What does balance of payments (BoP) mean for an economy?
An economy, like an organisation or a company, has a receipts and an expenditure account. The balance of payments is a statement of account of the income and expenditure made through foreign exchange.
What is the current account and capital account in BoP?
A country’s BoP statement is divided under two major heads — the current account and capital account. In any economy, foreign exchange movements take place through two routes. Investments come into India such as foreign direct investment (FDI) through the capital account because these funds are used over a period of time. On the other hand, there are expenses and income that are “current” in nature. These include export earnings, import payments, earnings from intangible services exports (such as tourism), a credit of income such as when an individual receives funds from a foreign entity including aid and donations.
What does a deficit or a surplus in the current account signify?
A current account deficit (CAD) means that there is more outflow of capital from the economy than inflow, which is not desirable.
Why is it critical to keep CAD within manageable limits?
In macroeconomics, the twin deficits — CAD and the fiscal deficit (the amount of money the government borrows to fund its expenses) — are of paramount importance. If no action is taken, we have to either earn about $70-$80 billion every year through the capital account or meet the deficit by depleting our foreign exchange reserves. Clearly, both options are not realistic. So far, India has been able to finance its CAD without drawing on the $275 billion foreign exchange reserves.
Why is it critical to keep CAD within manageable limits?
In macroeconomics, the twin deficits — CAD and the fiscal deficit (the amount of money the government borrows to fund its expenses) — are of paramount importance. If no action is taken, we have to either earn about $70-$80 billion every year through the capital account or meet the deficit by depleting our foreign exchange reserves. Clearly, both options are not realistic. So far, India has been able to finance its CAD without drawing on the $275 billion foreign exchange reserves.
What does the latest data on CAD show?
India’s CAD stood at 4.9% of GDP or $21.8 billion during April-June this year from 4% or $16.9 billion in the same period of the previous year, according to data released on Monday. The gap, however, is expected to taper down in the coming quarters aided by a sharp slump in gold imports and a smart rebound in exports amid early signs of recovery in the US and Europe that have boosted shipment orders. Gold imports during April-June 2013 stood at $16.5 billion, higher by $7.3 billion compared with $9.1 billion worth of inward gold shipments during the same quarter in 2012. Excluding the increase in gold imports, CAD would work out to $14.5 billion, or about 3.2% of GDP. CAD had declined to 3.6% in the January-March quarter after touching a record high of 6.5 % in the October-December quarter.
Why is CAD expected to fall in the coming quarters?
Over the past three months the government and the Reserve Bank of India (RBI) have launched a string of steps to attract foreign capital to arrest a sliding rupee and contain the CAD that hit a record high of 4.8% of GDP last year. Last week, it relaxed norms for domestic companies to trade shares on foreign bourses aimed at attracting dollar inflows. This followed a slew of other measures including import curbs and higher customs duties on gold, foreign exchange controls for companies and individuals and easier investment norms for a host of sectors such as telecom and high-tech defence. India has targeted to limit CAD to 3.7% of GDP or about $70 billion this year, down from $88 billion last year.