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Current Account Deficit

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  • 1. Current Account deficit By Vishnu. G XIME Kochi
  • 2. Intro...  The Current account balance is part of the Balance of Payments (BOP)  BOP Measures all financial and economic transactions over a specified period of time  BOP = Current account + Capital account and must equal zero  CURRENT ACCOUNT DEFICIT = TOTAL IMPORTS – TOTAL EXPORTS (Current CAD – 22.8b, 4.9%)  (Where Total Imports > Total Exports)
  • 3. Implications of a large Deficit  A net outflow of foreign exchange.  In India’s case, this means a dollar outgo. Such a deficit could drain the country’s forex reserves.  In layman terms, it means that India is a net debtor to the rest of the world  When capital flows are insufficient to meet the deficit, the country’s currency starts to depreciate and would be difficult to meet its international commitment or fund its current purchases.  A current account deficit in excess of 2.5% of GDP is seen as worrisome in case of India
  • 4. Causes  Gold imports - A sharp surge in gold imports in the December quarter of 2012 due to the Diwali festival and ahead of schedule gold imports on expectation of an impending import duty hike  India is the largest importer of gold.  Gold is its second biggest import item after oil and contributes around 10 per cent to the total import bill (345 tonnes in Q1, 20132014)  Mainly due to the rising disposable income
  • 5. Causes  A hefty oil bill – Petroleum products are the biggest contributor to India's import bill  India's current account deficit is likely to remain elevated reflecting the global new norm of high oil prices and weak exports  Coal production – Shortfall in domestic coal production has resulted in increased dependence on imports.  Hence reducing CAD through lowering oil and coal imports is not a feasible option
  • 6. Causes  Falling exports – India's trade deficit, or the excess of imports over exports, stood at $59.6 billion in the December quarter  Fall in FDI – FDI declined from $35.12b in 2011 to $22.42b in 2012 (38%)  India would require around $1 trillion in the next five years to overhaul its infrastructure sector such as ports, airports and highways to boost growth
  • 7. Q1 Overview
  • 8. Impacts  Loans from abroad, paid back with interest  Continuous deficit will be looked upon harshly by the international business and financial community – loans from abroad would be rejected  Downward pressure on currency  Foreign firms ultimately fund more and more of domestic investment, making the domestic economy vulnerable
  • 9. Impacts  Unemployment due to exit of foreign capital  Country may be forced to raise interest rates to attract more foreign investment and to keep a desired exchange rate
  • 10. AMOUNT (billion of dollars) CAD 2007 & 2013 100 90 80 70 60 50 40 30 20 10 0 90 CAD 8 2007 2013 YEAR  2007 - $8 billion  2013 - $90 billion
  • 11. Steps taken by RBI  Recently the Reserve Bank hiked Foreign Institutional Investor (FII) investment limits in government securities and corporate bonds by USD 5 billion each  The three-year lock-in period for foreign institutional investors (FIIs) purchasing government securities (G-Secs) for the first time has been taken away  Hikes import duties on Gold ( 8% - 15%)  Provide dollars directly to state-run oil companies
  • 12. Contd...  Hiking repo rate to contain inflation  The repo rate has been increased by 25 basis points to 7.5% from 7.25%  Cutting govt expenditures  Restricting Indians from investing abroad  Curb speculative trading
  • 13. CAD of developing Countries 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 2.3 2.3 Russia CAD China Mexico brazil -1.8 Indinesia India -4.1 South Africa -4.1 Turkey -5 -5.8 -6.6
  • 14. What’s the SCENE???  Current account deficit widens to $21.8 b in Q1 – The Hindu, Sep 30th 2013  Current Account Deficit to be much lower than initial forecast (Chidambaram) – CNN IBN, Oct 3rd 2013)  India will fully finance Current Account Deficit: Chidambaram – dna, Oct 5th, 2013  Will contain current account deficit below $70 bn: Finance Minister Chidambaram – The Economic Times, Oct 5th, 2013
  • 15. Thank you