THE GIST of Editorial for UPSC Exams : 10 December 2018 (Current account woes)

Current account woes

Mains Paper 1: Economy
Prelims level: CAD
Mains level: Economic Growth and development

Context

  •  The latest trade figures published by the Reserve Bank of India confirm the damage caused by high global oil prices in the last few months.
  •  India’s current account deficit (CAD) widened to 2.9% of gross domestic product (GDP) in the July-September quarter, a four-year high, under increasing pressure from the oil bill.
  •  This is in contrast to the same quarter a year ago when the CAD was only 1.1% of GDP.
  •  The widening of the CAD was due to an increase in the trade deficit, which jumped to $50 billion in the September quarter as compared to $32.5 billion a year ago, due to a higher import bill.

Steps need to be taken by the government

  •  The government, however, may not be too worried about the widening CAD figures as the major factor that was behind the phenomenon has abated; global oil prices have dropped sharply since early October.
  •  Brent crude is down almost 30% from the high it reached in early October. So the size of the deficit is likely to come down in the quarter ending December.
  •  This is not to suggest that all is fine. As usual, medium to long-term risks to the external sector remain. For one, there is the threat of price volatility faced by heavy importers of oil.
  •  Unless India manages to diversify its energy base by tapping into local sources of energy, this will remain a perennial threat to economic stability.
  •  A widening current account deficit per se should not be a cause for worry as long as foreign capital inflows into the economy are brisk enough to fund its huge import needs.
  •  The trouble arises when foreign inflows dry up and restrict the ability to purchase essential imports. So as liquidity conditions continue to tighten across the world, India’s heavy import dependence is a cause for concern.
  •  When Western central banks tighten their monetary policy, the RBI will be forced to tighten its own policy stance in order to retain investment capital and defend the rupee.

Way forward

  •  This will impact domestic economic growth negatively. Each time the external account has come under pressure, the government has simply tried to bring in piecemeal emergency measures, such as a little opening up of the capital account or ill-advised restrictions on imports.
  •  Such a policy obviously manages to only kick the can down the road rather than bring a permanent solution to the problem.
  •  In order to bring about any meaningful change, the government should also try implementing proper structural reforms that can boost exports, thus helping fund imports through means other than capital inflows, and end the over-reliance on imported oil.

Online Coaching for UPSC PRE Exam

General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) Which of the following constitute the Twin Deficit?
(a) Capital Account Deficit and Fiscal Deficit
(b) Budget Deficit and Effective Revenue Deficit
(c) Current Account Deficit and Fiscal Deficit
(d) Primary Deficit and Fiscal Deficit

Answer: C

Mains Questions:
Q.1) Critically evaluate the structural reforms are needed to boost exports, reduce dependence on imported oil.