Current Account Deficit

Oct 12, 2013 3 Comments by

 

Current Account Deficit – Is it worth the hype?

As on Aug 2013,

The markets have fallen about 13% in past 1 month. This has been primarily blamed on increasing Current Account Deficit (CAD). It is worth to ponder over that whether this is the correct reason or we have made CAD the escape goat.

To define in very simple terms, CAD is the difference between total exports and total imports of a country. According to Morgan Stanley, CAD of India is expected to be 4.9% of GDP in calendar year 2013, which is the third highest in the country after US ($473 billion) and UK ($106 billion). In the list of emerging economies India is at the top followed by Brazil ($58 billion), Indonesia ($31 billion) and South Africa ($24 billion). However, Brazil’s CAD is only 2.4% of GDP and Indonesia 3.3% of GDP.

India’s CAD in 2011-12 was $78.2 billion and in 2012-13 was $87.8 billion. This year the government is confident that it will contain the CAD to $70 billion. So, if we compare the situation with 2012-13 the CAD will be lower in 2013-14.

The rupee depreciation has been linked very closely to CAD. The CAD has decreased but the GDP growth has also slowed down. That is the biggest concern for the economy. An emerging nation like India should not have sub 5% GDP growth. The situation is very grim but people are making it even worse.

Now lets have another view on our currency devaluation. It is directly linked with Quantitative Easing (QE). After 2008 crisis, the Federal Reserve in USA decided to print money and buy sovereign bonds to increase the liquidity in the system. Due to this the bond yields dropped. So, for higher returns FIIs started investing in emerging markets, with India being one of their favourite choice.

The US economy has shown signs of recovery. On this basis, Feds have given signs of shown signs of tapering QE. So, if they stop printing dollars the value of dollar will appreciate and the US bond yields will increase. So, FIIs will draw out funds from different emerging markets to invest in US treasury bills. In June-July FIIS have pulled out over $10 billion dollar from Indian stock market.

This can be assumed as a dominoes effect. The Fed’s statement of tapering the QE caught India on the wrong foot. The inability of the government to fuel growth shook the faith of FIIs in the Indian Economy. So, India became their first choice to draw out their funds. This led to the huge fall we saw in the stock market as well as the currency. All the emerging nations’ currency has fallen but the expectations of India on growth front was high. So, it got battered down.

The negative sentiment has played a huge role in this. Forex is the most traded financial instrument in the world. On back of export import most of the traders have to take part in this. So, the view of all the analysts of rupee depreciating further to 70 levels has led to speculative bear positions.

 

 

 

The major part of the import bill is of Gold and crude oil. Government has increased the import duty on Gold to 10% to stop the imports and it has shown good effects. The crude oil imported in India is largely from the Middle East with Saudi Arabia being the biggest importer. If India can make any bilateral agreement on Currency Swaps, it will decrease the CAS to a large extent.

Having said this, CAD can’t be contained without the government focussing on growth. The faith has to be restored in the Indian Economy. Next year we have election which leads us into uncertainty. Each party has its own agenda and policies. Generally before election, the government passes many bills to woo the voters. If this happens it will be good for the economy as many delayed projects will be cleared.

All said and done, with so many resources at our disposal India surely has the potential to show remarkable growth. It has all the ammunition, it just needs the right person to fire those.

 

 

Economy

About the author

The author didnt add any Information to his profile yet

3 Responses to “Current Account Deficit”

  1. What is CAD (Current Account Deficit)? - Quora says:

    […] 1  Rohit Gupta, making my own Luck!making my own Luck! When a country's total imports of goods, services and transfers is greater than the country's total exports of goods, services and  transfers. This situation makes a country a Net Debtor to the rest of  the world.Source: Current Account DeficitEmbed QuoteComment Loading… • 22 Sep 1  Shubham Deva http://52weekhigh.in/… […]

  2. Economics: What is current account deficit and how is it calculated? - Quora says:

    […] 2  Vanathi Parthasarathi, Inquisitive Economist with a Post Graduate degree in Financial EconomicsInquisitive Economist with a Post Graduate degree in Financial Economics Vote by Arun Nagabhirava.In the world, there are two types of nations – Current account surplus nations and current account deficit nations.What is current account?It is the net revenue on exports minus payments for imports. i.e. current account = Total Exports – Total imports. Total exports is a country's income – It is what the country is selling to the world. Total imports is a country's expenditure. It is what the country is buying from the world. When current account balance value is positive, the country is exporting more i.e. earning more than it is spending. When this value is negative, the country is buying more than the amount it is earning.Embed Quote4+ Comments Loading… • 12 Sep 1  Shubham Deva http://52weekhigh.in/… […]

  3. India: Gold: How does gold import impact a country's current account deficit? - Quora says:

    […] 3  Sâmrüddhï Thäkkâr Votes by Dhwanil Shah and Prashant Phanse.The current account deficit is raised when the country's imports > exports. When India imports more gold/crude, it has to pay back in international currency (USD dollars) not the domestic currency (INR rupee).Due to this situation, the govt of India has implemented the import duty of approx 6% on gold imports. This will possibly reduce the gold imports in India with the intention of reducing the current deficit account.  Also, when you spend more of USD dollars, this could possibly decrease the foreign exchange reserves further fluctuating the demand and supply of currencies (exchange rate) in the forex market.Embed Quote1+ Comments Loading… • 2 Jul 1  Shubham Deva http://52weekhigh.in/… […]

Leave a Reply