According to a recent report released by British brokerage
firm Barclays, India's trade deficit has been steadily rising since July 2021.
The current account deficit (CAD) is due to the rise in commodity prices due to
the rise in crude oil prices.
CAD was expected to reach $ 45 billion or 1.4% of GDP by March 2021. This will put pressure on a weak economic recovery.
Definition: A current account deficit occurs when the total value of goods and services imported by a country exceeds the total value of the goods and services it exports.
The balance of exports and imports of goods is called 'trade balance'. Trade balance is a part of current account balance.
Factors of India's Current Account Deficit
High oil imports:
About 85% of India's oil demand is met by imports.
Because of this, an increase of $ 10 per barrel in global crude oil prices is estimated to increase the trade deficit to $ 12 billion or 35 basis points (bps) of Gross Domestic Product-GDP.
Large quantities of gold imports:
Another factor reducing the foreign exchange rate is the import of large quantities of gold.
Gold imports are on the rise due to improving domestic demand and the ongoing festive season.
According to the World Gold Council, the demand for gold will exceed the level of the year 2020 this year and it is hoped that the demand for gold will be higher given the growing wealth and income flows.
The positive side of the services:
The report states that the monthly services surplus has increased from an average of $ 6.6 billion in 2019 to $ 7 billion in 2020 and $ 8 billion in the first nine months of 2021.
Overall effect:
The report denies the emergence of any downside and states that high levels of foreign exchange reserves pose no major risk to macro stability or balance of payments.
However, the rising trend of deficit as an aggregate / combination of improving demand may continue for some time and trade deficit will widen rapidly with rising commodity prices.
Back to basics: outstanding debt
Definition:
Balance Of Payment-BoP refers to a statistical statement which records the financial transactions of the inhabitants of a country with the world during a given period.
Objective to calculate BoP:
It can be used as an indicator to determine whether a currency is rising or depreciating in a country.
It helps the government to decide on fiscal and trade policies.
Provides important information for analyzing and understanding a country's economic behavior with other countries.
Components of BoP:
To prepare a country's BoP account, its financial transactions are classified into current account, capital account, financial account and other parts of the world under errors and omissions. It also shows changes in foreign exchange reserves.
Current Account: It shows the export and import of visible (also called trade balance) and invisible goods (also called non-commercial goods).
Invisible includes services, remittances and income.
Capital Account
It shows the capital expenditure and income of the country.
It summarizes the net inflow of private and public investment in the economy.
External Commercial Borrowing, Foreign Direct Investment, Foreign Portfolio Investment etc. Is the capital part of the account.
Errors and Omissions:
This imbalance is sometimes referred to as errors and omissions in the BoP due to non-availability of balance of payments. This shows the country's inability to accurately record all types of international transactions.
Changes in Foreign Exchange Reserve:
These include changes in the holdings of foreign currency held by the Reserve Bank of India (RBI) and changes in Special Drawing Rights (SDRs).
Overall, the BoP account may have a surplus or deficit. If there is a deficit, foreign exchange (Forex) can be met by taking money from that account.
This situation is called a BoP crisis if the forex account reserves are declining.
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