The document discusses India's current account deficit (CAD), which was $22.8 billion or 4.9% of GDP in 2013. A large CAD can drain foreign exchange reserves and cause the currency to depreciate. India's CAD is driven by gold and oil imports. Though coal imports have increased due to domestic shortages, reducing oil and coal imports is not feasible. Exports have fallen while FDI has declined from $35.12 billion in 2011 to $22.42 billion in 2012. A large CAD can force India to raise interest rates to attract foreign investment. The RBI has taken steps like raising FII limits and removing lock-in periods on government bonds to attract foreign inflows and contain the CAD

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