Assignment On India's Current Account Deficit

Assignment on
India’s Current Account Deficit
Submitted By
Name: Debojyoti Naskar
Roll No: 2019MBA007
Batch: PGP-II 2019-21

India’s Current Account Deficit
Current Account Deficit
Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and
the money flowing out on imports. Current Account Deficit (or Surplus) measures the gap
between the money received into and sent out of the country on the trade of goods and services
and also the transfer of money from domestically-owned factors of production abroad. To
understand CAD in detail, it is essential to learn about the Current Account. A nation’s Current
Account maintains a record of the country’s transactions with other nations, in terms of trade of
goods and services, net earnings on overseas investments and net transfer of payments over a
period of time, such as remittances. This account goes into a deficit when money sent outward
exceeds that coming inward.
Is Current Account Deficit something to worry?
Current Account Deficit may be a positive or negative indicator for an economy depending upon
why it is running a deficit. Foreign capital is seen to have been used to finance investments in
many economies. Current Account Deficit may help a debtor nation in the short-term, but it may
worry in the long-term as investors begin raising concerns over adequate return on their
investments.
A persistent current account deficit may imply that you are relying on consumer spending, and
the economy is becoming unbalanced between different sectors and between short-term
consumption and long-term investment.
A current account deficit may imply the economy is becoming uncompetitive and the exchange
rate relatively overvalued.
A country running large current account deficit is always at risk of seeing the value of the
currency fall. If there is insufficient capital flows to finance the deficit, the exchange rate will fall
to reflect the imbalance of foreign flows of funds. Depreciation in the exchange rate will cause
imported inflation for consumers and firms who rely on imports of raw materials.
How to deal with a Current Account Deficit?
CAD exists due to a host of factors including existing exchange rate, consumer spending level,
capital inflow, inflation level, and prevailing interest rate. For the Current Account Deficit in
India, crude oil and gold imports are the primary reasons behind high CAD. The Current
Account Deficit could be reduced by boosting exports and curbing non-essential imports such as
gold, mobiles, and electronics. Currency hedging and bringing easier rules for manufacturing
entities to raise foreign funds could also help. The government and RBI could also look to
review debt investment limits for FPIs, among other measures.
India recorded first quarterly Current Account Surplus in 13 years
India recorded a current account surplus of $0.6 billion, or 0.1 per cent of GDP, for the January-
March period as against a deficit of $4.6 billion (0.7 per cent of GDP) in the year-ago period, the
Reserve Bank of India (RBI) said on Tuesday. According to news agency Reuters, this is the first
quarterly surplus in 13 years. For the full fiscal year 2019-20, the current account deficit
narrowed to 0.9 per cent of the GDP compared to 2.1 per cent in financial year 2018-19, the
central bank said. Lower trade deficit was one of the prime reasons for the improvement in the
current account balances both for the March quarter as well as for the whole fiscal year.
On paper this looks healthy but it primarily reflects India's economic slowdown, which has
significantly reduced the non oil, non precious metals imports during FY20.
RBI said the surplus in the current account in the March quarter was primarily on account of a
lower trade deficit at $35 billion and a sharp rise in net invisible receipts at $35.6 billion as
compared with the corresponding period of last year.
The net services receipts increased to $22 billion in March quarter as against the year-ago $21.3
billion on the back of a rise in net earnings from computer and travel services on a year-on-year
basis, the RBI said.
Private transfer receipts, mainly representing remittances by Indians employed overseas,

increased 14.8 per cent to $20.6 billion for the reporting quarter, the RBI said.
The net outgo from the primary income account, which primarily reflects the net overseas
investment income payments, decreased to $4.8 billion from $6.9 billion a year ago, the central
bank said.
The net foreign direct investment nearly doubled to $12 billion for the March quarter as against
the $6.4 billion in the year-ago period, while foreign portfolio investments (FPIs) declined by
$13.7 billion during the three month period as against an increase of $9.4 billion in the year-ago
period.
Graphical representation of the CAD journey of India across years
The below graph shows a comparison of Current Account Deficit as a percentage of GDP versus
Trade Balance as a percentage of GDP:
SOURCE: RBI
The below graph captures the Quarter-on-Quarter trend of India’s Current Account Deficit for
the last 3 years:
SOURCE: RBI
The below graph captures the Year-on-Year trend of India’s Current Account Deficit over the
last 10 years:
SOURCE: RBI
The Journey Ahead
The government expects a surplus in its current account balance for the first few quarters of the
ongoing fiscal and in the final quarter of the previous fiscal on account of curtailed imports due
to a significant drop in domestic economic activity. As a considerable drop in domestic
economic activity significantly curtails imports, India’s current account balance may generate a
small surplus in the first few quarters of 2020-21. India’s current account deficit (CAD) was also
supported by low levels of external debt servicing.
During COVID-19 times, the external debt and its repayment burden is a major challenge being
faced by some emerging market economies. However, India is not vulnerable on this count as its
external debt to GDP ratio has remained low at about 20 percent during the last three years.
Wall Street brokerage Bank of America Securities India in April projected a zero per cent current
account deficit for FY21 as it sees crude prices falling further from the current levels. The
brokerage also said the Reserve Bank raising the ceilings for foreign portfolio investors in
investing in government bonds by USD 30 billion can help its raise forex cover, which had the
steepest fall in recent years plunging to close to USD 11.98 billion to USD 469.909 billion in the
first week of May’20. This in turn open up the debt markets for the RBI to recoup the forex
cover and thus defend the rupee which has been plunging to new lows in recent weeks.
--------------THANK-YOU--------------
Reference:-
1) https://www.rbi.org.in/
2) https://www.moodys.com/
3) https://www.spglobal.com/en/

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Assignment on

India’s Current Account Deficit

Name: Debojyoti Naskar

Roll No: 2019MBA007

Batch: PGP-II 2019-21

Current Account Deficit

Is Current Account Deficit something to worry?

How to deal with a Current Account Deficit?

Private transfer receipts, mainly representing remittances by Indians employed overseas,

The Journey Ahead

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