Current Account
A nation's current account records its transactions with the rest of the world - specifically its net trade in goods and services, net earnings on cross-border investments, and its net transfer payments over a defined period of time. A positive current account balance (surplus) indicates the nation is a net lender to the rest of the world, while a negative current account balance (deficit) indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
Factors impacting the Current Account:
- Trade Balance - During a strong economic expansion, import volumes typically surge. However, if exports do not grow proportionately, the current account deficit widens. Conversely, during a recession, the current account deficit shrinks if imports decline and exports increase.
- Exchange Rate - Exports and Imports are hugely affected by the prevailing exchange rate and thus, by extension, impact the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit. On the other hand, an undervalued currency boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit.
During periods of economic uncertainty, a nation with persistent current account deficits comes under increased investor scrutiny and its currency is prone to speculative attacks. This creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency. This, in addition to a deteriorating trade balance puts further pressure on the currency forcing nations to take stringent measures to support the currency by raising interest rates and restricting currency outflows.
A nation's current account records its transactions with the rest of the world - specifically its net trade in goods and services, net earnings on cross-border investments, and its net transfer payments over a defined period of time. A positive current account balance (surplus) indicates the nation is a net lender to the rest of the world, while a negative current account balance (deficit) indicates that it is a net borrower from the rest of the world. A current account surplus increases a nation's net foreign assets by the amount of the surplus, and a current account deficit decreases it by that amount.
Factors impacting the Current Account:
- Trade Balance - During a strong economic expansion, import volumes typically surge. However, if exports do not grow proportionately, the current account deficit widens. Conversely, during a recession, the current account deficit shrinks if imports decline and exports increase.
- Exchange Rate - Exports and Imports are hugely affected by the prevailing exchange rate and thus, by extension, impact the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit. On the other hand, an undervalued currency boosts exports and makes imports more expensive, thus increasing the current account surplus or narrowing the deficit.
During periods of economic uncertainty, a nation with persistent current account deficits comes under increased investor scrutiny and its currency is prone to speculative attacks. This creates a vicious circle in which foreign exchange reserves are depleted to support the domestic currency. This, in addition to a deteriorating trade balance puts further pressure on the currency forcing nations to take stringent measures to support the currency by raising interest rates and restricting currency outflows.
SUBJECT Variables
ANNUAL BALANCE
Positive balance indicates a surplus and negative balance indicates a deficit
- India reported a current account surplus of USD 24 billion in 2020-21, a significant upswing from a deficit of USD 24.5 billion a year earlier. This effectively means that India was able to conveniently offset its payments obligations for imports and cross-border investments through its own exports and foreign inflows.
- The current account balance swung into the surplus territory on the back of a sharp contraction of USD 55.3 billion in the trade deficit - from USD 157.5 billion in 2019-20 to to USD 102.2 billion in 2020-21.
- India has reported a current account deficit for 7 consecutive years since 2013-14 due to a combination of factors - imports being higher than exports, an overvalued currency which in turn makes imports cheaper and exports less competitive, higher payments for overseas investments than investment inflows into the country, etc.
Positive balance indicates a surplus and negative balance indicates a deficit
Goods or Trade balance: Net imports of goods, excluding exports.
- International trade in 2020-21 resulted in a deficit of USD 102.2 billion - a 35% drop from USD 157.5 billion a year ago.
Services: Net imports of services (non-goods), excluding exports.
- The surplus in non-trade (services) increased by 4.3% to USD 88.6 billion in 2020-21, from USD 84.9 billion a year ago.
Primary Income: This is the net flow of profits and dividends from investments in other countries, and net remittance flows from migrant workers.
- Primary income deficit in 2020-21 increased by 31.9% to USD 36 billion, from USD 27.3 billion a year ago.
- Net FDI (Foreign Direct Investment) inflows in 2020-21 were USD 44 billion, in comparison to USD 43 billion a year ago.
- Net FPI (Foreign Portfolio Investment) increased by USD 36.1 billion in 2020-21 as compared to USD 1.4 billion in 2019-20.
- In 2020-21, there was an accretion of USD 87.3 billion to foreign exchange reserves (on BoP basis)
Secondary Income: This is the net income generated by Indians via foreign trade after adjusting for all taxes and refunds.
- Secondary income resulted in a surplus of USD 73.6 billion in 2020-21, a 2.2% drop from USD 75.3 billion in 2019-20.
- As per the statement by RBI, net invisible receipts in 2020-21 were lower primarily due to increase in net outgo of overseas investment income payments and lower net private transfer receipts, even though net services receipts were higher than in 2019-20.
- External commercial borrowings to India recorded inflow of USD 0.2 billion as compared with USD 21.7 billion in 2019-20
QUARTERLY BALANCE
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