Current Account Deficit
India and other developing nations
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of gratitude to our respected teacher Dr. Amiya
Mahapatra for his valuable guidance, interest and
constant encouragement for the fulfilment of the
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2. Current account
4. Balance of payment
5. Measurement of current account for a country
6. India’s current account situation
7. Import policies
8. Export policies
9. Graphical representations
Current Account Deficit
Current Account Deficit
Current account deficit occurs when a country's total imports of goods, services and transfers is greater
than the country's total export of goods, services and transfers. This situation makes a country a net
debtor to the rest of the world.
CURRENT ACCOUNT DEFICIT = (TOTAL IMPORTS) – (TOTAL EXPORTS)
Where Total Imports > Total Exports
A substantial current account deficit is not necessarily a bad thing for certain countries. Developing
counties may run a current account deficit in the short term to increase local productivity and exports in
The difference between a nation's total exports of goods, services and transfers, and its total imports of
them. Current account balance calculations exclude transactions in financial assets and liabilities.
Deficit is the amount by which expenses exceed income or costs outstrip revenues.
Deficit essentially refers to the difference between cash inflows and outflows.
It is generally prefixed by another term to refer to a specific situation - trade deficit or budget
deficit, for example. Deficit is the opposite of "surplus" and is synonymous with shortfall or loss.
For example, if a nation has exports of $2 billion and imports of $3 billion in a given year, it
would have a trade deficit of $1 billion for that year. Similarly, a government that has revenues
of $10 billion and expenditures of $12 billion in a particular year would have a budget deficit of
$2 billion in that period.
Large and growing deficits over prolonged periods of time are unsustainable in most cases,
irrespective of whether they are incurred by an individual, corporation or government.
Huge deficits over a number of years can wipe out equity for an individual or a company's
shareholders, eventually leaving bankruptcy as the only option.
Although sovereign governments have a much greater capacity to sustain deficits, negative
effects in such cases include lower economic growth rates (in case of budget deficits) or a
plunge in the value of the domestic currency (in case of trade deficits).
Balance of payment:
A record of all transactions made between one particular country and all other countries during
a specified period of time.
BOP compares the dollar difference of the amount of exports and imports, including all financial
exports and imports. A negative balance of payments means that more money is flowing out of
the country than coming in, and vice versa.
Balance of payments may be used as an indicator of economic and political stability. For
example, if a country has a consistently positive BOP, this could mean that there is significant
foreign investment within that country. It may also mean that the country does not export much
of its currency.
The current account is one of the two primary components of the , the other being . It is the
sum of the balance of trade (i.e., net revenue on exports minus payments for imports), factor
income (earnings on foreign investments minus payments made to foreign investors) and cash
Current Account Surplus
Positive net sales abroad generally contribute to a current account surplus.
Because exports generate positive net sales, and because the trade balance is typically the
largest component of the current account, a current account surplus is usually associated with
positive net exports
Current Account Deficit
Negative net sales abroad generally contribute to a current account deficit.
Measurement of current account for a country
The current account is calculated by adding up the 4 components of current account: Goods, services,
income and current transfers
When a transaction of certain good's ownership from a local country to a foreign country takes place,
this is called an "export." The other way around, when a good's owner changes to a local inhabitant
from a foreigner, is defined to be an "import." In calculating current account, exports are marked as
credit (the inflow of money) and imports as debit. (the outflow of money.)
When an intangible service (e.g. tourism) is used by a foreigner in a local land and the local resident
receives the money from a foreigner, this is also counted as an export, thus a credit.
A credit of income happens when an individual or a company of domestic nationality receives money
from a company or individual with foreign identity. A foreign company's investment upon a domestic
company or a local government is also considered as a credit.
4. Current Transfers
Current transfers take place when a certain foreign country simply provides currency to another country
with nothing received as a return. Typically, such transfers are done in the form of donations, aids, or
When CA is the current account,
X and M the export and import of goods and services respectively,
NY the net income from abroad, and
NCT the net current transfers.
Current Account Deficit-Report
What is India’s current account situation?
