By Netra Mittal
The Current Account Deficit (CAD), in a nutshell, refers to the measurement of a country’s imports and exports. A ‘deficit’ arises when a country’s imports are more than its exports. Depending on why the deficit arises, it could either be a sign of economic growth or a sign that the country is running on credit losses. As of the fiscal year 2017, the months of April-June brought in an increased deficit due to the imports that have risen substantially and are largely being led by oil imports, due to the low international crude oil prices. There has also been a sharp rise in the gold imports, about 33.1% in case of India, mainly due to two reasons: the Diwali season and the impact of demonetization, where the currency was converted to gold assets.
A major component of the CAD is the ‘Trade Deficit.’ A trade deficit occurs when a country does not meet its production standard. Most countries must borrow from foreign states to finance the deficit (pay for the imports).
Why you should care about the CAD
Every country’s CAD is a reflection of its government’s policy decisions. As stated previously, an increase in the CAD or the trade deficit could show a positive sign. What that essentially means is that having a trade deficit could mean that there exists a higher standard of living. The residents can access goods and services that other countries have to offer, and feel confident in the ability to pay for it. The prices in this international market are cheap due to the high competition amongst the producers and this helps keep the inflation rates in check.
However, it also results in job outsourcing. This often comes with the country’s local companies going out of business. Hence, the country’s overall production decreases. For this reason, many leaders propose reducing the trade deficit to increase jobs by raising import tariffs or using other forms of trade protectionism. PM Modi’s ‘Make in India’ campaign is a good example of our government’s attempts to increase production in the domestic markets and already has made significant progress in that area.
What the exports, FDIs and FIIs look like
An important thing to note is that the exports have remained stable for the last few months. FDI’s and FII’s have been a big supporting factor for the fiscal year 2017. However, pertinent to April-June, we observe that the FII flows have plunged about 8 billion US dollars. This can be linked to two reasons: the recent election of (the US) President Trump and the demonetisation hit in India.
While the FDI flows were strong during April-June, they were not as strong as the flows from the last few months. Hence, we see that the money invested in assets of the government (or, capital flows) in the months April-June are on the lower side–at about 6-7 billion dollars compared to the double digits observed in the last few months.
What the CAD looks like in 2018
In the coming months of the fiscal year 2018, it is anticipated that the imports will remain at the current level, with no significant rise. Money spent on bad investments (capital outflows) is also expected to return. And so India should see a positive sign on the ‘Balance of Payments,’ an account the government uses to keep track of its expenditure and incomes.
For 2018, the CAD is expected to trend higher at around 1.4%, depending on the rise in oil prices. It is also expected that there would be a rise in the oil imports along with the rise in oil prices. This increase will most likely be attributed to a sharp deterioration in the trade deficit, due to the appreciation of the rupee, as we can now import goods at a cheaper cost.
Hence, there is more debt to arise in the CAD, with no significant jump in exports expected. However, the expected rise in the CAD is still not a very concerning figure as funds to India will most likely remain strong. Even the currency, after its significant appreciation, is expected to remain in the dollar-rupee range of 64-69.
General outlook on the CAD
Going ahead, several policies under US President Donald Trump’s regime that are expected to be altered may pose an obstacle to India’s CAD position, if implemented. Revamping of trade, tax and immigration-related policies could hurt our service exports to a large extent, further leading to widening of the deficit in the coming months. However, India has made significant progress by itself and has worked its way into a redefining moment. Today, India’s credibility is stronger than ever. And with demonetisation and GST, India has made the right move to ensure its way to being a powerful economy.
Featured Image Source: Wikimedia Commons
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