Strategy: GameChanger - Decoding exports data:: Kotak Sec,

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Strategy
GameChanger
Decoding exports data. As per provisionally released data, India’s FY2011 exports
touched US$245 bn led by significant growth in engineering goods (export in FY2011
at US$60 bn, up 85% over FY2010). Our analysis indicates that this growth is driven by
a sudden uptick in 4QFY11—which is not corroborated by other data points like IIP and
order inflows into capital goods firms. As we highlighted in our recent GameChanger
report, X Factor: Made in India, India needs to focus on its manufactured goods export
and aim for indigenizing production of items (electronics: imports of US$21 bn in
FY2010, for example) where a large internal market exists.



Data on engineering goods export points to strong pick-up in last four months
The provisional data for FY2011 records India’s exports at US$245 bn, up 37.5% yoy led by an
85% yoy rise in engineering goods. We note that the exports of engineering goods had risen by
53% yoy in the period Apr-Nov to US$38 bn, implying a monthly run-rate of US$4.8 bn. The last
four months of the fiscal-year has seen exports of engineering goods rise 66% yoy to US$22 bn,
implying a monthly run-rate of US$5.4 bn. We are puzzled by the 14% rise in monthly run-rate
and we believe that there will be better clarity when the break-up of the same is released.
Growth not corroborated by other economic indicators
We note that the IIP growth numbers indicate that over the period Dec-Feb in FY2011, capital
goods segment has contracted by 15% on an average. According to our capital goods analyst,
Lokesh Garg, the order inflows into capital goods companies will be quite low compared to
previous quarters. Compared with the 85% growth in engineering goods exports, these facts do
not seem to stack up. We await more clarity when the full-year numbers are released by the
Department of Commerce.
Increasing difference between DGCI&S and RBI data provides less comfort
The trade deficit number as reported by DGCI&S and RBI has always been at a variance: in the last
few quarters, the gap has increased to US$6.5 bn in 3QFY11 from US$0.8 bn in 3QFY10. This gap
has traditionally been explained as defense imports which are not captured by the DGCI&S data.
Long-term sustainable trade balance improvement strategy should include indigenization
One large import item for India (other than energy and bullion) is electronics. Electronic goods
imports rose 10% CAGR for the period FY2006-10 to US$21 bn in FY2010, serving around 75%
of the total consumption. With such a large market, India needs to focus on getting its FDI policy
right rather than simply signing pacts providing market access (via regional free-trade agreements,
FTAs). Indigenization, either by 100% FDI or JV route, also creates a local knowledge and skill pool,
which can help create a stronger manufacturing base in India.
Current account deficit funding requires more FDI
According to a paper released by the Department of Commerce, if current trends continue, India’s
trade balance could deteriorate to US$278 bn in FY2014E from US$104 bn in FY2011 (based on
DGCI&S data). India’s services export and remittances save the day for its current account as a part
of the net invisibles earnings, which is expected to be US$89 bn in FY2011E and US$106 bn
FY2012E. As noted in our recent GameChanger report, X Factor: Made in India, a sustainable way
to fund the current account deficit will require (1) closing the trade gap and (2) funding the deficit
via more stable net FDI inflow.