India has a current account deficit; that is, its imports exceed exports. Current account deficit in India is
reported by the Reserve Bank of India. India’s CAD for the second quarter ended September 2012 rose
sharply to $22.3 billion from $18.9 billion in Q2 of a year ago higher pace of imports and moderating
exports growth. Every year India imports crude oil and gold worth billions of dollar and that disturbs the
whole balance. India’s current account deficit has increased due to weak exports, heavy gold and crude
More foreigners invest in India compared to Indians investing abroad. Rajiv Gandhi Equity saving scheme
was an initiative of the finance ministry, to make Indians reduce gold-purchase and use that money to
invest in capital market. The CAD increased to 5.4% of gross domestic product for Q2 of FY2012-13 from
4.2% for Q2 FY11-12.
The rise in the current account deficit was mainly on account of a widening trade deficit and a slowdown
in inward remittances from overseas Indians. The increasing CAD has become a major constraint on
easing monetary policy. With the CAD turning out to be a record high of 5.4% of GDP in the second
quarter of 2012-13, further caution is warranted while framing monetary and fiscal policies, according to
Reserve Bank of India (RBI).
Implications of a large deficit
In January 2013, the finance ministry said that India’s record current account deficit is “worrying”. Deficit
on the current account means 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 if inflows to make up the deficit do not
materialise. Therefore, a country with a current account deficit has to attract capital flows, which could
be in the form of, say, foreign direct investment, to meet the shortfall.
But when capital flows are insufficient to meet the deficit, the country’s currency starts to depreciate on
concerns that it may find it 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.
Planning Commission Deputy Chairman Montek Singh Ahluwalia on Saturday said for the quarter ended
June 2013, the country’s current account deficit (CAD) was likely to be much higher than 3.7 per cent of
gross domestic product (GDP), projected for the entire financial year.
“My expectation is we won’t see any real improvement till the end of the second quarter (July-
September) this year,” Ahluwalia said at a press conference. He, however, added containing CAD at 3.7
per cent this financial year was possible because of the curtailment in gold imports.
In 2012-13, CAD stood at a record $88 billion, or 4.8 per cent of GDP. Finance Minister P Chidambaram
has said this financial year, it would be restricted to $70 billion.
Large fiscal deficit, CAD impacted market confidence: IMF
India’s large fiscal and current account deficits have impacted market confidence; the IMF has said
CAD in Q1 to be much higher than 3.7%: Montek
emphasising that the rupee decline posed both challenges and opportunities for the country.
“The current situation presents a challenge, obviously, to the government of India, but also an
opportunity for the government to continue with its policy efforts on a variety of fronts,” International
Monetary Fund (IMF) spokesman Gerry Rice said.
Rice said the combination of large fiscal deficit and Current Account Deficit (CAD), reliance on portfolio
inflows, among other things, have affected market confidence.
“But may be just stepping back on the situation in India, the combination of large fiscal and CAD, high
and persistent inflation, sizable unhedged corporate foreign borrowing and reliance on portfolio inflows
are longstanding vulnerabilities that have now been elevated as global liquidity conditions tighten, and
this clearly has affected market confidence,” Rice said in response to a question.
The CAD, which is the difference between the inflow and outflow of foreign exchange, scaled to a record
high level of $ 88.2 billion or 4.8 per cent of GDP in 2012-13. The government expects to bring it down to
$ 70 billion this year.
With various fiscal tightening measures, the government was able to restrict fiscal deficit to 4.9 per cent
of GDP in 2012-13.
Fiscal deficit reaches nearly 63% of full-year target: Govt
Net tax receipts for the first four months of the current fiscal year to March 2014 touched Rs
145,000 crore, while total expenditure was Rs 521,000 crore.
India's fiscal deficit during the April-July period was Rs 341,000 crore, or 62.8 percent of the full-
year target, government data showed on Friday.
Net tax receipts for the first four months of the current fiscal year to March 2014 touched Rs
145,000 crore, while total expenditure was Rs 521,000 crore.
The country's fiscal deficit during the 2012/13 fiscal year ending March fell to 4.9 percent of the
country's gross domestic product, compared with 5.8 percent a year ago.
