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Current Account Deficit & India

March 26, 2013 - Decoded, Economics and Business, Latest, Miscellaneous - Tagged: current account deficit,
how current account deficit is calculated, India's condition in current account deficit, India's current account deficit,
pros and cons of current account deficit, simple explanation of current account deficit, What is current account deficit

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Definition:

current

account

deficit

is

when

countrys

government,

businesses

and

individuals imports more goods, services and capital than it exports. Thats because the current account
measures trade, as well as international income, direct transfers of capital, and investment income made on
assets, according to the Bureau of Economic Analysis. 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.

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What Are the Components of a Current Account Deficit?

The largest component of a deficit usually a trade 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

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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 countrys residents, the deficit will rise.

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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
What Causes a Current Account Deficit?
Countries with current account deficits are usually big spenders, but are considered very credit worthy. These
countries businesses cant borrow from their own residents, because they havent saved enough in local
banks. They would prefer to spend than save their income. Businesses in a country like this cant expand
unless they borrow from foreigners. Thats where the credit-worthiness comes into the picture. If a country
has a lot of spendthrifts, it wont find any other country to lend to it unless it is very wealthy and looks like it
will pay back the loans.
What Are the Consequences of the Current Account Deficit?
In the short-run, a current account deficit is mostly advantageous. Foreigners are willing to pump capital into
a country to drive economic growth beyond what it could manage on its own.
However, in the long run, a current account deficit can sap economic vitality. Foreign investors may begin to

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question whether economic growth can provide an adequate return on their investment. Demand could

Capitalism, Socialism & Communism :

weaken for the countrys assets, including the countrys government bonds. As this happens, yields will rise

Introduction

and the national currency will gradually lose value relative to other currencies.

MGNREGA: An Introduction

Indias Condition:
Indias CAD story is well known and reflects an overall failure to curb imports and boost exports. This leaves
India dependent on foreign capital to fund the current account. It also exposes the vulnerability of Indias
overall balance of payment (BoP) in a scenario of sudden exit of foreign capital as was seen in FY09 and
FY12 the only two instances in the past 12 years when India clocked a fall in BoP and had to draw down

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on its foreign exchange reserves. As a result, Indias foreign exchange reserves peaked in FY08 and have
stagnated ever since.

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Now rising current account deficit is a big worry for the government officials. Indias record-high current
account deficit is a chief worry as it is increasing the dependence on foreign investments, as stated by chief
economic advisor. According to Mr. Rangrajan Indias Current Account Deficit (CAD) for 2012-13 is likely to
be around 5 percent of the GDP in year 2012-13. But in a good move Indias trade deficit has fallen to 10month low of USD 14.9 billion in February on improving exports and a sharp drop in imports.

Sources:
1.Economic Data Source: Economic Survey
2.Reuters: http://in.reuters.com/article/2013/03/05/current-account-india-idINDEE92404B20130305
3.Moneycontrol:

http://www.moneycontrol.com/news/economy/current-account-deficit-to-be-5fy13-

rangarajan_842905.html

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Saturday, 31 August 2013.

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