Institutional Equity Research Global Trade Thematic

April 02, 2019

India Economics
Global Trade Balance: Theme in the Limelight

Economist:
Samiksha Punamiya
Contact : (022) 3303 4636
Email : samiksha.punamiya@relianceada.com

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Institutional Equity Research Global Trade Thematic

Global Trade Balance: Theme in the Limelight

India’s Position in Current Trade Scenario
In recent days, talks on “global trade” have occupied the centre stage with rising protectionist
Coming back to the current situation, where the US Government is levying tariffs in expectation
measures by the world’s largest economies, which has been affecting the Emerging Markets
of a fair trade, India has also come under US Government’s radar since India has a trade
(EMs). Though reducing the trade balance is one of the sticky points for the US Government’s
surplus with the US. US Government withdrew GSP benefit for India’s exports to the US.
actions against China, resolution of underlying issues of forced technology transfer and
Exports under GSP volume ~1,900 products and amounted to US$5.6bn in FY18. Withdrawal
contentious Chinese policies are not in sight at least in the near-term. We sense that the
of GSP in addition to the US tariffs on Indian exports of steel (@25%) and aluminum (@10%)
odds are against the possibility of China compromising its technological advancement
has started to hamper exports and is expected to continue going forward. Consequent to
mission, which can lead the US Government to continue levying higher tariffs on Chinese
this trade commotion, India has retaliated against the US and levy tariffs with effect from
goods. Consequently, we believe that global to eventually slowdown in near-to-medium
2nd May, 2019 on goods worth US$10.6bn imported from the US mainly consisting of agri
term. Global growth forecast has been revised downwards to 3.5% for 2019; 30bps lower
and chemical products. Though the impact of tariff cost is not so significant from macro
than post great financial crises (GFC) average of 3.8%. A past reference to episodes of
perspective, (~0.2% of total exports) it can negatively impact export sentiment.
protectionism shows that it has done more harm than good for the US economy.
Down the Memory Lane
Going back to the timeline of tariffs, one could recall the Smoot Hawley Act, 1930. Herbert
Hoover, a republican candidate, promised to raise tariffs after he took the seat. Though
thousands of economists and professionals were opposed to the tariff policy, the bill was
signed on 17th June, 1930. The law raised the average tariff by 20% to the existing tariffs,
targeting the European countries. Since Europe was a major trading partner then, it had
a magnified impact of the US economy, higher tariffs led to a decline in the industrial
production by almost half, increasing unemployment rate to ~30%. As a result, consumer
sentiment was in doldrums, which led to a tight restraint on consumption, parallel to
high tariff regime. Worsening economic situation dragged the economy into recession.
Economist : Samiksha Punamiya
Cumulatively, the US GDP contracted by 12% on from 1930 to 1934. The recovery began
Contact : (022) 3303 4636
only in 1935 after Franklin Roosevelt became the President and signed the Reciprocal Trade Email : samiksha.punamiya@relianceada.com
Agreement, which alleviated the concerns over tariffs.
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Institutional Equity Research Global Trade Thematic

Europe (13.9) Asia (137.9)

Serbia
Union of Serbia &
North America 11.7 Montenegro
Bosnia-Hzgovin Macedonia
Afghanistan
Turkey Pakistan
Albania Nepal

Bhutan

Africa (11.3) Bangladesh

Chad
Djibouti
C Afri Rep Rwanda Ethiopia
Rwanda
Kenya Maldives
Burundi Somalia Shrilanka

Congo D. Rep. Malawi

Tanzania
Seychelles
Latin America (9.5) Comoros

Mauritius
Madagascar
Reunion

Surplus

Deficit

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Institutional Equity Research Global Trade Thematic

Region wise trade balances (USD bn) (April'18 to Jan'19 )

