Recent Trends in India’s Current Account

Recent Trends in India’s Current Account

Question : Factors that influence the Current Account Deficit are beyond the control of the government . Discuss this in light of recent trends in India’s current account.

• CAD is the difference between sum total of imports and all outward remittances on one side and sum total of all exports and inward remittances on the other

• CAD is comprehensively based on external factors which Indian policy makers cannot control

• For example, international oil prices influence CAD in India. Consider how the global oil prices unexpectedly fell causing a reduction in the import bill and the extent of the deficit

• During 2011 to 2013, CAD rose from lower than 3% to 5% of the GDP and India became vulnerable to shocks

• Exchange rate fluctuated and Indian currency fell by 20% in the wake of a taper

• Rise of the markets was not related to economic fundamentals when the stocks did recover

• For BOP, continued flow of FII investment has been a positive strength

• However, India’s current account has been impacted due to the following trends:

- Oil prices are going up again and the geopolitical realities remain changing. Oil marketing companies being public sector, have not been able to hedge oil purchases

- Gold imports have risen on account of low prices and pent up demand. Also, the gold monetisation scheme suffers from a flaw in that individual households are unlikely to surrender jewellery for investing in gold deposits

- The success of coal auctions has not impacted India as it will remain a net importer in the times to come

- Exports have fallen on annual basis contracting in April to 22 billion dollars. Sharp appreciation of rupee is one of the causes as to drop in petrol prices

Facts and Stats

• CAD was 1.7% in 2013-2014
• It was 1.9% in the first half of 2014-2015
• Factors influencing CAD are beyond the control of the government
• CAD’s present level is an achievement considering runaway deficits of earlier years