India trade balance: better, but gold concerns persist

India’s external balances have been a focal point this year as the country’s economic woes have centred around the depreciation of the rupee.

So policy makers will be pleased to see India’s trade deficit narrowing yet again. The gap was squeezed to $9.2bn in November from $17.2bn in the same period a year earlier, according to new data from the Ministry of Commerce and Industry. Good news?

With the rupee down by well over 10 per cent against the US dollar in this calendar year, Indian companies have gained a competitive edge and exports grew 5.9 per cent year-on-year this November to $24.6bn. But it’s not as impressive as analysts expected and well below growth of 13.5 per cent in October (click chart to enlarge).

Meanwhile imports have been moderating, falling 16.4 per cent year-on-year in November to $33.8bn.

The big numbers in India’s import bill have been oil and gold. According to a note published by ICICI analysts on Wednesday:

Within imports, gold and silver imports remain muted at $1.05bn in November as against $1.4 bn in October. Crude imports contracted by 8.1% YoY and came at $12.9 bn in November as against $15.2 bn in the previous month.

Falling gold imports have driven the improvement in India’s external balances as the government raised the import duty on the yellow metal from 4 per cent to 10 per cent over the course of this calendar year and introduced quantitative restrictions.

But many in the industry argue that this has simply diverted shipments into unofficial channels – so the impressive trade data is misleading.

Ashok Minawala of the All India Gems and Jewellery Trade Federation estimates that almost half of India’s current consumption of gold is being satisfied by smuggled metal.

Others say that – though smuggling is undeniably a problem – the volume of gold coming in through unofficial channels is far too small to deem the official trade data inaccurate.

“It’s kind of like an ocean versus a bucket of water,” says Samiran Chakraborty, regional head of research at Standard Chartered.

It’s difficult to tell given smuggling is, after all, unofficial. But the government’s statistics certainly aren’t stacking up with World Gold Council data. In the month of September, for instance, the government reported imports of 50 tonnes where the council’s sources put that figure at 85 tonnes, according to PR Somasundarum, managing director for the lobby group in India.

His sources suggest the grey market has doubled in size this calendar year and he expects demand to pick up in 2014. The restrictions are only working at the moment thanks to advance buying in April and May when gold prices were at a low.

“The duty is the lesser of the two evils if you look at it from the industry perspective,” Somasundarum adds. “A 10 per cent duty becomes built into the buying habits of people… but quantitative restrictions are what’s hurting the industry.”

These measures may well be unsustainable, especially the quantitative limits that have created confusion in the industry where no party is sure quite how they should work in practice.

Analysts at Bank of America Merrill Lynch say it is “inevitable” that the restrictions will be eased and predict that will begin in the second half of 2014.

“We have to see how it plays out into next year when the wedding season starts, then again demand will go up,” says A Prasanna, an economist at ICICI Securities. “My guess is that at that time there will be pressure on the government.”

With general elections some six months away, New Delhi is unlikely to take any tough policy decisions soon. But if demand does pick up next year as jewellers run out of inventory and the government is forced to ease the current restrictions, the gold that is currently entering India unofficially may well come back onto the books.

It will be bad news for trade data but good news for the tax collector.

Related reading:
India’s current account deficit: smoke and golden mirrors? beyondbrics
India economy struggles to recover, FT
Rajan offers radical vision of India’s future, FT