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7/29/2019 MacroEco Project Final
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Current Account Deficit : An Indian Perspective
Submitted by :
Group 5Aishwarya Kumar (PGP/16/063)
Anirban Bhar (PGP/16/064)Anusha Acharya (PGP/16/071)
Palak Bansal (PGP/16/097)Pratik Agrawal (PGP/16/101)
Nimish Shah (PGP/16/110)
Required as part of Term Project
7/29/2019 MacroEco Project Final
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Current Account AnIntroduction
CAD An IndianPerspective
Case Study 1 USCAD and the Financial
Crisis
Case Study 2 Brazil :From Surplus to
Deficit
AGENDA
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Current Account AnIntroduction
CAD An IndianPerspective
Case Study 1 USCAD and the Financial
Crisis
Case Study 2 Brazil :From Surplus to
Deficit
AGENDA
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Current Account AnIntroduction
CAD An IndianPerspective
Case Study 1 USCAD and the Financial
Crisis
Case Study 2 Brazil :From Surplus to
Deficit
AGENDA
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Current Account AnIntroduction
CAD An IndianPerspective
Case Study 1 USCAD and the Financial
Crisis
Case Study 2 Brazil :From Surplus to
Deficit
AGENDA
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BOP: Balance of Payments
BOP
CapitalAccount
CurrentAccount
Current Account = TradeBalance + Factor Income+ Cash Transfer
Trade Balance : Exports
Imports
Factor Income :Earningson foreign investmentspayments made to foreigninvestors
Cash Transfers
Cash Transfer
Factor Income
Trade Balance
1
2
1
2
3
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Current Account : An Overview
CurrentAccount
Deficit Surplus
Nature of a Countrysforeign trade
Foreign AssetsForeign Assets
Positive Net Exports are generally accompanied by a Current Account Surplus However , in case of closed economy , the Factor Income may offset the Trade surplus and
might result in Current Account Deficit
Trade Balance
Factor Income
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Current Account : How is it calculated
CurrentAccount
Goods IncomeServicesCurrent
Transfers
Exports
Imports
Provided
Availed
Inflow
Outflow
Inflow
Outflow
Consists of Donations,Aids and OfficialAssistance
LEGEND : Credit Debit :
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The relation between CAD and Fiscal Deficit
CurrentAccount
PrivateSavings
Fiscal BalanceInvestment
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Is CAD always BAD?
ConsentingAdults
Transactionsconsideredfinanciallysound
Current Account Deficit
Excess ofImports
Excess ofInvestments
Low SavingsInter-temporal
Trade
Pitchford Thesis
Running aCAD today toachieve aCAS at a later
point in time
Indicateshighlyproductiveand growing
economy
ExcessiveConsumption
RecklessFiscal policy
IndicateCompetitivenessproblems
The Classic Answer : It Depends !!!!
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India : Current Scenario
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Indias CAD, at 3.9% of GDP Q1 2012 is approaching 1991 levels
Source :(1) Euromonitor International
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A persistent trade deficit has been the source of Indias CAD woes
Source :(1) Euromonitor International
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Trade deficit has been persistently negative, leading to CAD in India
Exports Imports
India has lost export competitivenessdue to a fall in manufacturingactivities
Traditional export items like textiles andreadymade garments, and leather andother manufactured goods have beengrowing at decreasing rates.
Regulations having reservations forsmall scale industries, reservations etc.
Harsh labour laws
Unfavourable indirect taxes
Poor infrastructure (road, logistics,storage, supply chain bottlenecks)
Delays in transportation (portcongestion, road transport)
16% pagrowth
21% pagrowth
Reasons for lacklustre export growth
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Rising fiscal deficit is also a contributor to CAD
PrivateSavings
(S-I)
PublicSavings
(T-G)
NetExports
(X-M)
India has been running a persistent fiscaldeficit leading to negative public savings,which hasnt been compensated by an
equivalent increase in private savings(which has remained flat at around 30%) ,leading to current account deficit
A high current account deficit means that acountry isnt able to sustain its day to dayexpenses from the revenue it earns
-12
-10
-8
-6
-4
-2
0
Budget balance (%
GDP)
Trade balance (%GDP)
CorrelationCoefficient = 0.52
Source :(1)Euromonitor International
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Gold and oil imports coupled with the depreciating Rupee is a major concern
22% rise in Gold and silver, cokes and briquettes and electronic goods imports from FY 2001- FY2010
Gold and silver combined were the 2nd most imported commodity in 2010-11. Whereas comparativelythe import share of other key industrial raw materials such as Coal, Coke, Iron and Steel is much lowerin the total import bill of the country.