Comparison of Current Account Deficit (2008-2013):
After the liberalization of import policy , almost all the items are allowed to import in India. There is only
a very short list of items either banned for import, or those required to be imported through
government agencies, or under special license. Import duties, which were earlier prohibitively high at
levels of 180% or even more, have been now decreased to as low as 15% for some items.
For the betterment of the Indian import and also export, the government has introduced Exim Policy in
India for a five year period. All the items that can be freely imported , items that are prohibited or items
that are restricted are mentioned in this list.
The short list of banned items that cannot be imported in India includes beef and tallow, fats and
oils,animalrennet and wild animals, including their parts and ivory.
List of items that are canalised can only be imported by the government of India or its designated
agencies. Canalised list of items include petroleum products, fertilisers, pulses, cereals and spices. Items
on the restricted list (requiring special licence) include safety and security related products, plants and
animals, insecticides and pesticides, and other items that could have an impact on security, health and
IMPORT POLICIES REGARDING FOOD PRODUCTS
According to Food Safety & Standards Act, 2006 the rules which are imposed on import of food products
are classified on the basis of the following parameters:
(A)Quality and Packaging requirements:
Import of all such edible/food products including tea, domestic sale and manufacture of which are
governed by Food Safety & Standards Act, 2006 and rules there under, shall also be subject to the
conditions laid down in the aforesaid Act and rules framed there under. Import of all these products will
have to comply with the quality and packaging requirements as laid down in the Act. Compliance of
these conditions is to be ensured before allowing customs clearance of the consignment.
(B) Shelf Life:
Import of all such edible /food products, domestic sale and manufacture of which are governed by Food
Safety & Standards Act, 2006 and rules thereunder shall also be subject to the condition that, at the
time of importation, the products are having a valid shelf life of not less than 60% of its original shelf life.
Shelf life of the product is to be calculated, based on the declaration given on the label of the product,
regarding its date of manufacture and the due date for expiry.
However, this condition of 60% shelf life stipulated above is not applicable to re-importfor export
purpose. Re-import for export purpose will be subject to following conditions:
(i) Re-imported edible/food products to meet stipulated phytosanitary conditions;
(ii) Importers to give an undertaking to Customs that re-imported the goods are not sold in the domestic
(iii) Importers to submit a certificate to Customs that such goods have been reexported.
(C) Meat and Meat Productsincluding Poultry products:
Import of meat and poultry products will be subject to the compliance of conditions regarding
manufacture, slaughter, packing, labeling and quality conditions as laid down in Food Safety & Standards
Act, 2006 and rules thereunder. All manufacturers of meat/poultry products exporting their goods to
India shall be required to meet the sanitary and hygienic requirements as stipulated under the
aforementioned Act and rules framed there under. The imported product shall also comply with the
specified packaging, labelling and quality standards as laid down therein. Compliance of these conditions
is to be ensured before allowing customs clearance of the consignment.
GEMS AND JEWELLERY:
(a) Import of gold of 8k and above is allowed under replenishment scheme subject to import being
accompanied by an Assay Certificate specifying purity, weight and alloy content.
(b) Duty Free Import Entitlement of Consumables, Tools and additional items allowed for :
(i) Jewellery made out of:
a) Precious metals (other than Gold & Platinum) – 2%
b) Gold and Platinum – 1%
c) Rhodium finished Silver – 3%
(ii) Cut and Polished Diamonds – 1%
(c) Duty free import entitlement of commercial samples shall be Rs
(d) Duty free re-import entitlement for rejected jewellery shall be 2% of FOB value of exports.
(e) Import of Diamonds on consignment basis for Certification/ Grading & re-export by the authorized
offices/agencies of Gemological Institute of America (GIA) in India or other approved agencies will be
(f) Personal carriage of Gems & Jewellery products in case of holding/participating in overseas
exhibitions increased to US$ 5 million and to US$ 1 million in case of export promotion tours.
(g) Extension in number of days for re-import of unsold items in case of participation in an exhibition in
USA, increased to 90 days.
