General Awareness

April 04, 2017 @ 01:15 PM

Widening Current Account Deficit of India

General awareness on current topics is essential as not only you will be getting questions on GK in various MBA entrance exams but it will be useful for Essay writing test and WAT also. 
 
Today, you will read General Awareness Topic: “Widening Current Account Deficit of India”  
 
The current account is that part of Balance of Payment (BOP) account which details the balance of goods and services traded with the rest of the world. 
 
The excess of imports of goods and services over their export is referred as Current Account Deficit (CAD). In 2011-12, CAD swelled to $78.2 billion (4.2 per cent of gross domestic product (GDP)) from $ 46 billion (2.7 per cent of GDP) in 2010-11 due to subdued external demand and relatively inelastic imports of POL and gold and silver. Moreover, year 2011-12 also happened be a year when India’s GDP growth rate fell to 6.5 per cent, compared to 8.4 per cent in the previous year.
 
In the second quarter of the current financial year, CAD fell to 3.9percent of the GDP; this is an improvement, however, not sufficient enough to conclude that the worst is over given the revival of the crisis in Europe.
 
In 2012-13, the current account deficit is likely to remain around 3.5 per cent of GDP, below last year's 4.5 per cent. However, CAD at 2.5 percent of GDP is considered safe for the economy.
 
Robust gold demand and continuing high crude oil prices, along with decelerating growth in emerging and developing economies are responsible for adversely affecting India's trade balance.
 
Empirically, it is seen that if oil shocks raise costs, and as a result growth falls, the CAD would rise along with falling growth. It can also be due to export-led growth. As exports rise, they raise income and reduce the CAD. On the other hand, a sudden collapse of export markets, due to a global shock, reduces income and increases the CAD. 
 
Thus the major factors responsible for high CAD are low export demand from the developed countries due to slowdown, high crude oil prices which forms the bulk import to India and low GDP growth in India. 
 
Historically, it is seen all around the world that during the high phase of growth, countries usually face high CAD and India is not an exception to it.
 
Global trade is slumping, and so is Indian export. India's mainstay, share of invisibles comprising services, including software exports, is also under threat as global companies put on hold capital expenses in a slowing economy despite their central banks throwing money at zero rate of interest.
 
Some measures which can directly affect the CAD are through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports, but these measures can be used for short term correction in case CAD goes out of hand but in the long run, as they distort the market and ultimately will adversely affect the exports as well.
 
Therefore, the measures adopted should be such that they address the structural issues of the economy. For instance, high rate of inflation persisting in the economy attracts cheap imports and makes export costly in the international market. High fiscal deficit run by the government is one factor behind the high inflation. 
 
Fiscal reforms have the potential to affect the CAD. Investment friendly business environment, better infrastructure, better technology increases the production activity with less cost making the exports competitive. Moreover, it is also reduced by promoting investor friendly environment i.e. Foreign Direct Investment (FDI), Foreign Institutional Investors (FII), the income from these foreign investments positively contributes to current account.
 
We should not focus on the CAD, which is an outcome rather than a policy variable. The need of the hour is to concentrate on increasing productivity. This requires reforms to improve governance, above all. It also requires reforms that reduce waste in government programmes and improve the space for private innovation and enterprise. All such measures will improve productivity. This is the best way to improve the balance of payments.
 

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