India's Loses Ground With Largest Trading Partner, Fears Possible Restrictions From US 2

Trade deficit declines in December

India’s trade deficit declined in December, which should please investors in the country (INDA). Even in the face of demonetization, the indicator, along with industrial production, is a positive surprise.

A decline in the trade deficit is beneficial to overall economic output as it reduces the drag of higher imports as compared to exports. This can be supportive at a time when demonetization is expected to have a dampening impact on economic activity.

India’s exports rose 5.7% in December while imports rose only 0.5%, thus leading to a decline in trade deficit. From April to December 2016, cumulative exports stood at $198.8 billion, up 0.75% from the corresponding period last year. In the same period, cumulative imports contracted by 7.4%.

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The decline in India’s trade deficit in December had more to do with depressed imports than increasing exports. A 48.5% nose dive in gold imports was mainly responsible for the marginal rise in imports. Excluding gold, silver and crude oil, imports registered a 6.1% rise year-on-year.

Trade with China declines

China (MCHI) surpassed the United States to become India’s largest trade partner in 2008, and has maintained this position since. However, Beijing’s import cutting spree has taken a toll on bilateral trade.

According to data collected by PTI (Press Trust of India) from GAC (General Administration of Customs), China showed that trade between the two nations in 2016 declined by 2.1% to $70.8 billion. India’s exports to China were estimated to be $11.8 billion in 2016, down 12% from a year ago. At the same time, China’s exports to India nudged up by 0.2% to $58.3 billion. This led to India’s trade deficit with China increasing to $46.5 billion.

Going forward

Apart from declining exports to China, India has to worry about possible trade restrictions from the US as well.

During his presidential campaign, Donald Trump expressed a desire to bring jobs back to the US and renegotiate trade deals which are not in favor of the country, mentioning China and India in various speeches. If Trump follows through on his promise, India’s IT (information technology) sector may be in for a rough ride in the coming years.

India’s flagship IT companies like Infosys (INFY) and Wipro (WIT) derive a large portion of their business via outsourced projects from US companies, with these activities forming over half of their total revenue.

The steady improvement in the US economy would be beneficial to India only if merchandise and services trade with the US does not come under the ambit of tax levies or sanctions. If not, India’s exports may come under pressure in 2017 given the sluggishness in other parts of the world including Europe and Japan which are large trading partners of India.

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