(h) In an endeavour to make India a diamond international trading hub, it is planned to establish
TEXTILE AND TEXTILE ARTICLES CONTAINING HAZARDOUS DYES:
Import of textile and textile articles is permitted subject to the condition that they shallnot contain any
of the hazardous dyes whose handling, production, carriage or use is prohibited by the Government of
India under the provisions of clause (d) of subsection of the Environment (Protection) Act, 1986 read
with the relevant rules framed there under. For this purpose, the import consignments shall be
accompanied by a pre-shipment certificate from a textile testing laboratory accredited to the National
Accreditation Agency of the Country of Origin.
In cases where such certificates are not available, the consignment will be cleared after getting a sample
of the imported consignment tested & certified from any of the agencies
(i) Textiles Committee of Ministry of Textiles and its various testing facilities,
(ii) Central Silk Technological Research Institute (CSRTI) (located at Bangluru, Karnataka) and Eco Testing
Laboratory Central Silk Technological Research Institute (located at Bhagalpur, Bihar, and Varanasi Uttar
Pradesh); of the Central Silk Board .
The sampling will be based on the following parameters:
a)At least 25% of samples are drawn for testing instead of 100%.
b) While drawing the samples, it will be ensured by Customs that majority samples are drawn from
consignments originating from countries where there is no legal prohibition on the use of harmful
c) The test report will be valid for a period of six months in cases where the textile/ textile articles of the
same specification/quality are imported and the importer, supplier and the country of origin are the
MULTICHANNEL GSM/CDMA RECIEVERS,TRANSMITTERS AND TRANS-RECEIVERS:
Multichannel GSM/CDMA receivers, transmitters and trans-receivers capable of
receiving or transmitting or both in two or more frequencies simultaneously, shall be
“Restricted” for imports.
Demand for gold is the reason for rise in import of the precious metal. The rising gold import is one of
the main reason for the Current Account Deficit (CAD), which widened to a record 4.8 per cent of GDP in
The RBI and the government has already taken various steps to control the import of gold with a view to
check CAD. The government recently raised customs duty on gold to 10 per cent.
Import of gold went up by a huge 87 per cent from 205 tonnes in April-July 2012 to 383 tonnes during
the corresponding period this year. In value terms, the increase was 68 per cent from Rs 56,488 crore to
Rs 95,092 crore.
The government has targeted a CAD at 3.7 per cent of GDP, or $70 billion, in the current financial year.
India's CAD, which indicates the excess of imports of goods, services and transfers over exports, touched
a record 4.8 per cent of GDP, or $88.2 billion, in 2012-13
General Notes to Export Policy – Goods under Restrictions
1. Free Exportability
All goods other than the entries in the export licensing schedule along with its appendices are freely
exportable. The free exportability is however subject to any other law for the time being in force. Goods
not listed in the Schedule are deemed to be freely exportable without conditions under the Foreign
Trade (Development and Regulations) Act, 1992 and the rules, notifications and other public notices
and circulars issued there under from time to time. The export licensing policy in the schedule and its
appendices does not preclude control by way of a Public Notice Notification under the Foreign Trade
(Development and Regulations) Act, 1992.
Goods listed as “Free” in the Export Licensing Schedule may also be exported without an export licence
as such but they are subject to conditions laid out against the respective entry. The fulfillment of these
conditions can be checked by authorized officers in the course of export.
2. Code does not limit the item description
The export policy of a specific item will be determined mainly by the description and nature of
restriction in the schedule. The code number is illustrative of classification but does not limit the
descriptio by virtue of the standard description of the item against the code in the import part of the
3. Classes of Export Trade Control
A. Prohibited Goods
The prohibited items are not permitted to be exported. An export licence will not be given in the normal
course for goods in the prohibited category. No export of rough diamond shall be permitted unless
accompanied by Kimberley Process (KP) Certificate as specified by Gem & Jewellery EPC (GJEPC).
B. Restricted Goods
The restricted items can be permitted for export under licence. The procedures / conditionalities
wherever specified against the restricted items may be required to be complied with, in addition to the
general requirement of licence in all cases of restricted items.
