2. Intro...
The Current account balance is part of the Balance of
Payments (BOP)
BOP Measures all financial and economic transactions over
a specified period of time
BOP = Current account + Capital account and must equal
zero
CURRENT ACCOUNT DEFICIT = TOTAL IMPORTS –
TOTAL EXPORTS (Current CAD – 22.8b, 4.9%)
(Where Total Imports > Total Exports)
3. Implications of a large Deficit
A net outflow of foreign exchange.
In India’s case, this means a dollar outgo. Such a deficit could drain the
country’s forex reserves.
In layman terms, it means that India is a net debtor to the rest of the world
When capital flows are insufficient to meet the deficit, the country’s
currency starts to depreciate and would be difficult to meet its
international commitment or fund its current purchases.
A current account deficit in excess of 2.5% of GDP is seen as
worrisome in case of India
4. Causes
Gold imports - A sharp surge in gold imports in the
December quarter of 2012 due to the Diwali festival and
ahead of schedule gold imports on expectation of an
impending import duty hike
India is the largest importer of gold.
Gold is its second biggest import item after oil and contributes
around 10 per cent to the total import bill (345 tonnes in Q1, 20132014)
Mainly due to the rising disposable income
5. Causes
A hefty oil bill – Petroleum products are the biggest
contributor to India's import bill
India's current account deficit is likely to remain elevated reflecting
the global new norm of high oil prices and weak exports
Coal production – Shortfall in domestic coal production
has resulted in increased dependence on imports.
Hence reducing CAD through lowering oil and coal imports is not a
feasible option
6. Causes
Falling exports – India's trade deficit, or the excess of
imports over exports, stood at $59.6 billion in the December
quarter
Fall in FDI – FDI declined from $35.12b in 2011 to
$22.42b in 2012 (38%)
India would require around $1 trillion in the next five years to
overhaul its infrastructure sector such as ports, airports and
highways to boost growth
8. Impacts
Loans from abroad, paid back with interest
Continuous deficit will be looked upon harshly by the
international business and financial community – loans
from abroad would be rejected
Downward pressure on currency
Foreign firms ultimately fund more and more of domestic
investment, making the domestic economy vulnerable
9. Impacts
Unemployment due to exit of foreign capital
Country may be forced to raise interest rates to attract more
foreign investment and to keep a desired exchange rate
11. Steps taken by RBI
Recently the Reserve Bank hiked Foreign Institutional
Investor (FII) investment limits in government securities
and corporate bonds by USD 5 billion each
The three-year lock-in period for foreign institutional
investors (FIIs) purchasing government securities (G-Secs)
for the first time has been taken away
Hikes import duties on Gold ( 8% - 15%)
Provide dollars directly to state-run oil companies
12. Contd...
Hiking repo rate to contain inflation
The repo rate has been increased by 25 basis points
to 7.5% from 7.25%
Cutting govt expenditures
Restricting Indians from investing abroad
Curb speculative trading
13. CAD of developing Countries
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
2.3
2.3
Russia
CAD
China
Mexico
brazil
-1.8
Indinesia
India
-4.1
South Africa
-4.1
Turkey
-5
-5.8
-6.6
14. What’s the SCENE???
Current account deficit widens to $21.8 b in Q1 – The Hindu,
Sep 30th 2013
Current Account Deficit to be much lower than initial
forecast (Chidambaram) – CNN IBN, Oct 3rd 2013)
India will fully finance Current Account Deficit:
Chidambaram – dna, Oct 5th, 2013
Will contain current account deficit below $70 bn: Finance
Minister Chidambaram – The Economic Times, Oct 5th, 2013
