India-- How real is the improvement in the current account deficit? Credit Suisse,

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India
India Market Strategy ------------------------------------------------------------------------------------------
How real is the improvement in the current account deficit?


● The current account deficit (CAD) fell sharply in the Dec-10 quarter,
largely driven by a ~US$4 bn fall in the trade deficit. The trend has
continued in monthly releases for Jan and Feb-11. This, together
with a strengthening rupee is being seen in some quarters as proof
that the rising price of oil is not material for India’s CAD.
● Two factors are driving this decline in trade deficit: (1) a fall in oil
imports (despite the rising price of oil) and (2) strong growth in
exports.
● Exports have been very strong since Nov-10: a breakdown is not yet
available, though engineering goods are said to be the reason.
● The fall in oil imports though is difficult to understand. Using derived
oil volumes, we find that Dec-Feb volumes are on average ~28%
below May-10 levels and also YoY (Figure 3). Compare this to ~9%
CAGR growth in these volumes FY01-10.
● Non-inclusion of oil imports at Reliance’s SEZ in Jan and Feb and
non-payment for imports from Iran are likely factors, although these
too don’t fully explain the decline. Taking last year’s derived volumes
on this year’s prices the combined trade deficit for Jan and Feb
would be US$22 bn versus the US$16 bn reported. Continued ECB
inflows are likely what are also helping support the rupee.



Are balance of payments and trade deficits improving?
Current Account Deficit (CAD) in the Dec-10 quarter fell to US$9.7 bn
from US$15.8 bn in Sep-10, largely driven by a ~US$4 bn fall in the trade
deficit (Figure 1), and a relatively small rise in software service earnings.
Further, with the last two reads on monthly trade balance (Jan & Feb)
being down YoY despite the rising price of oil, the market’s
apprehensions on a ballooning CAD have been allayed. We however
believe trade balance data from RBI’s quarterly balance of payments
release is more robust and comprehensive, as all of exports, imports
and trade balance are consistently higher.
There are two standout factors driving the decline in trade deficit: (1) a
fall in oil imports (despite the rising price of oil) and (2) continued
growth in exports.
Discrepancy in oil import volumes: how much from Iran?
We calculate this volume by simply dividing the reported oil import bill
by the average price of the Indian crude basket. FY01-10 derived oil
import volumes rose at a 9% CAGR. Since May-10 however, the
volumes have been falling—Feb-11 was down ~28% below May-10,
and also down 28% YoY.


This is partly explained by non-inclusion of oil imports at Reliance SEZ
in the Jan and Feb numbers. We note however that even Dec-10 was
down 30% YoY. Weakness during the monsoon months was
explained by slower consumption, but CS India oil analyst Mookim
has indicated that in the past few months demand although not
exciting, has been quite robust. Continued delays in payments to Iran
(~10% of India’s crude oil imports) are likely one reason, but even this
does not explain a 28% fall. We note that data for the last three
months is flattish, so not really driven by fewer working days in
February.