Current Account Deficit

A MACROECONOMICS

PROJECT REPORT ON

Current Account Deficit

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Balance-of-Payments accounts

These accounts provide a systematic statement of all economic transactions between that country and the rest of the world. Its major components are the current account and the financial account.

Current account

This includes all items of income and outlay—imports and exports of goods and services, investment income, and transfer payments. The current-account balance is akin to the net income of a nation.

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.

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 future.

Salient features of India’s current account balance

India recorded a current account deficit of 1.3% of the country's GDP in 2014-15. This deficit averaged around -1.45% from 1980 until 2014, reaching an all-time high of 1.50% in 2003 and a record low of -4.70% in 2012.

An analysis of India’s imports show a consumption-driven trend with the two major commodity groups being crude oil and precious metals, namely gold and silver. This doesn’t augur well for a developing economy whose major imports should be investment-driven.

India has a current account deficit due to strong imports, comparatively low saving rates and high personal consumption rates as a percentage of disposable incomes.

Causes of Current Account Deficit

Slowing Exports: Due to shocks in the global markets, strong exchange rates, lack of export competitiveness, declining technology content of manufactured goods

Surge in Imports: Due to strong domestic growth, rise in global crude oil prices, increased demand for gold as a physical asset

Unfavourable trends in “Invisibles” account: Rising external debt payment obligations, growing royalty payments, low gross domestic savings rate

Consequences of Current Account Deficit

Reduced GDP growth: Sustained current account deficit causes the aggregate demand to come down. This lowers the economic output and hence the growth which consequently leads to higher unemployment.

Rising external debt burden: External debt is often the medium for financing a current account deficit. As the debt keeps piling on, the existing creditors might lose confidence over the country’s ability to pay back its obligations. This might lead to a massive outflow of capital and selling of the currency. This depreciates the value of the currency leading to a compounded effect and ultimately a currency crisis.