{"id":1850,"date":"2013-05-07T18:01:43","date_gmt":"2013-05-07T12:31:43","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1850"},"modified":"2013-05-07T18:01:43","modified_gmt":"2013-05-07T12:31:43","slug":"why-current-account-deficit-continues-to-be-a-worry","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/05\/07\/why-current-account-deficit-continues-to-be-a-worry\/","title":{"rendered":"Why current account deficit continues to be a worry"},"content":{"rendered":"

 
\nVivek Kaul\u00a0<\/span><\/span><\/span>
\nEvery country needs foreign currency to pay for its imports. The foreign currency needed is typically the American dollar or the euro. This foreign currency is earned through exports. India is no different on this account.
\nBut what happens when the imports are greater than exports as is the case with India? This leads to a situation where the country does not have enough foreign currency to pay for its imports. How does the country then pay for its imports? What comes to the rescue are remittances of foreign currency made by the citizens of the country living abroad. These remittances can then be used to pay for imports. India is the world\u2019s largest receiver of remittances. In 2012, it received $69 billion, as per World Bank data.
\nBut even with such large remittances being made, a country may not have enough foreign currency going around to pay for its imports. In such a situation, the country is said to be running a current account deficit (CAD). In technical terms, the CAD is the difference between total value of imports and the sum of the total value of its exports and net foreign remittances.
\nIn 2012, India\u2019s CAD stood at $93 billion, which was only second to the United States in absolute terms. As Amay Hattangadi and Swanand Kelkar of Morgan Stanley Investment Management point out in a report titled Don\u2019t Take Your Eye of the Ball<\/em> \u201cAt $93billion, India\u2019s CAD in 2012 was second only to the US in absolute terms, and higher than the UK, Canada and France.\u201d
\nThe following table from the report shows the list of countries with the highest CAD in absolute terms. Even if we compare CAD as a percentage of GDP, only South Africa and Turkey are ranked ahead of India.
\nIndia\u2019s high CAD is primarily because of the fact that it has to import a large portion of the oil it consumes. For the year ending March 31, 2013, the country imported $169.25 billion worth of oil. This forms nearly 34.4 percent of India\u2019s total imports.<\/span><\/span><\/span>
\n\"Chart01\"<\/span>
\nWith oil prices falling in the recent past, this has given reason for hope that India will be able to control its CAD in the time to come. The price of the Indian basket of crude oil stood at $101.58 per barrel as on May 3, 2013. On January 31, 2013, the price was $111.44 per barrel. So, clearly the oil price has fallen over the last three months and this should help India control the CAD is a logical conclusion being made.
\nAnd this has led to a lot of optimism among the lot who run this country. The finance minister on a recent visit to the United States said, \u201cIf exports rise sharply, if the oil prices soften more quickly, the current account deficit could be contained at 2.5 percent even by next year.\u201d
\nThis is being a tad too optimistic, as Hattangadi and Kelkar put it, \u201ceven if we assume lower energy prices will result in a saving of about $20 billion in the current fiscal year\u201d. This means the CAD will stand at over $70 billion, which is not a small amount by any stretch of imagination.
\nWhat has also helped in controlling a galloping CAD to some extent has been a fall in the price of gold and various steps taken by the government to discourage buying of gold, like increasing the import duty on it. Gold imports declined by 11.8 percent to $50 billion during the period April 2012-February 2013.
\nFalling oil and gold prices may have come as a boon but what has somewhat negated this effect is rise in the import of coal. In the first nine months of the financial year 2012-2013 (i.e. the period between April 1, 2012 and December 31, 2012), coal imports jumped 70 percent. This trend is likely to continue. \u201cDespite having the fifth largest coal reserves in the world, India\u2019s coal imports this year may rise to 130 million tonnes, up 50 percent from two years ago,\u201d write Hattangadi and Kelkar. In 2012-2013 (i.e. the period between April 1, 2012 and March 31, 2013), the coal imports are expected to be around 110 million tonnes.
\nSo unless India takes concrete steps to address its energy sufficiency, its high CAD is likely to continue. As Hattangadi and Kelkar write, \u201cIndia has done little to adequately address energy self-sufficiency. After declining for almost 20 years until 2005, US energy self-sufficiency has gone up from 69 percent to 80 percent. In contrast, India\u2019s energy self sufficiency has been falling from 90 percent in 1984 to 63 percent in 2011.\u201d
\nWith the coalgate scam currently haunting the government, it is unlikely that much will happen in the area of encouraging private production of coal in the months to come.
\nAs mentioned earlier India ran a CAD of $93 billion in 2012-2013. What this means is that the sum total of foreign exchange that came in through exports and remittances was not enough to pay for imports. So where did the remaining foreign exchange to pay for imports come from?
\nThis is where foreign investors came in. Foreign investment in the form of foreign direct investment and portfolio investment (the money that comes into the stock market and the debt market) has been in the range of $40-50 billion in the five out of last six years.
\nForeign investors bring money into India in the form of dollars, euros or yen, for that matter, and exchange it for rupees to invest in India. This foreign exchange accumulates with the Reserve Bank of India or any of the banks, and is bought by importers looking to pay for their imports.
\nHence it is safe to say that to a large extent India remains dependant on foreign investors to continue financing its CAD. And that explains why Finance Minister P Chidambaram has been on several foreign roadshows over the last few months trying to encourage foreign investors to invest more in India.
\nBut there are two problems here. As Chidambaram said in the budget speech earlier this year, \u201cThe key to restart the growth engine is to attract more investment, both from domestic investors and foreign investors. Investment is an act of faith.\u201d
\nAnd faith can turn around very quickly. When the financial crisis erupted in 2008-09, foreign investment fell to $8 billion from the $40-50 billion level. Any sense of a crisis can lead to foreign investors stopping to bring money into India. They might also start withdrawing the money they have invested in India.
\nThe other problem here is that how does the finance minister motivate foreigners to invest in India, when Indian businessmen are looking to invest abroad. As Ruchir Sharma writes in\u00a0<\/span><\/span><\/span>Breakout Nations<\/span><\/span><\/span><\/em>, \u201cAt a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 percent, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2 percent just five years ago.\u201d
\nAnd if all this wasn\u2019t enough imports are not the only thing competing for foreign currency. Over the last few years more and more Indian businesses have borrowed abroad given the low interest rates that prevail internationally. This money now needs to be returned. Hattangadi and Kelkar estimate that \u201cthe total amount of debt that will likely come up for redemption or refinancing in the current year is about $165billion, which is about $20billion higher than last year.\u201d Hence, imports and repayment of debt will be competing for foreign currency.
\nSo yes, oil prices and gold prices are falling, but there are other reasons to worry about, when it comes to the current account deficit, something the political class that runs this country, isn\u2019t really talking about.
\nThe article<\/a> originally appeared on www.firstpost.com on May 7,2013\u00a0<\/span><\/span><\/span>
\n(Vivek Kaul is a writer. He tweets @kaul_vivek)<\/span><\/span><\/span><\/strong>
\n <\/p>\n","protected":false},"excerpt":{"rendered":"

  Vivek Kaul\u00a0 Every country needs foreign currency to pay for its imports. The foreign currency needed is typically the American dollar or the euro. This foreign currency is earned through exports. India is no different on this account. But what happens when the imports are greater than exports as is the case with India? … <\/p>\n

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