Hopeful signs

The export numbers out on Wednesday should offer some cheer to the incoming BJP government which has already laid the groundwork to trigger a resurgence in industrial activity and alleviate headline inflation.

The May exports have risen 12.4 per cent, the highest in the last six months, and imports contracted 11.4 per cent. Exports are likely to be on course to breach the $325 billion target for last year.

While trade deficit during May rose to $11.2 billion from the previous month, this was because imports outstripped exports in absolute terms. And, on a year-on-year basis, trade deficit has actually fallen.

Non-oil imports have also continued to fall mainly from the high levels of last year, gold imports have continued to be low, while oil imports rose marginally. However, it is likely that imports will see a correction in coming months.

Pent-up demand for gold and the 80:20 scheme which allows trading houses to import gold will lead to higher gold imports impacting the import bill in coming months.

Hence, the main takeaway from the export numbers is that the pickup is an offshoot of growth in major economies, and is likely to remain buoyant even in a low output sector like consumer durables.

While the US growth is gaining momentum, the euro area is safely out of recession. Going by the IIP figures for April, with the exception of consumer and non-consumer durables, every other sector has shown tangible growth. Capital goods showed output growth of 15.7 per cent in April, while manufacturing and mining grew 2.6 per cent and 1.2 per cent respectively.

With the better performance of export-oriented and import-substituting sectors in IIP, trade-related commodities will do well going ahead. Oil prices and the rupee rate versus the dollar have also stabilised and the oil import bill is also likely to ease.

While the export train is set to arrive at the station earlier than planned, the shadow of a higher current account deficit still looms ahead. Financing CAD with higher net capital flows (by way of FDI and FII) in the current fiscal will not pose a problem, though FDI and FII inflows in fiscal 2014 have been $16.3 billon lower than fiscal 2013.

All eyes are now focussed on government restructuring, and this will result in net capital inflows improving – and helping streamline CAD management. Hence, keeping the exports tempo upbeat will be crucial.

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