Regions Exports Imports Trade deficit(-)surplus(+)
Europe 52.7 66.6 -13.9
European Union 46.8 49.2 -2.4
European Free Trade Area 1.2 15.5 -14.3
Other Europe countries 4.6 1.9 2.7
Africa 23.3 34.6 -11.3
South Africa Customs Union 3.7 6.4 -2.7
Other South African countries 1.4 4.8 -3.4
West Africa 6.1 16.7 -10.6
Central Africa 1.1 0.5 0.6
East Africa 6.3 1.2 5.2
North Africa 4.6 5.0 -0.3
America 56.8 54.5 2.3
North America 48.8 37.1 11.7
Latin America 8.0 17.4 -9.5
Asia 131.8 269.6 -137.9
East Asia - Oceania 3.4 12.0 -8.6
ASEAN 30.1 49.7 -19.6
West Asia - Gulf Cooperation Council 34.4 67.0 -32.6
Other West Asia 8.5 33.6 -25.1
North East Asia 34.6 103.7 -69.1
South Asia 20.7 3.6 17.1
CIS and Baltics 2.8 8.0 -5.2
Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

The Big Picture – India’s Merchandise Exports, Trade Deficit Trajectory & Growth
Trade forms a critical part of India’s growth composition. India’s trade scenario shows a different growth rate both before and after the great financial crises. During 1998-2008 (Pre GFC), India’s exports
clocked 15% CAGR, while imports witnessed 17.8% CAGR. During 2010 to 2019 (Post GFC), while the country’s exports clocked 6.3% CAGR, imports witnessed 5.9% CAGR in CC terms (considering a simple
extrapolation of data for 11 months ending Feb’19). It is interesting to note that exports have marginally grown faster than imports post GFC owing to trend of oil imports and exports. Growth of oil imports (4.9%)
is lower than exports (5.3%). In addition to that, weight age of oil imports to total imports (~27%) is more than oil exports to total exports (~14%). If we look at trade deficit to GDP, the ratio moved from 1.3% to
3.2% in pre-GFC period (1998-2008) and from 5.1% to 4.1% in post-GFC period (2010-2019). Though the trade deficit ratio has been in downward trajectory, it has increased to 4.1% in FY19 from 3.1% in FY 18,
on account of higher oil prices and depreciated rupee. Notably, INR showed resilience in the pre-GFC period. Faster depreciation after the taper tantrum episode in 2012-2013 rendered INR in downward
trajectory, reaching an all-time low of US$74 in FY19. Going forward, we expect INR to recover to US$67.5-68 levels, which will improve the trade deficit to GDP ratio, as GDP growth is expected to recover from
H2FY20E. Since India has heavy deficit at global level, it becomes important to assess the dynamics of export markets. Since we have already started to witness slowdown in growth, it will be imperative for
the pace of exports to pick-up from current stagnancy in order to spur the GDP. Empirical evidence shows that while an increase of US$1bn in exports causes the GDP to rise by 0.3%, reduction of US$1bn in
trade deficit can increase GDP by 0.5% in CC terms. Therefore, we can conclude that fall in imports is more sensitive to GDP. Since imports can turn to be inelastic in the longer run given its concentration of
products, it would be imperative to increase exports for stronger growth. Also, as we expect export of lagging commodities to pick-up pace parallel to decline in imports, trade deficit could eventually decrease
aiding the GDP growth.

Exhibit 1: Trade Balance (Deficit) Exhibit 2: Exports Growth Exhibit 3: Imports Growth
0 0.0%
40% 20%

-30 -1.0%
35% 18%
-2.0%
-60 30% 15%
-3.0%
-90 25% 13%
USD bn

-4.0%
-120 20% 10%
-5.0%
-150 15% 8%
-6.0%

-180 10% 5%
-7.0%
5% 3%
-210 -8.0%
2018-19 (E)

0%
2011-12

2017-18
1997-98

2012-13
2013-14
2014-15
2015-16
2010-11
1998-99
1999-00

2001-02

2007-08

2009-10

2016-17
2002-03
2003-04
2004-05
2005-06

2008-09
2000-01

2006-07

0%
CAGR (1999-2019) CAGR (1999-2019)

Trade Balance (Deficit) Trade deficit/GDP Exports Oil Exports Non-Oil Exports Total Imports-Oil Imports Non-Oil Imports Total

