We all keep on hearing of the Current Account Deficit close to budget time and then sometimes when we switch on the business channel. Most of us know what it is – a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. In its most basic form, it means how much we export less how much we import. It is not just goods but includes services too. It also includes interest and dividend from abroad and transfers like global aid too.
Why do we keep our eyes peeled for any news on it? There are many reasons for it but primarily the issue is of currency and the exchange rate. If we are buying more from abroad and paying in their currency then obviously the foreign currency appreciates more than ours – simple supply and demand. And the second is consumption pattern and its skew. For example, crude and gold, we import massively – the first because it runs the country and the second because we hoard it. The first we need so no compromise on it and the second we could do away with but don’t but it does make our holidays abroad so much more expensive as the exchange rate goes out of favour.
But is it really changing – The deficit – and is the change really so bad for us?
Over the last two decades, the deficit as a percentage of GDP has been wild. There are periods of negative deficit, meaning times when we actually made more importing than exporting. But barring some difficult years, like the 20
08-2011 period, it has bunched around the 2.5-3.0 percent mark.
On an absolute basis, the numbers are not so sunny as it seems we are marking the very high absolute figures that we touched during the Euro crisis.
But does this absolute high that we are in now having an affect on our forex rates. Or has it had?? Let us check out the relation between the Current account deficit and the benchmark that we all peg forex to – the US Dollar (USD). There is obviously a connect between the deficit and the USD rates as clearly illustrated but there is equally certainly no singular causality (meaning direct cause and affect). When we speak of the percentage of GDP that is. But when we see the total deficit, then it is clear – total amount deficit clearly influences the exchange rate.
Is the sky looking as gloomy as the above portends?? Definitely no. There is every indication that we will not stop buying cars and mostly they would be in petrol or diesel. There is every indication that the number of flights and trains will of course increase meaning more crude imports and more expensive fuel consumption. But there is every indication that slowly but surely the value of services that we export from India is going higher. And so much so that there is more than a chance the deficit will be negative. We will perhaps for quite sometime soon start having a positive in the export minus import situation. And that will be a very good thing. Not good enough to drop the USD to 50 to the INR but at least there will be one less worry for us and the government.
Yes, it is important that we keep on having a current account surplus. And hopefully it remains like that for a long time.