- India’s current account deficit (CAD) stood at $13 billion or 1.9% of the GDP in Q4 of 2017-18.
Highlights of the news
- India’s trade deficit increased to $160 billion in 2017-18 from $112.4 billion in 2016-17.
- For the full financial year, the CAD increased to 1.9% of the GDP in 2017-18 from 0.6% in 2016-17 reflecting widening of the trade deficit.
- India’s current account deficit (CAD) has increased from $2.6 billion or 0.4% of the GDP in Q4 of 2016-17 to $13 billion or 1.9% of the GDP in Q4 of 2017-18.
- However, the CAD moderated marginally from $13.7 billion (2.1% of GDP) in the preceding quarter.
- The Reserve Bank of India attributed the widening of the CAD to a higher trade deficit brought about by a larger increase in merchandise imports related to exports.
- The oil import bill, which saw a 57% increase, and a 41% jump in gold imports to $2.96 billion in July are seen as the main reasons for the high trade deficit.
Impact of increase in CAD
- Widening CAD impacted the rupee that depreciated rapidly.
- High current account deficit forced the government to impose import restrictions on non-essential items like gold.
- The rising trade deficit is adding to the worry about the currency stability.
- The foreign exchange reserves, also seen as an important factor for currency stability, have depleted by $26 billion since April, due to sporadic interventions by the central bank to control the pace of fall in the currency.
- The rupee is the worst performing currency among the emerging market economies in Asia, and depreciated over 9% against the dollar in the current financial year.
- As the rupee is under pressure and oil prices are inching up, it will impact the current account further.
- A huge current account gap could make the rupee depreciate further in the absence of meaningful intervention from the central bank.
- Since a higher trade deficit will widen the current account deficit, the rupee could be under pressure from domestic factors also.
About Current Account Deficit (CAD)
- The current account measures the flow of goods, services and investments into and out of the country.
- A country runs into a deficit if the value of the goods and services it imports exceed the value of those it exports.
- The current account includes net income, including interest and dividends, and transfers, like foreign aid.
- It indicates a country (say India) is borrowing and is net debtor to rest of the world.
- 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.
Consequences of the Current Account Deficit
- A deficit in the current account leads to depletion of foreign currency assets as these assets are used as a source to fund deficit which forms part of capital account.
- Depletion of foreign currency assets reduces money supply which in turn results to liquidity issues.
- High imports results in higher demand for dollar causing rupee to weaken (rupee depreciation) which in turn impacts liquidity.
- In the long run, a current account deficit can sap economic vitality.
- Foreign investors may begin to question whether economic growth can provide an adequate return on their investment.
- Demand could weaken for the country’s assets, including the country’s government bonds.
- As this happens, the national currency will gradually lose value relative to other currencies.
- As the value of its currency declines, the value of the foreign assets rise, thus further reducing the current account deficit.
- The consequences of a current account deficit can be a lower standard of living for the country’s residents.
- As, the central bank wants to see the current account gap within 2.5% of the GDP, which is seen as crucial for currency stability, it should intervene and control depreciation of currency.
- Import of unnecessary items can be reduced.
- Import duties can be increased.
- Exports can be increased to maintain foreign currency reserves.