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

Imports to Move Southwards! Exhibit 4: % Share of Exports

% share of exports
A detailed analysis of India’s import commodities portfolio points out that only 5% of the total
commodities make for 70% of the total value. These commodities include petroleum products, gold CIS and Baltics,
1.0
and other precious metals, chemicals, electronics and machineries. Therefore, decline in imports of Europe, 19.5
non-essential items as well as oil can considerably bring down the import bill, as happened in the
current year, where we have seen a dip in import of gold by ~5.5% for CY19. We feel that the decline
in gold imports will continue in FY20E as well. As far as oil is concerned, we feel that global focus on Africa, 8.6
Asia, 49.3
RE and strong supply from the US make a bearish case for oil prices. We expect fall in the prices to
offset increase in consumption. Crude prices averaged at ~US$70 in FY19.Considering an average
price of US$65 for FY20 and 5% volume growth; we estimate a fall of ~US$3.5bn in the oil import
bill. Cumulative decline in imports of gold as well as oil can bring down the imports by US$9-10bn.
America, 20.9
Lagging Export Commodities – Expected to Pick-up
A detailed analysis of India’s export commodities portfolio points out that only 14% of the total
commodities make for 70% of the total value. These commodities include petroleum products,
Source: Ministry of Commerce, Rsec Research
pharmaceuticals, chemicals, vehicles, machineries and metals, which are fairly defensive in nature.
However, for the balance 84% products, which are demand-driven, adhering competitive strategies,
developing new markets as well as expansion in the extant markets should be on focus. If we look Exhibit 5: % Share of Imports % share of imports
at the past data, textiles and apparels come under the radar of commodities, which are lagging
CIS and Baltics,
despite being of high-value in India’s export product basket. To understand in detail, we spoke to the
1.9 Europe, 15.2
Joint Secretary, Ministry of Textiles.

FY18 saw major headwinds in textile exports. Glitches on the supply chain side of the retailers in
the importing countries led to procurement issues. Synthetic textiles saw a major cost movement on Africa, 8.0
account of higher tax incidence, which is affecting their exports. As a result, India has been losing Asia, 62.4
the edge for textile and the procurement of importing countries has shifted to more competitive
countries like Bangladesh and Vietnam. Also, since textile market in India is largely clustered, India America, 12.5
is considerably petit in scale compared to China in terms of digitization and e-commerce.

However, the GST Council is now coming up with various export incentive schemes for textile sector,
which shall ease out the process. Normalisation of GST in synthetic textiles from 12% to 5% and
refund of input tax credit paid on exports are expected to unblock the working capital constraints
and increase export competitiveness. Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

High value exports to key markets

Exhibit 6: Euro Zone Exhibit 7: East Africa

Euro Zone
East Africa
2018-19 extrapolated
2018-19 extrapolated
2017-2018
2017-2018
2016-2017
2016-2017
2015-2016
2015-2016
2014-2015
2014-2015
0 1000 2000 3000 4000 5000 6000 7000
USD mn 0 1000 2000 3000 4000 5000 6000
USD mn
ARTICLES OF APPAREL AND CLOTHING ACCESSORIES, KNITTED OR CORCHETED.

NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING STOCK, AND PARTS AND ACCESSORIES THEREOF.

ORGANIC CHEMICALS
CEREALS.
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF.
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF.
PHARMACEUTICAL PRODUCTS
MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES.
MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

Exhibit 8: North America Exhibit 9: Asean

North America ASEAN
2018-19 extrapolated
2018-19 extrapolated

2017-2018 2017-2018

2016-2017 2016-2017
2015-2016 2015-2016
2014-2015
2014-2015
0 2000 4000 6000 8000 10000 12000
USD mn 0 2000 4000 6000 8000 10000 12000
USD mn
OTHER MADE UP TEXTILE ARTICLES; SETS; WORN CLOTHING AND WORN TEXTILE ARTICLES; RAGS
FISH AND CRUSTACEANS, MOLLUSCS AND OTHER AQUATIC INVERTABRATES.
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF.
ORGANIC CHEMICALS
VEHICLES OTHER THAN RAILWAY OR TRAMWAY ROLLING STOCK, AND PARTS AND ACCESSORIES THEREOF.
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF.
PHARMACEUTICAL PRODUCTS
MEAT AND EDIBLE MEAT OFFAL.
NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES.
THEREOF;IMIT.JEWLRY;COIN.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research
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Institutional Equity Research Global Trade Thematic

