Oil Saves India's Trade Balance As Deficit Shrinks

For commodity importing nations like India, oil under $50 a barrel is gas station gift card from the gods.

India’s trade deficit came back to normal levels in December thanks to weaker oil prices, falling to $9.4 billion after the unexpected spike in November to $16.9 billion. The deficit means India’s government has more cash in the country to pay things like its current account deficit. And when a country has more cash at home, it usually means the government doesn’t need to ask banks for loans in the bond markets. All of this is considered positive for a country like India, where cash is not as plentiful as it is in the U.S. and European Union.

Overall imports fell to $34.8 billion last month, down 4.8% from December 2013, led by oil.

Oil imports fell 28.6% in December to around $9 billion. Meanwhile, weaker growth in India’s prime export market — the E.U. — came in weaker by around 4% annually.

Gold also helped shrink the deficit. India is one of the world’s largest importers of gold due to cultural customs, primarily. And gold imports for December declined by $1.3 billion from $5.6 billion in November.

Today’s readout should ease investor concerns about India’s current account deficit, says Barclays Capital in a note to clients on Friday morning.

“The underlying trend will remain positive…even if gold imports increase at the margin,” analysts led by Rahul Bajoria wrote today from Mumbai.

The trade balance’s impact on the current account deficit will likely be helped along by declining oil prices . India’s overall current account deficit is estimated to come in at $25 billion this fiscal year, which ends in March for India’s economy. That’s around 1.2% of GDP. The market is forecasting a trade deficit of $136 billion, however, most of which was tacked on from the start of 2014, when oil prices were well over $80 a barrel.

Barclays said it expect a stable and healthy path for India’s current account in the near and medium term.

Foreign investors are liking India’s outlook. Net foreign direct investment in the country has improved and now sits just over $20 billion as of Nov. 30 compared to around $12 billion in the same period last year. For a country of India’s size, however, net capital inflow from portfolio investment and corporate investment remains less than half of that of another big BRIC country — Brazil’s FDI is over $60 billion.

India’s Sensex index rose 0.17% on Friday. The popular Wisdom Tree India (EPI) exchange traded fund is up 5% so far this year, making it one of the best markets in the world. By comparison, the S&P 500 is down 3.16% as measured by State Street Bank’s SPDR S&P 500 (SPY) ETF.

The United States is the new emerging market. It dominates global capital flow, both from portfolio investors buying stocks and bonds, to corporate entities. And new discoveries in shale gas have led to billions more being pumped in from China and Canada.

Even though the U.S. is the third biggest recipient of global FDI ($193.4 billion in 2013, according to the OECD), the U.S. is looking at investing $41 billion in India over the next four years, the U.S. India Business Council said on Jan. 15. Here’s where India sits within the top 10 recipients of global FDI. Notice that besides the financial hideout of Luxembourg, and the global consumer and manufacturing behemoth of China, the top recipients of FDI in the world all have oil to thank. Brazil, Canada, Russia and the Netherlands continue to attract oil and gas money to their economies. The Netherlands is not an oil producer, but is a huge oil refinery and trade hub for oil and gas entering Europe.

1. Luxembourg: $367.3 billion
2. China: $258.2 billion
3. Brazil: $64 billion
4. Canada: $62.3 billion
5. Russia: $54.5 billion
6. Australia: $50.8 billion
7. Netherlands: $41.3 billion
8. Spain: $39.2 billion
9. United Kingdom: $37.1 billion
10. Ireland: $35.5 billion
INDIA: $28.2 billion

Top 10 list does not include U.S., which is behind China at No. 3. Luxembourg numbers include Special Purpose Vehicles. Brazil was the fourth largest recipient of FDI in 2013.