Current account deficit comprises trade deficit and investment income from abroad. It is a measure of a country's net asset position in the world. A deficit would occur when its total imports (services, goods and transfers) are greater than exports. A deficit implies that the country is a net debtor to the world.
Where does India stand?
According to the Planning Commission, India's current account deficit is likely to increase to 3% of the GDP from 2.9% last fiscal. The country's trade deficit, which is part of the current account, stood at a 23-month high of $13 billion in August. The full year could see a trade deficit of around $135 billion, which is about 10% of the country's GDP, the highest in recent Indian history.
The reasons why we export more:
• India is an energy deficient economy. It imports huge amounts of crude oil to meet its energy needs.
• The economic growth is driven by high domestic demand. When incomes grow, import of commodities grows much faster.
• Export growth is not fast enough.
How does the economy fund the deficit?
The current account deficit is financed by a combination of portfolio investment inflows, long term capital inflows, remittances from non-residents and overseas borrowings.
Risks posed by big current account deficit
An increasing current account can pose serious problems for an economy.
• Payments are dependent on long-term capital inflows, which, in turn, depend on the growth prospects of an economy. A pause in these flows can lead to payment problems.
• A decline in exports can lead to further problems. Interest rates have to be kept higher than other countries to attract inflows, which lead to ballooning of deficit/debt.
