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Q. Give an account on India’s current status of current account deficit (CAD).
Mar 30, 2016 Related to : GS Paper-3

Ans :

Introduction-

Balance of payments is an overall statement of a country’s economic transaction with the rest of the world over given period of time. Balance of trade has mainly two components: Current account and Capital account.

Current account refers to an overall statement of export and import of goods and services and remittances (unilateral transfer) over a given period of time. Deficit in current account arises when inflow of items more than outflow.

India’s Current Position-

According data realised by RBI recently current account deficit for the third quarter of 2015-16 is $7.1 billion, which amounts to 1.3% of GDP. Compared to third quarter of 2014-15, CAD brought down by 0.4% of GDP. Numbers suggest that India's external sector is strong and doing well compared to its previous years. However, a closer look at the numbers suggests that there are significant weaknesses in India's external account.

Worries/Weaknesses

  • The most important is weakness in exports. Exports of goods have been declined by $15.2 billion from the equivalent quarter in the previous year. Though decline fuel prices may be one of the factors, but half of the decline in exports was due to non-oil goods. The continuing weakness in India's non-oil exports is problematic.

  • Remittances are also causing concern on India’s external account. India received remittances from overseas Indians totalling $14.8 billion during third quarter of 2015, which is lowest in last 18 quarters. Weaker oil prices are main reasons which have hit the incomes of Indians in the Gulf States.

  • Even service sector also experiencing the deceleration, particularly software and business services exports, which accounts more than half of services exports. In software exports, growth is barely positive; in business services exports, there is a decline.

What’s next?

Due to low fuel prices and sharp increase in FDI, the condition may appears comfortable, but both are cannot be controlled by our policy initiatives. If they reverse, then situation get worsen. Hence the structural changes needed to counter the decline in exports and improve the health of economy on external count. For that bold policy initiatives and firm political will is need of the hour.

(Please note- Students no need to mug up the figures/numbers. Focus should on issues not on figures.)


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