UPSC CSE Mains Syllabus: GS-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Current Account Surplus – Associated issues
- RBI’s recent recourse to rupee appreciation brought to fore the challenge of retaining domestic monetary control amidst sustained foreign currency inflow pressures.
- With headline and core inflation rising for many months, at the same time as growth slowed to 4.2% before Covid and descended to -24% thereafter, the difficult configuration impelled exchange rate adjustment for reconciliation.
- In the current, exceptional circumstances, a major source of foreign currency surplus is the sharp current account compression.
What is Current Account:
- The current accountmeasures a country’s imports and exports of goods and services over a defined period of time, in addition to earnings from cross-border investments, and transfer payments.
- Exports, earnings on investments abroad, and incoming transfer payments (aid and remittances) are recorded as credits; imports, foreign investors’ earnings on investments in the country, and outgoing transfer payments are recorded as debits.
What does it indicate:
- Current account surpluses refer to positive current account balances, meaning that a country has more exports than imports of goods and services.
- Countries with consistent current account surpluses face upward pressure on their currency.
- Current account surpluses can also indicate low domestic demand or may be the result of a drop in imports due to a recession.
Current account surplus:
- It is in this context that RBI’s $56 billion addition of foreign currency assets in April-August needs to be viewed.
- 55% of this or $25 billion was bought in one month, July.
- Coarse calculations based upon April-June balance of payment outturn and assumptions for July-August indicate current account surplus could have been as much as $35-40 billion in April-August; the -37% fall in non-oil, non-gold imports was an important factor.
- The math from the capital account side buttresses the severe current account compression is the larger surplus source: net capital and financial account was -19.3 billion in April-June; net foreign investment flows (FDI and portfolio), non-resident deposits and overseas borrowings aggregate around $13 billion possibly.
- More than half the reserves’ accumulation in the five months to August arose from the current account side, therefore.
Current Account surplus and issues:
- Current Account surplus is not always a thing to cheer. It has its issues.
- A current account surplus is partly due to high exports, but the other side of the equation is imports and domestic demand.
- A country may have a large current account surplus because of relatively weak domestic demand.
- This weak demand leads to lower consumer spending and lower spending on imports.
- Therefore, in this case, domestic employment will suffer from a weak economy.
- The current account is often cyclical.
- In a boom, we see a rise in the current account deficit because consumer spending rises, leading to an increase in imports. During a boom, unemployment falls and inflation rises.
- But, in a recession, consumer spending falls leading to lower imports, lower inflation, and an improvement in the current account. The deficit may convert to a surplus, but this is due to the recession, and therefore leads to higher unemployment.
- In India current account surplus is mainly due to the lessening of import demand and not due to rise in exports.
There is also reason to expect its normalisation as production recovers from its abysmal decline last quarter and import disruptions ease.
Going forward, it is anticipated that current account pressures may ease due to progressive restoration of domestic production and import supplies, allowing the central bank more freedom to balance monetary and exchange rate policy objectives with an open capital account. However, the possibility of this trilemma persisting cannot be ruled out. The pronounced or reinforced protectionist turn initiated by Atmanirbhar Bharat measures could be a contributor.
Careful steps have to be taken to resolve the issue.
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