh.
“Assuming that the pandemic is controlled and there is no second wave, consumer demand and consumer imports should normalise by Q3 FY21. Several Asian economies have seen a turnaround in consumer demand already and European economies are beginning to see a return in consumer appetite,” he said. Singh added that he expects any divergence in industrial and consumer goods to narrow by the third quarter, after which demand in the two categories will reinforce each other.