Current Account Deficit

Current Account Deficit

           The recent fall in the value of Indian rupee against American dollar is a matter of serious concern. The rupeehas depreciated by about 40% in the past two years. The Indian rupee has lost 20% of its value against the US dollar this year (2013) and stood at 67 at the end of August 2013. The rupee, which was valued at around 55 to a US dollar in January 2013, now trades lower at 64. A fall in the value of rupee makes imports of everything from oil to coal and chemicals costlier, and comes as foreign capital inflows into India are drying up and the government is trying to cap the gaping current account deficit.

           This sharp depreciation witnessed in the value of Indian rupee against dollar is attributed mainly to current account deficit (CAD). India's current account deficit -- which is the difference between the total imports and exports of goods and services, as also inward and outward money transfers – shot up more than 10 times in five years. Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). The balance of trade is typically the most important part of the current account. And a current account surplus is usually associated with trade surplus. However, for the few countries with substantial overseas assets or liabilities, net factor payments may be significant. A deficit then means that the country is importing more goods and services than it is exporting—although the current account also includes net income (such as interest and dividends) and transfers from abroad (such as foreign aid), which are usually a small fraction of the total.

          India's current account deficit, which stood at 4.9 per cent of the GDP in the year 2013, is reported to be the third highest in the world in absolute terms. More importantly, among the emerging economies, India stands right at the top. At $98 billion, India's current account deficit in absolute terms stood behind only the US ($473 billion) and the UK ($106 billion).Among emerging economies, India is followed by Brazil ($58 billion at 2.4 per cent of the GDP), Indonesia ($31 billion at 3.3 per cent) and South Africa ($24 billion at 6.4 per cent).In percentage terms, Mexico and France has the least current account deficit at 1 per cent and 1.3 per cent, respectively, while Lebanon, Ukraine and Morocco are right on top at 16.1 per cent, 7.9 per cent and 7 per cent. India has been struggling to control its                       current account deficit to finance this deficit.

           The Finance Minister Mr. P. Chidambaram recently said that that controlling the CAD was one of the measures in his 10-point prescription for reviving the economic sentiment and assured that the government will be fully able control the deficit. The government has increased duty on the import of gold and silver in a bid to contain the foreign exchange outflow, and also announced a slew of measures including easier overseas borrowing norms to fetch an additional $11 billion this fiscal to bring down its CAD. Provisional government data shows that India's trade deficit narrowed to $10.9 billion in August, due to rise in merchandise exports offering some respite for the troubled rupee. Merchandise exports rose 12.97 per cent in August to $26.14 billion from a year earlier. Imports fell 0.68 per cent year-on-year to $37.05 billion. The government is planning steps to curb imports of non-essential commodities and boost exports of iron ore. The new RBI Governor has also stated that necessary steps will be taken to bring about stability in the value of rupee and increase exports. 
          But only a sustained effort will bring about significant fall in CAD thereby stemming the fall in the value of Indian rupee. Among others the following are some of the measures to bring down CAD and to arrest and   reverse the fall in the value of rupee against dollar. Firstly, steps have to be taken to reduce the dependence on dollar by having trade arrangements with local currencies. Secondly, efforts should be made to raise the level and range of exports from the country which has remained sticky   during the past many years. Steps should be taken to stimulate export of engineering goods.  Thirdly, steps should be taken to reduce imports, particularly all non-essential items, particularly from China. Fourthly, the import of gold should be banned and purchase of gold by households shoud be discouraged. Fifthly, limit the import of oil and other petroleum products, which is possible only through discouraging the use of private transport and by encouraging the use of public transport. Sixthly, measures should be initiated to prevent the outflow of foreign capital. Seventh, steps should be taken to bring back the black money stashed in foreign countries by politicians and others. Eighthly, promote internal savings and thereby reduce dependence on foreign capital, including foreign direct investment. Ninthly, give up the obsession to liberalisation and globalisation.