ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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The ‘What,’ ‘Why,’ and ‘How’ of a Widening Current Account Deficit

The reason for the increase in the current account deficit during first quarter of fiscal year 2022–23 is analysed. One reason for the widening of CAD has to do with India’s growing dependence on fossil fuels. There is also an element of lack of price competitiveness that is hurting exports. India is exporting low-valued technology-intensive goods whereas importing high-valued technology-advanced goods. The Government of India and the Reserve Bank of India are taking adequate measures to control the widening trade deficit. While some of these measures are yielding results in reducing CAD, external factors such as geopolitical tensions and the United States Federal Reserve System’s move of quantitative tightening are making CAD difficult to control.

The authors acknowledge the support provided by the National Research Foundation of Korea Grant funded by the Korean government.
 

In recent times, an increase in Indias current account deficit (CAD) has caught media attention.1 According to India Ratings and Research (Fitch Rating Services), during the first quarter of the current fiscal year 202223, Indias CAD widened to a nine-year high of 3.4% of gross domestic product (GDP) (Jasrai 2022). In this paper, we analyse the reasons for the widening CAD, and fiscal and monetary policy interventions to counter the same.2 CAD comprises trade account (imports and exports of merchandise goods), services account (imports and exports of services), and net income from abroad (such as remittances). Out of these three components, trade account is the largest. As per the latest data, surplus in the services account and net income from abroad are smaller in comparison to deficit in the trade account. According to estimates from the Ministry of Commerce, Government of India (GoI), the trade deficit for the first quarter of the current fiscal year (AprilJuly 2022) is $96.5 billion (GoI 2022a). Data on services trade are collated from the Reserve Bank of India (RBI). The trade surplus on account of services during the same period is $35.8 billion (RBI 2022). Services trade refers to exports and imports on account of travel, transportation, insurance, and miscellaneous services, such as software, business, financial, and communication services (RBI 2022). The quarterly data on the remittances account is not available. We take as a proxy the quarterly average figures for remittances over the last two years. During 2020 and 2021, India received $83.15 billion and $87 billion, respectively, as remittances from abroad; roughly translating to $21.2 billion per quarter (World Bank 2022). Adding the surplus figures on account of services trade and remittances, we still have a scenario of a CAD of nearly $40 billion.

A search on items using the harmonised system (HS) at the 2-digit level reveals that there are six items (among the top 10 merchandise tradable items) that are of intra-industry types3 and contribute more than 50% of Indias total trade share (GoI 2022a). As Figure 1 and Table 1 (p 39) show, these six items of interest are mineral fuels, oils, and bituminous substances (HS Code 27); natural or cultured pearls, semi-precious stones, diamonds, and gold (HS Code 71); electrical machinery and equipment, sound recorders, and television (HS Code 85); nuclear reactor boilers, machinery, and mechanical equipment (HS Code 84); organic chemicals (HS Code 29); and iron and steel (HS Code 72). A few other items fall in the category of inter-industry trade, which features among the top 10 merchandise exports and imports. For example, India typically exports vehicles other than railway or tramway rolling stock (HS Code 87), and articles of apparel and clothing accessories, not knitted or crocheted (HS Codes 61 and 62), whereas imports plastics and articles thereof (HS Code 39), and animal and vegetable fats and oils (HS Code 15). Controlling CAD would call for understanding the nature of the deficit and demand management policy response (both fiscal and monetary) to counter this growing deficit.

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Published On : 20th Jan, 2024

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