C. State Trading Enterprises
Export through STE(s) is permitted without an Export Licence through designated STEs only as
mentioned against an item and is subject to conditions in para 2.11 of Foreign Trade Policy 2009-14.
D. Restrictions on Countries of Export
(i) Export of Arms and related material to Iraq shall be prohibited.
(ii) Direct or indirect export of all items, materials, equipments, goods and technology which could
contribute to Iran’s enrichment related, reprocessing or heavy water related activities, or to
development of nuclear weapon delivery systems including those listed in INFCIRC/254/Rev.9/Part
1 and INFCIRC/254/Rev.7/Part 2 (IAEA Documents) and items listed in S/2010/263 (UN Security
Council Document) or any items related to nuclear and missile development programmes is
prohibited. All the UN Security Council Resolutions/Documents and IAEA Documents referred to
above are available on the UN Security Council website ( www.un.org/Docs/sc) and IAEA website
(iii) Direct or indirect export of following items, whether or not origninating in Democratic People’s
Republic of Korea (DPRK), to DPRK is prohibited:
All items, materials equipment, goods and technology including as set out in lists in documents
S/2006/814, S/2006/815 (including S/2009/205), S/2009/364 and S/2006/853 (United Nations
Secruty Council Documents) INFCIRC/254/Rev.9/Part 1a and INFCIRC/254/Rev.7/Part 2a (IAEA
documents) which could contribute to DPRK’s nuclear-related, ballistic missile-related or other
weapons of mass destruction-related programmes.
(iv) Export of rough diamonds to Cote d’Ivoire is prohibited in compliance to Paragraph 6 of UN
Security Council Resolution (UNSCR) 1643 (2005).
(v) Export of rough diamond [ITC (HS) Code 710210, 710221 or 710231) to Venezuela shall be
Prohibited in view of voluntary separation of Venezuela from the Kimberley Process Certification
Scheme (KPCS). No Kimberley Process Certificate shall be accepted / endorsed / issued for export
of rough diamond to Venezuela.
(vi) In addition to above, export to other countries will be subject to conditions as specified in Para 2.1
of the Foreign Trade Policy 2009-14 and Para 2.2 of the Handbook of Procedures 2009-2014 (Vol.
I) and other conditions which may be listed in the title ITC (HS) Classification of Export and Import
Column Column Description
1. Entry No. Gives the order of the main entry in the schedule. The column is designed for
easy reference and gives the identity of the raw covering the set consisting of
Tariff Item Code, Unit Item description export policy and Nature of restriction
along with the connected Licensing Note and Appendix.
2. Tariff Item This is an eight digit code followed in the import policy in the earlier part of the
(HS) Code book, customs and the DGCIS code. The first two digits give the chapter
number, the heading number. The last two digits signify the subheading. The six
digit code and product description corresponds exactly with the six digit WCO
(World Customs Organisation). The last digits are developed in India under the
common classification system for tariff item.
3. Unit The second column gives the unit of measurement or weight in the tariff item,
which is to be used in shipping bill and other documents. In most cases, the unit
is given as “u” denoting number of pieces.
4. Item The item description against each code gives the specific description of goods,
Description which are subject to export control. This description does not generally
correspond with the standard description against the code. In most cases, the
description will cover only a part of standard description.
5. Export This column is for the general policy regime applicable on the item.
Policy Generally, the Export Policy is one of the following.
Prohibited Not permitted for Export Licence will not be given in the
Restricted Export is permitted under a licence granted by the DGFT
STE Export allowed only through specified State
Trading Enterprises (STEs) subject to specific conditions
laid out in the FTP and also Para 2.11 of the Import
and Export Policy
6. Nature of This column specifies the special conditions, which must be met for the export
Restriction of goods in the item description column. The column may also give the nature of
restriction under the broad category in the Export Policy column.
Dress materials/ready made
Items with imprints of excerpts or
verses of the Holy Quran
Restricted Exports permitted under
2. 0102 10 10 Live Cattle and buffaloes Restricted Exports permitted under Licence.
