Country’s Current Account Deficit
(CAD) has soared into record heights of 6.7% of total GDP in 3rd quarter of the financial year. The reason for this high deficit is the heavy oil
and gold imports and some muted exports in that time being.
Eventually this current scenario will force the Government of India to take more necessary steps to contain the
deficit, and provide the Indian economy some soothing airs. Already Finance
Ministry has taken some key measurements to control the situation, and boost up
the economic growth.
In the quarter of October to December the CAD widened to $32 billion from
$20 billion in the same corresponding quarter of the previous financial year.
Last year the Current Account Deficit for the Q3 was 4.4 percent of total GDP.
What is CAD?
According to Investopedia CAD is a country's total imports of goods,
services and transfers is greater than the country's total export of goods,
services and transfers. This situation makes a country a net debtor to the rest
of the world.
We should understand that a substantial current account deficit is not necessarily a bad
thing for certain countries. Developing counties may run a current account
deficit in the short term to increase local productivity and exports in the
future.
It has to be mentioned here that during April-December
quarter of 2011 India’s CAD stood at $56.5 billion, which was around 4.1% of
the GDP, but in the same period of 2012 it rose to $71.7 billion or 5.4 percent
of GDP. The CAD has been increasing in a steady manner, which is big reason to
worry for the developing countries like India.
The Finance
Ministry published a statement to acknowledge this issue recently. In its
statement the ministry said, “The number (6.7 percent) is large though not
surprising. Both RBI and the government will continue to monitor the CAD and
will take additional steps whenever warranted."
Important information has to be added here
that the import of gold in the April-December period of stood at $38 billion,
while the same import was $56 billion for the 2011-12 fiscal year.
In the December quarter even the trade
deficit increased to $59.6 billion with respect to $48.6 billion in the
corresponding for the previous financial year. During this period of time the
imports rose about 9.4 percent, which is one of the main contributing factors
to this high trade deficit.
The Ministry added that the CAD was basically
financed through capital inflows without depending into the foreign exchange
reserves. It assured that the coming days would reduce the deficit, and boost
the overall Indian economy. It hoped some improvements in the exports
numbers, which is essential to reduce the widened gap.
"CAD for fourth quarter is expected to
be smaller. Government is committed to bringing down CAD over the time, as well
as ensuring that it is financed safely," the Ministry added in its
statement.
As I mentioned earlier that the government
has taken some key measurements to deal with this situation like it has already
imposed curbs on import of gold by increasing duty in it. The government’s
main view is to contain the soaring CAD under control. It has also taken some
essential steps to improve the overall availability of gold.
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