Global economic uncertainty has led to gold being considered as a safe haven asset
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
0
5000
10000
15000
20000
25000
30000
35000
40000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Gold Imports (US$ Mn)
Current Account Balance (% GDP)
Source :(1) Euromonitor International
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Unfavorable exchange rate movements with increasing oil prices raised imports
Share of crude oil imports increased from 23% in FY 1995 to 31% of the import bill in FY 2010
The middle East crisis and US tensions with Iran (Irans threats to shut down the Strait of Hormuz) were
responsible for high oil prices. Speculation over the commodity market could also be a cause of oil priceincrease
However, lower overall global demand, specially because of the Euro crisis, is expected to lead to easing ofoil prices
-35.0
-30.0
-25.0
-20.0
-15.0
-10.0-5.0
0.0
5.0
10.0
15.0
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Petroleum/Crude imports (US$ Mn)
Current Account Balance (% GDP)
% Change in currency (Rs/$)
Source :(1) Euromonitor International
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Aggregate demand (C+I) exceeds Domestic Output (Y) - Compared to its Asianpeers, India remains a low export, high import (consumption) economy
Indias growth is mainly consumption driven and not manufacturing driven (export driven). As a result, despite the globaleconomic turmoil, Indias growth wont be affected. The downside to this is that this consumption is dependent on variables such asexchange rate. An appreciation of the Indian currency due to foreign capital inflows would boost imports, and henceconsumption, but a depreciation of the rupee would adversely affect consumption.
Source :(1)Kotak Mahindra Research
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How does Indias CAD sustain itself?
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Deficits in Indias CAD are made up for by surpluses in its Capital Account
Over the last three years,
Indias CAD has deterioratedsteadily owing to the globalfinancial crisis, Euro crisisand weak global economy.
Capital flows may beunsustainable and volatile in
the long run, as suddenoutflows may destabilize the
economy
Source :(1)Kotak Mahindra Research
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Indias exchange rate fluctuates in tandem with portfolio flows
Excess appreciationof the currency due
to capital inflowsdiscourages exports
and increasesimports, leading todeindustrialization
and loss of
employment
Source :(1)Kotak Mahindra Research
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IT services and foreign remittances help prop the current account deficit
India received foreign remittances of US$ 54 Bn in 2010, making it the largest receiver ofremittances in the world
The IT industry has played a
major role in propping up thecurrent account, specially
during the 2008 financial crisis.The industry has been bringing
in foreign exchange throughthe export of its services and its
employees across the worldhave contributed to the
remittance pool. Remittances
remained stable at US$ 46 bn in2009, whereas capital accountsaw huge swings
Source :(1) Euromonitor International
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Is Indias CAD sustainable for long term growth?
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Economists and former RBI Governors opine that the sustainable level ofCAD is around 2.5%
The current CAD levels are not too high for India to cut imports drastically and provide highlevels of export subsidies. These levels, though high, can be taken care of by effective policymeasures.
A strong self-correcting mechanism is at work. The big CAD has caused the rupee to fallsharply, from Rs 45 to Rs 56 to the dollar. As a result, the rupee has weakened to a verycompetitive level, which by itself should trim the CAD.
Despite policy paralysis and a poor investment climate, India received large inflows of bothFDI and foreign portfolio inflows in 2012. Despite bad publicity from the alleged mistreatmentof Vodafone and Walmart, FDI inflows actually shot up 34.4% to $46.84 billion in 2011-12. FIIinflows are typically far more volatile than FDI. However, despite the Eurozone crisis andrecent slowdown in the US, FII inflows into India exceeded $10 billion in January-July 2012.
