India’s Trade Data Was Signalling A Resurgent Economy, Until... 

For four straight months, India’s exports and imports have grown well. Will that change amid the second Covid wave?

A vendor waits for customers at an electrical goods store at a market in the Gandhi Road area of Ahmadabad. (Photographer: Dhiraj Singh/Bloomberg)
A vendor waits for customers at an electrical goods store at a market in the Gandhi Road area of Ahmadabad. (Photographer: Dhiraj Singh/Bloomberg)

Until a month ago, the Indian economy was looking stronger than it had in a while. So were large global economies like the U.S. The result was that India’s inbound and outbound trade, often seen as the cleanest indicator of demand conditions, was buoyant.

In March 2021, India’s exports and imports hit all-time highs, amounting to $34.4 billion and $48.4 billion respectively. In the January-March 2021 quarter, exports rose 19.6% and imports were higher by 18.4% over a year ago.

Then came April and the second wave of Covid-19 cases. With the country adding between 2-3 lakh cases a day in recent days, states have stepped up restrictions on normal activity even though a country-wide lockdown has not been announced.

Imports may hurt more than exports amid the second wave, said Vivek Kumar, an economist at QuantEco Research, explaining that while local demand may soften, global demand may remain strong for businesses provided they continue operating without disruptions.

Sequentially imports are expected to soften a bit amidst the second wave of the pandemic. The impact is likely to be more on the consumer side as industries are still open. While there are no blanket restrictions, things are getting difficult to do and consumer demand is likely to take a hit in the short term.
Vivek Kumar, Economist, QuantEco Research

Consumer demand may once again falter, even if moderately, said Sameer Narang, chief economist at Bank of Baroda.

Import Surge At Risk

The January-March quarter had seen a strong rebound in imports led by gold. Imports of the yellow metal have been increasing since July 2020, rising by a sharp 591.7% in value terms in March this year. The volume of gold imported also surged 471% to 160 tonnes.

“The growth is mainly attributed to factors like demand surge for gem and jewellery products from export markets like the U.S., U.K. following lockdown relaxation, the wedding season in India, improved business and consumer sentiments and as well as a recent sharp drop in gold prices,” said the Gems and Jewellery Export Promotion Council in a media statement on April 20.

Electronic goods imports were another category reflecting the strength of consumer demand. Inbound shipments of items within this category rose 77% in March after a 37.8% increase in February and a rise of 17% in January.

As domestic demand opened up, non-oil non-gold imports stabilised, said Narang. The normalisation was led by consumer imports such as gold, electrical equipment, and vegetable oils, he said. Imports of capital goods remained lower in comparison, given that capex is likely to remain low amidst low-capacity utilisation, Narang added.

Among non-consumer goods categories, imports of organic and inorganic chemicals, chemical materials, artificial resins and plastic materials, iron and steel, non-ferrous metals have shown strong growth since December.

But some of these categories could see a moderation in demand amid the second wave.

Some slowdown is likely in imports in April and May as lower requirements for raw materials and intermediate goods is likely to pull down industrial imports, said Madan Sabnavis, chief economist at CARE Ratings. Petroleum demand and demand for precious metals may see some decline because of lower mobility and postponement of events such as weddings, added Kumar.

Exports May See Less Damage

Given that large export markets such as the United States are seeing a strong economic revival, outbound shipments may suffer less, said economists.

Among key exports, rice, drugs and pharmaceuticals, organic and inorganic chemicals, iron ore, cotton yarn and handloom have seen strong growth since December.

Iron ore exports saw the sharpest growth, rising 135% between December 2020 to March 2021. India’s largest export category of engineering goods saw intermittent bouts of contraction but its share in exports rose to contribute 27% of India’s total outbound shipments in March 2021, compared to 24% in January 2020.

Headline exports have shown signs of recovery for about four months now, said Kumar. Agricultural and pharmaceutical exports have performed well through the year, along with imports of chemicals that have remained elevated because of APIs and requirements in vaccines, he said.

Now amidst yet another round of the pandemic, some supply chain disruptions are imminent in the case of exports, said Narang, even though manufacturers expect exports to largely remain unaffected.

As of now, exports are likely to take a smaller hit because it is India that’s the worst hit while other economies that India exports to are better placed, said Kumar. “The U.S. and U.K. are doing a decent job of vaccinating and even if there is a third wave in these economies it may be better than the second. A few economies in Europe are seeing a slower pace of vaccinations and exports to those may remain vulnerable.”