0102 10 20
0102 10 30
0102 10 90
0102 90 10
0102 90 20
0201 10 00 Beef of cows, oxen and calf Prohibited Not permitted to be exported
3. 0201 20 00
0201 30 00
0202 10 00
0202 20 00
0202 30 00
0402 Milk and Cream, concentrated or
Not permitted to be exported
4. added sugar or other
sweetening matter including
d milk powder,
whole milk powder, dairy
r and infant milk
1006 10 Non Basmati Rice Free 1. Export to be made by private
1006 10 90 parties from privately held stocks
6. 1006 20 00
Trading Enterprises (STEs)
1006 30 including M/s. NCCF & NAFED
1006 30 10 are also permitted to export
1006 30 90 privately held stocks of non-
1006 40 00 Basmati rice.
100190 10 Wheat of seeds quality Free 1. Export will be allowed subject
to submission of following
Customs at the time of export:
(i) A license to carry on the
of a dealer in seeds issued under
Section 3 of the Seed Control
Order (1983) from the State
Graphical Representations and Comparisons
India: Then and Now
India and other Developing Economies
Graphical Representation and Comparison on Current
Economic Condition of India
Flow of money out of India
Series 1- Equity
Series2- FII Debt
Till May’13 equity stood at $14 billion. And FII Debt at $16billion.
A total of $12 billion went away since May’13.
Time period (month'2013)
2008 - $48billion
2013 - $27 billion
India is not as attractive an investment destination as it was before.
There has been more dependency than ever on foreigners.
Short term debt:
2007 - $80 billion
2013 - $ 170 billion
Top 10 companies deeply in debt:
2007 – $1000 billion
2013 -$ 6000 billion
Short Term Debt
short term debt
Corporate India investing abroad:
India and other developing economies:
A Thorough Comparison:
GLOBAL VS LOCAL: STOCK MARKETS
FISCAL DEFICIT (% OF GDP)
Currency Devaluation (currency v/s dollar)
Current account deficit (% of GDP)
Statement of problem
After thorough analysis of the EXIM policies and comparison with the current account deficits
of other countries on various parameters we have come to the conclusion that such a
mammoth current account deficit of India is the result of various contributing factors such as
1. Policy paralysis
2. lack of reforms in past few quarters
3. High gold imports
4. Oil imports
5. Low exports
6. Depreciation of rupee
7. Less reforms in agricultural sectors
are some of the contributing factors.
India would save over $8.5 billion in foreign exchange this fiscal by increasing crude oil imports
India, which paid about $144.29 billion last fiscal for importing oil, is renewing imports from
Iran as unlike imports from other countries it pays the Persian Gulf nation in rupees.
Detailing plans to save $20 billion in foreign exchange spending, Mr.Moily on August 30 wrote
to Prime Minister Manmohan Singh saying about 11 million tonnes of crude will be imported
from Iran in the remainder of the fiscal.
“About 2 million tonnes crude oil has been imported from Iran so far during the current
financial year. An additional import of 11 million tonnes during 2013-14 would result in
reduction in forex outflow by $8.47 billion (considering the international price of crude oil at
$105 per barrel),” he wrote.
Measures to reduce Current Account Deficit in India
Major components of deficit which needs to be taken care of
1. Trade deficit
The first component of current account deficit is usually a trade deficit this means the
country imports more goods and services than its exports. An ongoing trade deficit weakens
the country’s economy over the long term because it is financed with debt. So in order to
reduce the trade deficit India must focus on more of exports of goods and services and
implementation of usage home produced goods and services
2. Net Income
Second component is usually a deficit in the net income. The income paid out by the
country’s individuals, businesses and government to their foreign counterparts should not
exceed more than the receipts. This would contribute to surplus, specifically these are
payments of interest and dividend from foreigners who own assets in the country.
3. Direct Transfers
The third component of deficit is direct transfers which includes government grants to
foreigners. Specifically, deficit is decreased by these direct transfers
1. Wages received from a foreigner’s home country
2. Government grants received by Indians individuals/businesses from other countries
3. Direct disinvestment made abroad by a countries residents
4. Increase in FII.