Current account surplus may not be all good news
2 min read . Updated: 20 Jul 2020, 09:48 PM IST
PremiumIndia registered a current account surplus of $558 million in Q4FY20, the first quarterly surplus since 2007. Many hailed the government for reducing the trade gap, while economists have cautioned against the outcome, calling it a sign of weakness. Mint explores the issue.
India registered a current account surplus of $558 million in Q4FY20, the first quarterly surplus since 2007. Many hailed the government for reducing the trade gap, while economists have cautioned against the outcome, calling it a sign of weakness. Mint explores the issue.
How do we define the current account?
The current account captures the transactions of a country with the rest of the world. That is, it captures the net trade in goods and services, net earnings on investments, and net transfer payments over a period of time, typically a year or a quarter. Essentially, net trade in goods and services is a major component of the current account. The current account provides important information about the economic condition of a country, and a higher balance of the current account usually corresponds to higher exports than imports, indicating a healthy inflow of foreign exchange reserves.
What’s India’s current account like now?
India’s current account has largely been in deficit due to the higher value of imports compared to exports. Some of the major items we import are crude oil, gold, and electronic items. Limited domestic production and issues related to competitiveness of our domestic industry such as land and labour laws, high cost of capital and taxes resulted in stiff competition from cheap imports coming from countries such as China. Consequently, our trade deficit with these countries has increased which has had an adverse impact on our current account balances and has come at the expense of our domestic manufacturers.
Why is our current account suddenly in surplus?
Lower crude oil prices, lag in domestic demand, and the effect of supply disruptions due to the lockdown in China are responsible for lower value of imports in the January-March quarter. This lower value of imports is behind the $558 million current account surplus, and therefore, it is likely to be short-lived once economic activity normalizes post the pandemic.
Do fewer imports imply lower level of demand?
The economy was experiencing a growth slowdown throughout FY19-20 and therefore, domestic demand was weak the whole year. This is likely to have hit imports adversely in the final quarter of the financial year. With the covid pandemic far from being under control and economic activity yet to normalize, we can expect domestic demand to be muted and the current account could be in a surplus for FY20-21. However, this will be a sign of weak domestic demand instead of improvement in our position on trade.
A surplus is not a good thing always, then?
A current account surplus implies a higher inflow of forex than outflow. It helps with an increase in reserves which is critical for maintaining financial and external sector stability. However, in the current situation, an improvement in our current account is coming from lower levels of imports which coincides with muted domestic demand. This makes it important to view such an uptick as a sign of potential weakness and undertake supportive policy measures.
Karan Bhasin is New Delhi-based policy researcher.
