Factors Responsible for Widening of Current Account Deficit

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India’s current account deficit (CAD) at US$ 3.4 billion (0.6 per cent of GDP) in Q4 of 2016-17 was higher than US$ 0.3 billion (0.1 per cent of GDP) in Q4 of 2015-16 but narrowed from US$ 8.0 billion (1.4 per cent of GDP) in the preceding quarter.

For 2016-17 full year, the current account deficit (CAD) narrowed down to 0.7 per cent of GDP from 1.1 per cent of GDP in 2015-16.

Quarterly data on India’s CAD are given in the following Table:

India’s Current Account Balance:

 Quarters CAD (US$ billion) CAD as Per cent of GDP
2015-16 Q1 -6.1 -1.2
2015-16 Q2 -8.5 -1.7
2015-16 Q3 -7.1 -1.4
2015-16 Q4 -0.3 -0.1
2016-17 Q1 -0.4 -0.1
2016-17 Q2 -3.4 -0.6
2016-17 Q3 -8.0 -1.4
2016-17 Q4 -3.4 -0.6
Source: India’s Balance of Payments Statistics

Factors Responsible:

The widening of the CAD in Q4 of 2016-17 on a year-on-year (y-o-y) basis was on account of a higher trade deficit (US$ 29.7 billion) due to a larger increase in merchandise imports relative to exports.

High increase in imports of Petroleum, Oil & Lubricants (POL) and gold & silver imports led to the rise in imports in Q4 of 2016-17.

Despite the widening in Q4 of 2016-17, the CAD is low and within manageable limits.

The Government and the RBI closely monitor the emerging external economic situation including CAD and calibrate policies on an on-going basis.

Current Account: Meaning

Current account records transactions of merchandise trade and invisibles (services+ transfers+ net income) of India with rest of the world.

Merchandise Trade refers to trade of goods only. Invisible component is subdivided into services, transfers and net income.

– Services refers to trade in services like transportation, tourism etc.

– Transfers are receipts or payments without any intention of receiving anything in return like workers’ remittances, donations, aids and grants etc.

– Net Income refers to income paid or received on investments like dividends, rents, interest etc.

CURRENT ACCOUNT = MERCHANDISE TRADE + INVISIBLES

Over the years, it’s seen the trade deficit has been widening on back of higher imports and slower growth of exports. The key reasons for this trend is Increasing oil and gold imports which are major contributors to the increase of imports. The present crisis is largely due to these factors.

Current account deficit is generally funded by Capital account which records all inflows and outflows of capital of the country.

Both current and capital account are components of balance of payment which records all monetary tractions of a country with rest of the world.

Balance of Payment = Current Account + Capital Account

Positive balance of payment means country is receiving monetary inflows which increase the foreign currency assets.

Current Account Deficit: Meaning

Current account deficit is when payments exceed receipts from trade of goods & services, transfers and net income.

It indicates a country (say India) is borrowing and is net debtor to rest of the world. A current account deficit is when a country’s government, businesses and individuals import more goods, services and capital than it exports. That’s because the current account measures trade, as well as international income, direct transfers of capital, and investment income made on assets. When those within the country rely on foreigners for the capital to invest and spend, that creates a current account deficit. Depending on why the country is running the deficit, it could be a positive sign of growth, or it could be a negative sign that the country is a credit risk.

The largest component of a deficit usually a trade deficit. Increasing trade deficit on account of higher imports is the major component leading to increase of current account deficit.

This simply means the country imports more goods and services than it exports. The second largest component is usually a deficit in the net income. This occurs when the country exports dividends on stocks, interest payments made on financial assets, and wages paid to foreigners working in the country. If all payments made to foreigners are greater than the interest, dividends and wages made by foreigners to the country’s residents, the deficit will rise.

The last component of the deficit is the smallest, but often the most hotly contested. These are direct transfers, which includes government grants to foreigners. It also includes any money sent back to their home countries by foreigners.

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