CURRENT ACCOUNT SURPLUS IN INDIA
CONTEXT
- India is likely to report a current account surplus at the end of the current financial year ending in March 2021, mainly led by a fall in imports.
REASONS FOR CURRENT ACCOUNT SURPLUS
- In last quarter, India’s GDP contracted by a whopping 24%, among the highest rates globally. This collapse of domestic demand led to India’s record current account surplus in April-June.
- This largely attributed to fall in crude oil prices.
- Demand for imports has fallen amid the COVID-19 pandemic, coupled with recent economic reforms initiated by the government to boost manufacturing may lead to Current Account Surplus in ongoing financial year
Implications of Current Account Surplus
Positive Implications
- This development as it can give a much-needed shot in the arm to investor confidence in the country as well as the Indian currency.
- Positive impact on Rupee: A current account surplus has a direct positive impact on the rupee. The current account reflects all payments between countries for goods, services, dividends and interests. A surplus in the current account means that the country is expected to receive payment in rupees. This means other countries are likely to buy rupee and sell foreign currencies. This means the rupee could appreciate in the near future.
- High Employment – In theory, this could expect a current account surplus (X-M) to boost employment because it is indicative of higher domestic demand.
o High exports (X) leads to increased employment in the export sector.
o Lower import spending may mean people are spending more on domestic goods rather than buying foreign goods. Greater demand for domestic goods helps domestic employment.
- Rise in Forex reserve of RBI – It will protect India in balance of Payment crisis as it happened in 1991 and after which India has to borrow from IMF. Further, it is also critical for maintaining financial and external sector stability.
Negative Implications
- Domestic demand – Surplus in current account could also be a result of weak domestic demand. This could result in lower consumer spending and decrease in imports. Meaning, exports did not rise, but imports fell. Hence, analysts in some quarters feel that a surplus indicates a weak economic growth in the country.
- Lower Investment- it reflects weak investment demand in the country. This directly impacts the pickup of imports from the country. In the last four months itself, imports fell by 16.33% due to lower gold and oil imports. This reflects poorly on the investment opportunities in the country.
- Banks are afraid to lend easy money from the RBI to corporations. The huge current account surplus implies that a poor country that badly needs investment finds economic prospects so weak that it is not investing.
Way Forward
- Inject large sums of purchasing power through cash transfers. Rising demand will spur private investment.
- The government should also accelerate all planned investment. This will mean a much larger fiscal deficit. So be it.