FIEO: Escalation in US-Iran tension may affect India's exports

FY2019-20 advance estimates of GDP growth at 11-year low

As per the first advance estimate of national income the National Statistical Office (NSO), expects FY2019-20 real GDP growth to decelerate to 5% from 6.8% in FY2018-19. This officially corroborates the much talked about ongoing economic slowdown, which highlights a sequential deceleration in GDP growth momentum by 180 bps, thereby marking the fifth largest episode of growth slowdown witnessed since the post 1991 reform period. While global factors have indeed dampened FY2019-20 growth momentum, domestic factors have also contributed towards the downdraft. The NSO expects a broad-based decline on the expenditure side. It expects private consumption growth to weaken to 5.8% in FY2019-20 (8.1% in FY2018-19). However, the NSO expects consumption growth to rebound sharply to around 7.5% in the second half of FY2019-20 after a disappointing growth of 4.1% in the first half of FY2019-20. Some analysts expect downside to the NSO’s implied second half FY2019-20 consumption growth estimate given the lack of any fresh impetus. The government consumption growth is expected to remain robust at 10.5% in FY2019-20 (9.2% in FY2018-19). Meanwhile, the NSO anticipates that the slump in investment activity is likely to continue through second half of FY2019-20.  Favourable base effects, government spending, lower policy rates and easier liquidity conditions have resulted in some improvement in the high frequency indicators from November. While growth may have bottomed out, recovery is expected to be slow and prolonged. Most analysts estimate that the FY2019-20 GDP growth will be lower than the NSO’s estimates at around 4.7-4.9%.

International Relations

FIEO: Escalation in US-Iran tension may affect India's exports

According to the Federation of Indian Export Organisations (FIEO) further escalation in the tension between the US and Iran will have implications on India's exports.  Iran is a key trading partner of India. Its major exports to India are oil, fertilisers and chemicals, while it imports cereals, tea, coffee, basmati rice, spices and organic chemicals, among others.  India's exports to Iran in 2018-19 were worth USD 3.51 billion while imports were valued at USD 13.52 billion. The trade imbalance is mainly because of India's import of oil from Iran.  A proposed preferential trade agreement (PTA) with Iran, being negotiated by India to access the West Asian country’s lucrative domestic market, could also be the latest collateral damage of escalating tensions between Tehran and Washington DC.

Sectoral Developments

Indian government puts restrictions on import of refined palm oil

The Indian government this week imposed restrictions on imports of refined palm oil, a move which could discourage the inbound shipment of the commodity from Malaysia. According to a notification of the Directorate General of Foreign Trade (DGFT), “import policy” is amended from “free to restricted” for refined bleached deodorised palm oil and refined bleached deodorised palmolein. Putting the commodity in restricted category means an importer will require licence or permission for the inbound shipment.

Both refined and crude edible oils were under the free category of foreign trade, resulting an unrestricted inflow into the country. Now refined palm oil can be imported only after obtaining an import licence while crude oils can continued to be shipped in on the basis of the import export code, without the requirement of any kind of licences. According to some experts, the need to amend the existing trade policy has arisen as the duty on both crude and refined palm oil had been lowered from January 1, 2020. The duties were down to 37.5% from 40% on crude palm oil and to 45% from 50% on refined palm oil, effecting a low differential of 7.5 percentage points between the import duty of crude and refined palm oil, making import of refined palm oil more lucrative. Meanwhile, some policy experts are of the view that the move comes in the backdrop of remarks by Malaysia on India’s new citizenship law and Kashmir issue.  Ministry of External Affairs spokesperson commented that though this is not a country specific restriction, the state of relationship between individual countries do come into play when taking business decisions. India, the world’s largest importer of vegetable oils, buys nearly 15 million tonne annually. Of this, palm oil comprises 9 million tonne and the rest 6 million tonne soybean and sunflower oil. Indonesia and Malaysia are the two countries which supply palm oil. Malaysia last year overtook Indonesia as India’s biggest palm oil supplier after it won a lower duty for refined palm oil imports.