Exhibit 10: West Asia - GCC Exhibit 11: North-East Asia

West Asia - GCC North-East Asia

2018-19 extrapolated 2018-19 extrapolated

2017-2018 2017-2018

2016-2017
2016-2017

2015-2016
2015-2016

2014-2015
2014-2015

0 2500 5000 7500 10000 12500 15000

0 3000 6000 9000 12000 15000
USD mn
USD mn
CEREALS.
NUCLEAR REACTORS, BOILERS, MACHINERY AND MECHANICAL APPLIANCES; PARTS THEREOF.
ELECTRICAL MACHINERY AND EQUIPMENT AND PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE AND SOUND RECORDERS AND REPRODUCERS,AND PARTS.
COTTON.
SHIPS, BOATS AND FLOATING STRUCTURES. ORGANIC CHEMICALS
MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES. MINERAL FUELS, MINERAL OILS AND PRODUCTS OF THEIR DISTILLATION; BITUMINOUS SUBSTANCES; MINERAL WAXES.
NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN. NATURAL OR CULTURED PEARLS,PRECIOUS OR SEMIPRECIOUS STONES,PRE.METALS,CLAD WITH PRE.METAL AND ARTCLS THEREOF;IMIT.JEWLRY;COIN.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

High growth exports to key markets

Exhibit 12: Euro Zone Exhibit 13: North America

North America
Euro Zone

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
CAGR CAGR

PREPARATIONS OF MEAT, OF FISH OR OF CRUSTACEANS, MOLLUSCS OR OTHER AQUATIC INVERTEBRATES

FURSKINS AND ARTIFICIAL FUR, MANUFACTURES THEREOF. COCOA AND COCOA PREPARATIONS.
FERTILISERS. MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK.
ALUMINIUM AND ARTICLES THEREOF. RESIDUES AND WASTE FROM THE FOOD INDUSTRIES; PREPARED ANIMAL FODER.
UMBRELLAS, SUN UMBRELLAS, WALKING-STICKS, SEAT-STICKS, WHIPS,RIDING-CROPS AND PARTS THEREOF. FURSKINS AND ARTIFICIAL FUR, MANUFACTURES THEREOF.
MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research
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Institutional Equity Research Global Trade Thematic

Exhibit 14: ASEAN Exhibit 15: East Africa

East Africa
ASEAN

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

CAGR
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
CAGR
COCOA AND COCOA PREPARATIONS.
ARTICLES OF STONE, PLASTER, CEMENT, ASBESTOS, MICA OR SIMILAR MATERIALS. FOOTWEAR, GAITERS AND THE LIKE; PARTS OF SUCH ARTICLES.
ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF. ORES, SLAG AND ASH.
PRODUCTS OF ANIMAL ORIGIN, NOT ELSEWHERE SPECIFIED OR INCLUDED.
SHIPS, BOATS AND FLOATING STRUCTURES.
FURSKINS AND ARTIFICIAL FUR, MANUFACTURES THEREOF.
MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK.
COCOA AND COCOA PREPARATIONS.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

Exhibit 16: West Asia - GCC Exhibit 17: North-East Asia

West Asia - GCC North-East Asia

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

CAGR
0% 10% 20% 30% 40% 50%
COCOA AND COCOA PREPARATIONS.
CAGR
PULP OF WOOD OR OF OTHER FIBROUS CELLULOSIC MATERIAL; WASTE AND SCRAP OF PAPER OR PAPERBOARD.
WOOD AND ARTICLES OF WOOD; WOOD CHARCOAL.
MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK. TIN AND ARTICLES THEREOF.
FURSKINS AND ARTIFICIAL FUR, MANUFACTURES THEREOF. FURSKINS AND ARTIFICIAL FUR, MANUFACTURES THEREOF.
LIVE ANIMALS. ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF.
MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK.

