Recently, an American financial services company Morgan Stanley has predicted that the Current Account Deficit will widen to a 10-year high of 3% of GDP in FY23.
GS III- Indian Economy (Growth and Development)
Dimensions of the Article:
- What is the Current Account Deficit?
- What is Balance of Payments?
- As a result of prolonged geopolitical tensions, the rise in oil prices is likely to persist, resulting in a worsening of the current account deficit due to increasing oil import bills.
- Because capital flows are projected to be lower than the current account deficit, the Balance of Payments (BoP) will be in deficit of about 0.5-1 percent of GDP (Gross Domestic Product).
- The substantial currency reserves, which currently stand at USD 681 billion, will help to mitigate the extent of the country’s exposure to funding threats.
- With a reverse repo rate hike in April 2022, the business aims to complete the policy normalisation process. However, delaying the RBI’s normalisation process increases the potential of policy rate hikes that are disruptive.
- Given the high deficit and debt levels, there is less room for fiscal policy stimulus to promote growth – a modest fuel tax decrease is viewed as a possibility, as is dependence on the national rural employment programme as an automatic stabiliser.
What is the Current Account Deficit?
- A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
- The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part of ‘Current Account Balance’.
- According to an earlier report of 2021, High Oil Imports, High Gold Imports are the major driving force, widening the CAD.
What is Balance of Payments?
- BoP of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period, usually one year.
- Purposes of Calculation of BoP:
- Provides information about a country’s financial and economic situation.
- Can be used to evaluate whether the value of a country’s currency is appreciating or depreciating.
- Assists the government in making budgetary and trade policy decisions.
- Provides crucial data for analysing and comprehending the economic dealings of a country with other countries.
Components of the Balance of payments (BOP)
- Current account: It includes the financial transactions dealing with the export and import of goods, services, unilateral transfers, investment income etc.
- Capital account: It includes the financial transactions dealing with assets such as foreign direct investment, foreign portfolio investment, foreign loans etc.
- Official reserve transactions: It conducted by the central bank in case of the BOP deficit or BOP surplus.
- Errors and omissions: It is the element of BOP (other than the current account and the capital account) which refers to the balancing items reflecting the inability to record all the international financial transactions.
-Source: The Hindu