Current Account deficit

By Vishnu. GXIME Kochi

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 timeBOP = Current account + Capital account and

must equal zeroCURRENT ACCOUNT DEFICIT = TOTAL IMPORTS

– TOTAL EXPORTS (Current CAD – 22.8b, 4.9%) (Where Total Imports > Total Exports)

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

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, 2013-2014)

Mainly due to the rising disposable income

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

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

Q1 Overview

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

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

CAD 2007 & 2013

2007 - $8 billion2013 - $90 billion

2007 20130

102030405060708090

100

8

90

CAD

YEAR

AM

OU

NT

(b

illi

on

of

do

llars

)

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

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

CAD of developing Countries

CAD

-8

-6

-4

-2

0

2

4

2.3 2.3

-1.8

-4.1 -4.1

-5

-5.8

-6.6

RussiaChinaMexicobrazilIndinesiaIndiaSouth AfricaTurkey

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

Thank you