It was when I had a talk with my father about the news on the television, I decided that this is the topic I wanted to do my case study on. The news was about the current account deficit in India which I was not much aware about, though I had studied about current account, deficit and surplus in economics but there was not much clarity. He then explained me that current account deficit is when the value of imports of goods, services or investment income is more than the value of exports and it is also referred as trade deficit. Also, trade deficit is a part of current account deficit and it is also called CAD in short. Then I started my own research on the internet and read some articles in the newspaper.
It was noticed that from 2007 to 2015, the current account got better by 1.5% of Gross Domestic Product(GDP) on average, between January-March and October-December each year. Current account deficit in short term, if under control, is not bad. It can be seen as a sign of a developing country as to grow local productivity and exports in the future. In short-term, a current account deficit is predominantly favourable, the foreigners are ready to venture capital into a country to drive economic growth surpassing what it can manage on its own. However, in long term, a deficit can drain economic vitality.
In India, CAD narrowed sharply to USD 0.3 billion, or 0.1 per cent of GDP, in Q4 FY2015-16, significantly lower than USD 7.1 billion, or 1.3 per cent, in Q3 and marginally lower than USD 0.7 billion, or 0.1 per cent, in Q4 FY2014-15 said the Reserve Bank. As known to everyone that the main imports of India is crude oil and gold, and it was seen that there was an increase in price of crude oil in 2016. But, Moody’s Investors Services raised their crude oil price forecasts to $40-60/barrel in medium term which is manageable for India. Also, the recent increase of the crude oil prices will be beneficiary for the Indian exports, especially after the fall in exports for 18th month in a row in May 2016. Regardless of the weak merchandise exports and a lower services trade surplus, lower oil imports and a sharp moderation in March in gold imports which was due to the jewellers’ strike in April helped to increase the current account of 2016.
In the first quarter of 2016-17,low GDP growth was expected because the private investment which is of the engines of growth had not been obtainable for quite some time. Also, the need for rational agriculture policy was overlooked as the government is more focused on urban-centric policies. Whereas, most of India’s population is depended on agriculture. Though, there is a mix of both urban and rural Indians but both have the basic food necessities. Also, the January – March period of 2016 consisted of lower oil and gold import.
Deficit on the current account means a net outflow of foreign exchange. In India’s case, it refer to a dollar outgo and such a deficit could drain the country’s forex ,i.e. foreign exchange reserves and it is when the inflows to make up the deficit do not come into being . Therefore, a country with a current account deficit has to draw capital flow. This could be in the form of,say, foreign direct investment so as to meet the shortfall. But when the capital flows are in short supply to meet the deficit, then the country’s currency starts to depreciate on concerns that it may find it strenuous to meet its international commitment or fund its current purchases.
However, it is encouraging that manufacturing has exhibited robust growth which government should take positively. The issues that obstruct the ease of doing business must be dealt with a sense of urgency which is not seen, but such initiatives should be taken for the betterment. Also, the decreased performance of agriculture was one of the factors that bought down GDP growth from 7.9 percent in January-March quarter to 7.1 percent. The low production and prices for agricultural commodities were the main reason for this unsatisfactory performance, and it must be handled in a fair manner.
As far as manufacturing is concerned it is seen that changes are required. FDI ,i.e. foreign direct investment being a steady creator of foreign capital that can aid India to finance the current account deficit. Further, the government is hoping that as the rate of return in India is more than that in the US and European countries, even portfolio capital by FII which is now flowing out will finally be returned to India. The basic solution to our widening current account deficit is to make the economic policies in a way so as to improve the productivity of our manufacturing sector substantially so that their exports may be increased. Over the years manufacturing exports have struggled while service exports have surged.
Policies must be taken on so as to revive domestic private investment. Further decreasing of interest rates may not meet the requirement in the current situation of aggregate demand deficiency which is a result of weak foreign demand as well as poor domestic rural demand because of two consecutive monsoon failures. One long-term solution is significant,public investment in education, health and environment, which will not only improve India’s socio-economic situation but also crowd in domestic private investment. Therefore, relying on foreign investment in the long term is not an economically sound policy.
Also, it is obligatory to have a change in mindset and an understanding of the constant changes in the agriculture sector. Farmers should be paid remunerative prices if they have to produce and survive, and should not be impoverished in order to keep inflation under control. Initiatives and opportunities like these given to farmers would encourage them to work harder and better which would lead to increase in GDP of the country.
As I refer to the increase in acreage under pules this year, resulting the price of tur dal dropped to Rs 80 per kg from Rs 200 per kg, and may come down further below Rs 5,550 per quintal, that is the minimum support price the government gives. The government and urban India must keep up with the fact that an impoverished rural India is not satisfactory. They are as salient as consumers and have to be given the purchasing power if production, demand and consumption have to increase to fuel economic growth. The aim of 8 percent growth and more can be achieved if the mindsets of people and policies are altered. Though inflation is something that cannot be ignored, but there should be a way to work around this with the farmers’ cooperation.
The contraction in the CAD in the June quarter was essentially on account of narrowing of the trade deficit to $23.8 billion from $34.2 billion a year ago. Even this year the imports and exports were not in a good shape because of slow moving global demand and low commodity prices. In August, exports observed the signs of stabilizing and contracting only by 0.3%. Net services exports fell in the June quarter mainly due to a fall in net earnings on account of travel, financial services and other business services.
Also,as I read in an article on my NDTV app recently,it was stated that a Japanese brokerage Nomura said that the country is expected to have a current account surplus after nine years in the June quarter at 0.8 % of the GDP.What I understood by this article is that,despite the subdued non-oil exports, services exports and remittances, imports have contracted sharply and that there should be a rise in the full current account deficit for 2016-17.
India came very close to announcing its first current account surplus in more than a decade. The data released by the Reserve Bank of India (RBI) on Wednesday showed a small gap of $300 million in the June quarter. That is around $1.2 billion on an annualized basis. There are more than adequate capital inflows to fund such a current account deficit. The balance of payments for the quarter had a $7 billion surplus.The dramatic turnaround in external accounts is welcome. The parallel decline in the fiscal deficit as well as the gradual easing of inflationary pressures shows that macroeconomic imbalances are no longer a serious threat to stability.
The current account deficit exhibits the shortfall between inflow and outflow of foreign exchange. However, it does not definitely mean that a deficit is always bad or a surplus is always good it all relies on the components giving rise to that deficit or surplus. In India’s case, the fall in deficit is on the back of weak imports rather than any growth in exports. Most importantly weakness in non-gold, non-oil imports is alarming as it pinpoints to the poor health of the industry, increasing concern that the companies are not doing much to add to the capacity. Also, exports displayed a little role in bringing down the deficit. Some other factors that the data includes are fall in private transfer receipts mainly representing remittances by Indians employed overseas and decline in foreign direct investment.