CAD to GDP gap is closing and it remained 1.2 per cent. RBI’s strategic moves have started showing its effects but, if it’s enough for the revival of Indian economy or needs more improvements still needs to be monitored.
Current Account Deficit (CAD) is the difference between inflow and outflow of foreign exchange in a country. From the last few fiscals, outflows were quite higher than the inflow and hence, CAD was about 4.5 per cent of GDP on an average. But with the new RBI policies which are sharply focusing to reduce inflation and CAD, the gaps are finally closing in. In a recent conclave by RBI on 11 Dec, 2013 CAD has narrowed down to 1.2 per cent of GDP which can be a hint of revival of Indian economy. Some of the strategic moves by Dr. Raghuram Rajan, Governor, RBI, has brought down CAD to USD 26 billion in H1 FY14 from 37.9 billion in H1 FY13. If this performance remains consistent, it is expected that this year i.e. FY14, CAD will remain around USD 56 billion as compare to USD 88 billion last fiscal.
A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports. The current account is a calculation of a country’s foreign transactions, and along with the capital account is a component of a country’s balance of trade.
Adoption of stringent policies such as 10 per cent import duties on Gold and a mandate re-export came to the rescue as almost half of the CAD was owing to its imports. In addition, a separate window for oil companies to buy USD helped the deficit to correct to a good extent. Market correction in west eventually helped International trading in India. It gained a competitive advantage over the depreciating INR and exports were increased to about 5.9 per cent more in November, resulting in a cash inflow of about USD 24.6 billion.
In a contrasting view point, the picture is not very clear at the moment. Correction in CAD has come through high cash inflows as well, by the Indian corporate. Total overseas debt stood at 136 per cent of foreign exchange reserves by the end of June FY14. Short term debt maturing in the coming few months is at around USD 96 billion. In addition, capital outflows in the month of September were the highest at around USD 5.38 billion. The unnoticed factors such as smuggled gold and tapering might as well result in ripple in the economy again.
Although CAD and inflation is well within control for now, one still need some time to monitor the trend closely as the boat may sail either way. Perhaps a clear picture can be drawn only after the coming elections and let’s hope that the magic works.