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National Awareness Program


India and its Current Account Deficit

Economists world over consider the Current Account as one of the three primary components of the balance of payments, the others being the Capital Account and the Financial Account. To put it succinctly, Current Account is the sum total of all balances left after trade, investment and cash transfers done by the government. To explain it further, it is calculated as the sum of the balance of trade (net earnings on exports - payments for imports), factor income (earnings on foreign investments - payments made to foreign investors) and cash transfers. Current Account Deficit reflects the inflow and the outflow of foreign currency. It occurs when a country's total imports of goods, services and transfers are greater than the country's total export of goods, services and transfers. Current account deficit has serious implication on government policies. This could be manifested in some of the govt. policies like overseas corporate investment. For instance, Government can increase the cap on overseas investments depending upon improvement in current account. Any liberalization (of overseas investments by corporates) can take place once current account condition improves. The current ceiling on overseas investment by companies and individuals is 200 per cent of their net worth while corporate lobby wants it to be stretched till 250% For almost past three years, every policy-maker has been appreciating India for escaping the misery caused by the 2008 credit crisis due to the deft handling of the situation by administrators. Today, another crisis is brewing that is making us remember the year 1991 when The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million. The current crisis, however, is not due to any global shock, but owing to the steps taken by policy-makers. There is no red flag raised yet, but there are apprehensions after the Reserve Bank of India released the quarterly balance of payments report on March 30. For the first time since Lehman Brothers collapsed, the balance of payments fell into the deficit zone. The current account deficit (CAD) - the net position of cross-border trade and services - crossed 4% of the gross domestic products (GDP), when 3% is considered intimidating. Current scenario is harshly similar to the worst situation faced by the nation two decades ago at least economically. But today, the cacophony over the slowing economic growth rate, taxes and corporate profitability is dominating the debate of worsening external balances. Today, Indian economy is many times bigger than 1991. Trade is up multiple times. Actors are many and instruments are numerous. However, the impact of the worsening situation will probably be more severe than it was earlier since global economy is not in the best shape today. Any global turmoil shall have definite ripple effects on the domestic sector. One can get solace only when he sees the current account deficit of the United States. It has been increasingly large, reaching close to 7% of the GDP in 2006. In 2011, they have been the

Best Of Luck for your Flying Career SMARG EDUCATION, 101, BR Complex, Opp. UNA Enclave, Mayur Vihar Phase 1, New Delhi 110091 Contact: 9990125705, 9211901817 www.smargeducation.com

National Awareness Program

highest deficits in the world. New evidences, however, suggest that the U.S. current account deficits are being mitigated by positive valuation effects.

The ideal way forward for India


In order to reduce the current account deficit increase in exports (goods going out of a country and entering abroad countries) or decrease in imports (goods coming from a foreign country into a country) is required. This is generally accomplished directly through import restrictions, quotas, or duties (though these may indirectly limit exports as well), or subsidizing exports. Similar inter related ways to curb the deficit could be as follows: Influencing the exchange rate to make exports cheaper for foreign buyers will indirectly increase the balance of payments Countries could devalue their currencies to ensure export competitiveness Current account deficit are reduced by promoting investor friendly environment, i.e., foreign direct investment (FDI), foreign institutional investors (FII) Adjusting government spending to favor domestic suppliers Other measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government Kindly add the other thoughts/ways/policies which if deployed might help to bridge the mighty gap of Current Account Deficit in our country. Lets support our government, our country and in the process ourselves.

Best Of Luck for your Flying Career SMARG EDUCATION, 101, BR Complex, Opp. UNA Enclave, Mayur Vihar Phase 1, New Delhi 110091 Contact: 9990125705, 9211901817 www.smargeducation.com

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