Services exports decline from 8.2 % of GDP in Feb 2014 to 7.4 % in Feb 2016

India’s trade surplus in services has been contracting, mainly due to a sharp drop in non-software services exports, which, according to economists, shows that the global economic slowdown is finally beginning to affect India’s services sector.

In addition, though the overall trade deficit has been decreasing due to low commodity prices, India’s trade deficit with China is worsening which is a worrying trend.

“This trend (of contracting trade surplus in services) is important to watch since the services trade has been quite resilient and has cushioned against the overall trade deficit,” D.K. Joshi, Chief Economist at Crisil, told The Hindu.

“On a 12-month rolling sum basis, the services trade balance has fallen to 3.4 per cent of GDP in February 2016 from 3.9 per cent in February 2014,” according to a paper by Nomura research analysts Sonal Varma and Neha Saraf.

The main reason for this, the Nomura paper says, is the sharp decline in services exports, from 8.2 per cent of GDP in February 2014 to 7.4 per cent in February 2016.

“Although a drop in software services exports was a driver of the decline, receipts from transportation (sea and air), financial services and other business services (consulting and technical/trade-related) were also much lower, and together these non-software categories comprised 73 per cent of the moderation in services exports between Q4 2013 and Q4 2015,” according to the paper.

“The global slowdown is finally hitting the services exports and that is where we had a competitive advantage over China,” D.K. Srivastava, Chief Policy Advisor at Ernst and Young, said.

A research paper by Crisil found that India’s trade deficit with China has been worsening at an alarming rate.

“Between fiscals 2006 and 2016, it compounded at an annual 30 per cent, or thrice as fast as India’s overall trade deficit,” according to the paper.

“If the trend continues, the trade deficit with China will equal and even surpass what India runs with the rest of the world.”

The reason behind this, according to Mr. Joshi, is that China’s ongoing economic slowdown has meant that it requires lower quantities of the raw materials that it imports from India.

On the other hand, India’s imports from China have not been affected to any large degree,

“In some sense, it is showing India’s lower competitiveness with regard to China,” Mr. Joshi said. “Such a large trade deficit with a single country is worrying.”

However, there is a possibility that this trend could be short-lived, especially if the rupee appreciates in the near term and medium-term.