Wednesday, 3 April 2013

Current Account Deficit Soars Record High to 6.7% in Q3

Country’s Current Account Deficit (CAD) has soared into record heights of 6.7% of total GDP in 3rd quarter of the financial year.

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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