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Economics

Amid global uncertainty, India’s current account deficit (CAD) strategy

Now that the main global energy and commodities shocks have passed, there appears to be a lot of confidence over India’s prospects for near-term growth. Even if these shocks have abated, India still has a significant issue with its enormous current account imbalance (CAD). How will you handle this? It turns out that the word “exports” is the answer to both queries.

Current Account Deficit (CAD)

  • The balance of payments, which is the accounting of exchanges or transactions between entities in a nation and the rest of the world, includes a current account as a crucial element.
  • Included in this are a country’s net commerce in goods and services, net earnings from international investments, such as interest and dividends, and net transfer payments, including remittances and foreign aid.
  • While the trade balance refers to the net balance of exports and imports of products or merchandise trade, a CAD occurs when the value of imported goods and services exceeds the value of exports.
  • CAD = Trade Deficit + Net Income from Abroad + Net transfers

Recent trend

  • Growing CAD: The post-pandemic normalisation has led to the current account deficit growing to exceptional levels during the past year.
  • Reduced demand abroad: Normalization at home has sparked a resurgence in the need for foreign supplies. However, it has had the opposite impact abroad, causing demand to drop.
  • India’s imports increased while exports decreased because foreign households are no longer in need of as many goods now that the financial and physical restrictions keeping them inside their homes have removed. India’s imports have therefore increased just as its exports of goods have started to decline.
  • For example, according to statistics, the value of products imported and exported decreased from $59.75 million in Q3 FY2021-22 to $54.48 million in Q4 FY2021-22.
  • However, thanks to the strong performance of the computer and business services, net service receipts increased both sequentially and annually.

Future projections

  • Looking ahead, the situation is certain to get worse: As advanced countries enter what now seem to be unavoidable recessions, foreign demand will slow down even more.
  • India’s current account deficit (CAD) may get wider under the recession: In that scenario, India’s CAD may widen much more, possibly reaching 4% of GDP in 2022–2033, which would be twice the amount that the Reserve Bank of India (RBI) has historically deemed “safe.”

How depreciating rupee could be helpful?

  • The rupee must depreciate in order to adjust the price, which indicates that a fundamental shift is required. In the end, a discrepancy between the supply and demand of foreign exchange is reflected in India’s CAD. The rupee must decline in order for the price to adjust and balance to be achieved.
  • Exporting becomes more profitable when this occurs, encouraging an increase in the number of businesses that explore international markets. As a result of the rupee’s depreciation becoming less valuable, foreign demand is increasing. Exports rise as a result, and the CAD declines.
  • Exchange rate depreciation aids in long-term growth: Exports played a significant role in India’s economy’s recovery from the epidemic. However, with exports now in decline, India’s future reliance on this vital source of growth is dubious. Therefore, strengthening the export industry is essential for maintaining growth.

Way ahead

Allowing international companies access to their supply chains will encourage them to produce in India. This will also encourage domestic companies to compete more aggressively and will create a level playing field for all participants.

@the-end

The big CAD, on the other hand, is a long-term issue that calls for a long-term solution. India’s two biggest macroeconomic issues, lowering the high CAD and assuring swift, steady growth, may be resolved by implementing the outlined method.

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