One of the reasons why policymakers are worried is the weak rupee and one of the things affecting weak rupee is the high current account deficit we run. Here is a quick look at what this means and how it can impact you.
What is it?
A current account deficit happens when a country’s total import of goods, services and transfers is higher than the total exports of goods, services and transfers. When something is exported, essentially goods and services produced in India are sold overseas and hence there is receipt of payment for it. On the other hand, when something is imported, goods or services produced elsewhere in the world are bought in India at a cost. If buying is more than selling overseas, it is termed as a deficit because it means that the domestic capacity is not enough to meet domestic demand. Also, it means the country is essentially spending more than it earns in foreign currency and in goods and services.
How does it impact the Indian rupee?
Payment for cross-border trade is usually defined in an accepted currency, typically the US dollar. So, in case of exports, India earns dollars and for imports pays in dollars.
Now if our exports are higher than imports, we will have more dollars, which is a good thing as it builds overall foreign currency reserves for the country. On the other hand, as is the case for India, if our imports are high, we need to buy more dollars to pay for the imports. In this case, we have to give up Indian rupees to purchase dollars and that weakens the position of our currency against the dollar.
The present scenario
India traditionally has had a negative balance on current account or has run a current account deficit. The main reason for the high import bill is oil, the demand for which is growing in India; we rely mostly on imports for our oil demand. Another reason is high demand for gold; nearly all the gold consumed in India is imported. At present, our current account deficit of around 4.2%, which is historically a high figure.
Experts say the problem gets magnified because domestic as well as global economic growth is slowing, leading to decline in exports growth. A high current account deficit puts more pressure on the rupee and that can keep rupee inflation high. Another concern is that though exports are hit by slower global demand, imports are not declining even as India’s gross domestic product growth is slower now. This means the gap between exports and imports is rising or the current account deficit is increasing.