The current account deficit is one of major challenges that Indian economy is facing. It has pulled down the economy growth to 4.8% from average growth of 5.5%. The current account records the trade of goods and services of an economy with other countries of the world. It consists of net exchange i.e. exports minus imports of goods, net exchange of services and net transfers to and from the country. Balance of the account before calculating the transfers is also called as balance of trade.
X = Exports of goods and services
M = Imports of goods and services
I =Invisibles (net)
NMG=Non-monetary movement of gold
CAB = (X – M) + I+ NMT
So now we can define current account deficit which means if CAB holds a negative value whereas if CAB has a positive value it will be called as current account surplus. Practically current account deficit, also referred as CAD, means there is negative balance of trade. In Indian economy the CAD occurred because there are more imports than exports. While a current account deficit can be considered akin to a country living “outside of its means," having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent.
At this stage, it was perceived that a CAD level of around 1.6 per cent of GDP was sustainable.
during 2011-12, CAD exceeded the level of 4.0 per cent of GDP and there has been net drawdown of reserves to the extent of about USD 13 billion. CAD began rising in the second half of the decade and almost hit the level of 3 per cent of GDP in aftermath of global financial crisis. During 2008-09 to 2010-11, CAD averaging at 2.7 per cent of GDP. economy is far more open, Rupee is convertible on the current account, financial markets are far more deep and vibrant, investment flows are freely permitted, country is one of the top recipients of capital flows among the emerging economies and the nation has accumulated large forex reserves which are 9th highest in the world (2012).
BALANCE OF PAYMENT:
It consists of current account and capital account. Capital account is calculated by considering all the money flows between country and outside the country. the balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its non-residents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts(as defined by investopedia). The state of economy is described by the BOP. IF BOP is negative it suggests that country is having more foreign outflows than inflows. It represents that economy is facing much more challenges.
The 1991 BOP crisis which led to turnaround...