Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Current account surplus likely:
Context:
India may record a current account surplus in FY21. This is because there is moderation in import due to under heating of the economy triggered by the Covid-19 crisis.
- This crisis is different from what the world witnessed during the taper tantrum.
What is the taper tantrum?
Taper tantrum phenomenon refers to the 2013 collective reactionary response that triggered a spike in US treasury yields, after investors learned that the US Fed was slowly putting brakes on its quantitative easing (QE) program. This led to a surge in inflation to high double digits emerging economies.
What is the Current Account?
The current account 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.
Relevance:
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.
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.
InstaLinks:
Prelims Link:
- What is Current Account?
- Components.
- Impact of Current Account surplus.
- What is the taper tantrum?
Sources: the Hindu.
