Trade activity tumbles on stark slowdown in demand
Trade activity worsened further in Aug'19, with total trade (exports + imports) declining by 10.6%, the lowest in the past three years. Although the drop in commodity prices was, in part, one of the major culprits, other factors that dragged overall activity were the slackness in domestic demand and decline in world trade volumes. Trade deficit narrowed to USD 13.5bn in Aug'19 vs. Q1 FY 20 average of USD 15.3bn, but it is still elevated given the sluggishness in demand. World trade volumes in June also pointed toward weakness as trade activity worsened in the US and LatAm. Capital goods trade also worsened in August, with both imports and exports declining sharply. Net services exports remained high, with overall services exports and imports remaining strong at 8.7% and 18.2% growth in July. Rebel attack in Saudi oil facilities has increased the geopolitical risks which might widen the trade deficit going forward.
Some of the important measures announced by the FM on Saturday are: 1) remission of duties or taxes on export products (replacing Merchandise Exports from India Scheme) which will cost the government Rs. 500bn; 2) providing higher insurance to banks to cover working capital loans for exporters; 3) inclusion in priority sector lending which will release liquidity of Rs. 360 - 680bn; and 4) real-time electronic processing of GST refunds by month-end. These measures are likely to aid export growth in the longer term.
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