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

Indian Exports of key commodities is declining

Exhibit 18: Apparels YoY growth Exhibit 19: Textiles and Textile Articles YoY growth9
15.0% 10%

10.0% 8%

5.0%
6%
0.0%
4%
-5.0%
2%
-10.0%
0%
-15.0%

-20.0% -2%

-25.0% -4%

-30.0% -6%
2014-15 2015-16 2016-17 2017-18 2018-19 2014-15 2015-16 2016-17 2017-18 2018-19

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

Exhibit 20: Leather and Footwear YoY growth Exhibit 21: Agri abd Allied YoY growth
15.0% 20.0%

10.0% 15.0%

5.0% 10.0%

0.0% 5.0%

-5.0% 0.0%

-10.0% -5.0%

-15.0% -10.0%

-20.0% -15.0%

-25.0% -20.0%
2014-15 2015-16 2016-17 2017-18 2018-19 2014-15 2015-16 2016-17 2017-18 2018-19

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

Exhibit 22: Apparels Exports Exhibit 23: India Apparels Exports to key markets
18% 10%
16% 5%
14% 0%
12%
-5%
10%
-10%
8%
-15%
6%
-20%
4%
-25%
2%
-30%
0% 2016-17 2017-2018 2018-2019(Apr-Jan)
2016 2017 2018
Bangladesh Vietnam Exports to US Exports to UK

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

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Institutional Equity Research Global Trade Thematic

Road Ahead Exhibit 24: US Consumer Confidence

Revival in export of textiles and agri and allied products is expected in FY20E with normalisation in 103
GST rate on textiles and agri exports policy in place. However, with the overhang of uncertainty on 102
101
account of Brexit and trade war, the developed markets have started to enter the zone, where growth 100
99
prospects are becoming indistinct. Waning global demand could be a full blown risk to India’s exports, 98
going forward as can be seen from consumer confidence indicators of the developed markets. To that 97
96
extent, demand-based products, which form 30% of the value of exports, can be negatively impacted. 95
94
Other commodities like leather as well as agri and allied products are also seeing slippages in the 93
92
global markets. A fall of ~6-7% in consumer confidence index across markets can impact exports
91
worth US$6-$7bn. Since we can see that the fall in imports is more than the fall in exports, we expect 90

Nov-18
May-18

Oct-18
Mar-18

Aug-18

Sep-18

Mar-19
Jul-18
Jun-18

Dec-18
Jan-18

Jan-19
Feb-18

Apr-18

Feb-19
trajectory of trade deficit to be gradually improving in FY20E.
US Consumer confidence

Source: Ministry of Commerce, Rsec Research

Exhibit 25: UK Consumer Confidence Exhibit 26: Euro-zone Consumer Confidence

-4
-3

-4
-7

-5

-10 -6

-7

-13

-8

-16
-9

Nov-18
May-18

Oct-18
Mar-18

Aug-18

Sep-18

Mar-19
Jul-18
Jun-18

Dec-18
Jan-18

Jan-19
Feb-18

Apr-18

Feb-19
Nov-18
May-18

Oct-18
Mar-18

Aug-18

Sep-18
Jul-18
Jun-18

Dec-18
Jan-18

Jan-19
Feb-18

Apr-18

Feb-19

UK Consumer Confidence Euro-zone Consumer Confidence

Source: Ministry of Commerce, Rsec Research Source: Ministry of Commerce, Rsec Research

12
 NAVEEN
Digitally signed by NAVEEN KULKARNI
DN: c=IN, o=Personal,

Institutional Equity Research Global Trade Thematic

2.5.4.20=0c1ff234f79bd813e0368a6dc03b4
ca15b14b3b5a481882c186a1ef7b6330566,
postalCode=400072, st=MAHARASHTRA,

KULKARNI
serialNumber=97c18031b020ff979ee607a3
efa48cfba8b1455defbde1b85beecbfbf99bb
de3, cn=NAVEEN KULKARNI
Date: 2019.04.02 12:00:48 +05'30'

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or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report.

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RSL CIN: U65990MH2005PLC154052. SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839, Depository Participants: CDSL IN-DP-257-2016 IN-DP-NSDL-363-2013, Research Analyst: INH000002384); AMFI ARN
No.29889.

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