Indian Economy

INDIA’S CURRENT ACCOUNT DEFICIT IN SIMPLE TERMS

on
March 17, 2018

1. A country’s Current Account consists of the following three components:-

1.1. Foreign Trade (imports & exports);

1.2. “Net Income”; and

1.3. Net Unilateral Transfers.

2. The sum of all the three components determine if the country is running a Current Account surplus or deficit.

3. Net Income stands for the difference between the income earned by a country’s Govt.& private entities from their foreign assets and such income earned by the foreign governments and private entities from assets held in that country.

4. Three important components of ” Net Income” are:

4.1. Dividends;

4.2. Rentals, and

4.3. Interest income.

5. Net Unilateral transfers represent the difference between the sum of non- resident transfers into the country, inward grands and aids given by foreign governments and the funds sent out by foreigners in that country plus grands & aids given by the country’s Govt. These are called unilateral because there is no quid pro quo involved in these.

6. Coming to India’s case, We are continuously running a Current Account Deficit for decades now, which stands at present at about 3.5% of our GDP.

7. The main contributor to this deficit is our chronic Trade Deficit ( about USD 150 billion now) which means that we are importing much more goods & services than we export, crude oil imports constituting the major chunk of imports followed shamefully often by gold imports.

7.1. This huge adverse trade balance is covered to a large extent by our NRI inward remittances to the tune of 60-70 billion USD a year.

8. Clearly the world does not believe that we are competent to export value added goods & services!

9. Thus we are kind of living beyond our means by running this Current Account Deficits consistently over many years!

10. Now, how do we fund this deficit? Naturally , through more borrowing from abroad which further pushes up our external debt.

11. If this borrowing does not produce a return adequately higher than the cost of borrowing through productive investment, we will be defeating ourselves by just borrowing to pay off earlier debts and interest, something similar to the PNB Scam LC roll over!

12. With our incremental capital / output ratio being among the lowest in the world because of our chronic inefficiencies in managing the use of capital, it is doubtful if we can wriggle out of the chronic current account deficit in the foreseeable future.

13. On the flip side manageable current account deficits are good since it devalues the country’s currency, there by enhancing export pricing competitiveness while dousing the appetite for imports which turns costlier when our rupee keeps depreciating against the USD and other major foreign currencies.

14. But this is a short term remedy as ultimately we have to be export competitive not on the basis of our worth less currency but on the strength of our ability to create unique selling value for our goods & services exported through enhanced capital and labour utilisation efficiencies.

 

Ramdas.S.Iyer

TAGS
RELATED POSTS

LEAVE A COMMENT