- Current account surplus takes place when a country has more exports than imports of goods and services
- A current account deficit occurs when a country spends more money on its imports than on its exports
- The terms current account deficit and trade deficit are often used interchangeably, but they have substantially different meanings the difference between exports and imports of visible items is called Trade Balance (if imports exceed exports, it is regarded as trade deficit)
Improvement in the current account due to an increase in exports, helps strengthen the external sector in a country like India. According to the data released by the Reserve Bank of India, India posted a current account surplus of $23.9 billion in pandemic-affected FY21, which accounts for 0.9% of GDP as against a deficit of $24.7 billion in the previous fiscal year.
Q1FY21 – Foreign exchange reserves rose by $28 billion to $468 billion. The huge current account surplus implies that a country that badly needs investment now finds economic prospects so weak that it is not investing, which was the situation last year as many people lost their jobs and investors were hesitant to invest, owing to the uncertainty of the future.
Q2FY21 – India recorded a current account surplus of 3.1% of the GDP against 1.6% of the GDP in Q2FY20. The steep contraction in merchandise imports and lower outgo for travel services led to a sharper fall in current payments (by 30.8%) than current receipts (15.1%) – showing a current account surplus of USD 34.7 billion.
Q3FY21 – The current account was deficit by $2.2 billion (0.3% of the GDP) because there was a $19.70 billion spurt in the trade deficit on the back of higher oil imports and sustained pressure on exports. The net services receipts increased sequentially and on a YoY basis, primarily on the back of higher net export earnings from computer services.
Q4FY21 – The current account recorded a deficit of $8.1 billion (1% of the GDP), which was primarily on account of a higher trade deficit and lower net invisible receipts than in the corresponding period of the previous year. Net FDI coupled with net FPI had a huge impact on the current account. Net FDI fell by 77% YoY, while the net FPI increased by $7.3 billion.
DECODING CURRENT ACCOUNT SURPLUS AND DEFICIT
- The surplus witnessed during FY21 comes from lower imports, as a result of declining domestic demand. These are signs of potential weakness, and regulators must respond to the situation with appropriate measures
- The current account deficit may result in the depreciation of the currency. As deficit in any account is usually financed by a surplus in other accounts. If there are insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the imbalance of foreign flows of funds
- Limited domestic production, land, and labor law issues, high borrowing cost and taxes, and cheap imports from China has adversely affected India’s current account. India imports products such as gold, crude oil, electronics, etc.
- India is looking to build self-sufficiency in pharmaceutical APIs, specialty chemicals, electronics, and telecom and become an export hub for automobiles, auto components, mobile phones, and refining. This will bring a structural shift in the current account towards a long-term surplus
Contributed by: Team Leveraged Growth
Co-contributors: Priyanka Dugar | Devansh Daga | Prachi Agarwal