Growth-inducing policy measures would lead to increased confidence in the economy thatwould bring in more capital inflows. Also, with the INR deemed to have reached the true
levels that reflect the state of Indias economy, further depreciation seems unlikely and with
the advent of J-curve effect, Indias CAD would become more favourable over a period oftime.
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Our Recommendations
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Increase innumber of SEZs
Recommendations to improve CAD
Build strongmanufacturing
base, boostexports
Currently India has surplus workers in agricultural sector. If manufacturing
sector gets a boost, these surplus workers could get employment
Diversification of current export basket in terms of location (reducedependency on Eurozone) as well as products
Indian exports need to move up value chain at global level
Encourage
FDI/FII inflows
Recent government policies like FDI in retail and aviation encourage capitalflows and capital account surplus, which can cushion CAD
. Local land restrictions, labour, political and environmental restrictions are in astate of flux, and these uncertainties make it more difficult for foreign investors toinvest in India.
Tax sops for manufacturing specially small scale industries. Encourageforeign investment in roads, infrastructure, logistics and supply chain.
SEZs have made exporting easier and hence export growth from SEZs hasbeen phenomenal (121% y-o-y growth 2009-2010)
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Improveproductivity /
structural reforms
There should be reforms to improve governance and reduce wastage ingovernment programmes
Encourage private enterprise and innovation. All such measures will improveproductivity. A number of projects are stuck in bureaucratic mire environmentalregulations, labour laws, unfavourable tax policies etc.
Replicate Brazilmodel
Export growth through growth in agricultural products - India has the largestarable land in the world and is one of the largest producers of agriculturalcommodities and grains. However, net exports have remained small and the
variety hasnt changed over the years
. India could increase its agricultural exports through drastic measures like theGreen Revolution of the 1970s.
Recommendations to improve CAD
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Reduce golddemand
Reduction in demand of gold through education of investors of alternativesources of investment
Increase domestic production of gold to reduce dependency on imports
Discover/developalternate energy
sources
Encourage through policies and investments in development of alternativesources of energy like Shale gas
Following model of Gujarat of boosting investments in solar panels would go along way in reducing Indias oil imports over a long period of time.
Use Monetarypolicy
Offset unfavourable exchange rates. E.g. use open market operations toincrease/decrease liquidity and interest rates to regulate capital flows in/outsidethe country
Recommendations to improve CAD
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Case Study 1 : US Current Account Deficit and2008 Financial Crisis
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2008 Financial Crisis : What went wrong
Current Account Deficit
Net Savors to NetDebtors
Large Treasury Debtissued
US considered a safehaven
High Oil Prices
Oil exporting countrieshaving huge income
Invested in US
As investmentsincreased Yield
decreased
Investors moved toriskier assets
Mortgage backedseurities
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United States of America : CAD and 2008 Financial Crisis
CurrentAccountBalance(In$billion)
Source :(1) World Bank Statistics(2) World Economic Outlook
This line denotesInvestment (as apercentage of GDP)
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United States of America : Housing Price Index(1)
Source :(1) http://www.frbsf.org/publications/economics/letter/2011/el2011-37.html
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Case Study 2 : Brazil Current Account Surplusto Current Account Deficit
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2004-2007Current Account
Surplus
Surplus turns to Deficit
2008Sub-pri
meCrisis
Developing EconomyGrowing Demand
Increasing Deficit
High Import demandLow Exports*
Heavy dependence onExternal funding
HighInflation
Debt TrapWeak
Currency
* - Due to weak Global demand,the exports were falling
Might lead to
Although the Surplus waslow, but it is a good signfor a Developing country
Brazil : The falling BRICK?
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Brazil : Current Account Surplus to CAD
CurrentAccountB
alance(In$billion)
Source :(1) World Bank Statistics
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In the long run we are all
dead- John Maynard Keynes
..so enjoy life while you still can