Current Account records: scope for improvement

Prevailing “Current Account” (CA) dynamics in India evokes contemplation. It is a crucial determinant of the state of the economy. It reflects the volume and level of flow of goods, services, investments and assets within and across the country’s territorial boundaries. The CA is essentially used to gauge an important aspect of the state of the nation’s economy as also its possible trajectories in the near future, affecting the economic growth and exchange rate. India’s CA is expected to widen its deficit extent from 0.5% of its GDP to about 1.6%.

The concerned estimation, made by the Japanese financial firm, Nomura, is based on two factors: higher levels of commodity prices, on average, which could drive up debit entries and relatively deplete credit accumulations on ledger books and an expectation of strong domestic recovery which would almost inevitably mean greater aggregate demand necessitated through increased short-term borrowings.

These differences in earnings and expenditure or that between exports and imports is termed as CA balance. It is represented by three broad identities, which, in their respective ways, display records of the same economic attribute: net foreign investment; difference between national saving and domestic investment; difference between domestic product and national expenditure.

India’s CA records would have reflected positively had the country been among those nations which positioned as lender to or as investor in the rest of the world, saved more than it spent, produced and exported more than it spent on import of goods and services. The latest records, display a reverse of this trend – not excessively, but perceptibly, for sure.

Till March 2017, the country’s exports and imports have registered higher records than earlier. Exports grew from 17.5% in February to 27.6% in March. Imports display an even greater uptick — from 21.8% in February, it grew to 45.3% in March.

Therefore, at present, the country’s net CA balance is on the negative. Stronger global demands for Indian goods and services have driven up export earnings but, the tapering out affect from demonetisation, harbingers of contextual protectionism in the US, seeming economic deceleration in China, and a semblance of fading price effects have dampened the uptick from export earnings, and continue to necessitate an advisement of the situation to be able to thwart further rolling down of earnings from Indian exports.

A major segment of CA records are dependent, directly and indirectly on exchange rate dynamics of the country. The Indian exchange rate, set against the US Dollar, has been on a protracted freefall relative to one unit of the American Dollar, when compared to the exchange rate records from about a decade ago.

In 2007-08, symptomatic of the time immediately preceding, or coinciding to an extent, the onset of the global financial crisis, the Indian rupee valued to about Rs 45/$, while today it is Rs 64/$.

While the turbulence of the financial crisis was brought about by unplanned financial management and overspending relative to earnings in the advanced democracies of the Western world — substantially so in the US — the Indian economy, albeit buffeted to some extent by the raging tempest, was able to ride over the ordeal, without incurring much adverse aftermaths.

However, the succeeding four years post 2008 witnessed lukewarm economic reforms in the country, excessive government expenditure, perhaps merited, and credible allegations of financial unscrupulousness, where the quantity of money involved was often humongous.

A consequential effect was palpable on the country’s organised economic productivity. It made its impact onto the exchange rate determination of the country, which further had its imprint on the output levels, and export-import records.

Exchange rates
Exchange rates are determined in the long-term as also in the short-term. Long-term value changes in a country’s exchange rates are principally due to reactions of traders in the forex market to changes in relative price levels, relative productivity levels, consumer preferences for domestic or foreign goods and trade barriers.

Short-term approach to exchange rate is emphasised by investor appraisals of relative levels of interest rates and expected changes in the interest rate itself over the term of any particular investment. Its aftermath, whatever the direction, determines the country’s earnings and expenditures, and provides a perspective of the concerned economic scenario.

India had been undergoing policy procrastinations, continuation of certain unnecessary procedural bottlenecks despite the onset of economic liberalisation, delay in taking the reform process to its next step as also grappling with the ordeals of policy paralysis. There were all discouraging indicators to investors, both domestic and foreign, in regard to hastening the process of investment.

The consequence played out through excessive spending, both in public and private sectors, without appropriate revenues to offset the expenditure. Import spending moved northward, export earning remained on a trough, if not inched southwards. The attendant pressure on the Indian rupee, forced it to depreciate in the international market.

When demonetisation took place, there was wariness regarding the ability to recover from it in a reasonable period of time. That has been belied. Financial instruments of the country have substantially, if not wholly, recovered from the effect of demonetisation.

A World Bank report has stated that the Indian economy is slated to grow at a pace of an encouraging 7.2%, on average, for the current financial year 2017-18, and improve further in the following years. While challenges from commodity prices, corporate debt overhang, and financial sector stress cannot be ruled out, the country’s fiscal, inflationary, and external economic balance conditions are estimated to exude appreciative attributes.

The CA deficit was about 1.5% of GDP of fiscal year 2015-16. Today, despite greater economic vibrancy, the CA deficit is expected to be a 0.1% increase from that of 2015-16. If the World Bank projections are to take effect, higher growth would occur, the exchange rate could somewhat appreciate, output would increase and exports would rise. CA deficit would then decline, thereby indicating a better economic efficacy; hopefully, sooner than later.

(The writer is an analyst on international finance)

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