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INTERNATIONAL FINANCE
2
nd
Mid Term
Assignment
Sagnik Biswas
4
th
Semester

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Current Account Deficit
India's current account deficit (CAD) is likely to be around 2 per cent of GDP in the coming few years due
to slackening of gold imports, among other factors. With inflation showing signs of decline and gold
prices also not rising, the attraction of gold as an asset is coming down. And as we go ahead we should
find the demand for gold falling. There are also other factors contributing to improvement in exports.
CAD was brought down significantly to $32 billion in 2013-14 as against $88 billion during 2012-13 and
fiscal deficit contained within the target in the last fiscal. The CAD in 2012-13 was at 4.7 per cent of GDP
and in 2013-14 it will be only 1.7 per cent. Gold is the largest item in the country's non-essential imports
bill and has often been seen as the main culprit in India's ballooning CAD story.
So far, the government and Reserve Bank of India (RBI) have taken aggressive measures to curb gold
imports. Administrative restrictions that were imposed on gold import may be relaxed as the prices of
the yellow metal are stabilised. Import of gold will come down because of the natural factors like
inflation coming down, and gold prices not rising and the attraction of gold as an asset will come down.
That's what reflects in the reduction of gold import. Gold and silver imports contracted by 40 per cent to
$33.46 billion in 2013-14, or just seven per cent of total import bill, against 11 per cent in the earlier
fiscal, after the government put in place steps to check their runaway imports.
The RBI restricted them on a consignment basis by banks. A transaction tax of 0.01 per cent was
imposed on non-agricultural futures contracts including precious metals. India's biggest jewellers'
association asked members to stop selling gold bars and coins, and the import duty on gold was raised
to 10 per cent. The official explanation for the slowdown in exports is that the developed economies are
in recession. Also, increase in gold imports is being blamed for higher import bill and consequent
worsening of current account deficit.
The solution for the worsening current account deficit is with the Reserve Bank. By buying up the inflows
whenever the rupee appreciates and not selling when the rupee depreciates, the Reserve Bank can build
up its foreign exchange reserves. Buying up the foreign exchange inflows may mean more rupees in the
system but greater liquidity may be needed when growth rate is going up.
A weaker rupee will not only help exports become competitive but also provide much needed
protection to the domestic industries. It will also help shore up customs revenues. Containing inflation
may become more difficult but that seems less difficult now than containing the current account deficit.
Since the world economy is challenged, Indias economy also faces challenges. One of the main
challenges is the Current Account Deficit (CAD). Last year, there was a larger CAD at USD 88.2 billion.
This year too, investors and analysts have raised concerns about the CAD. Their concerns are reflected in
the pressure on the exchange rate. The RBI has taken a number of measures to increase the interest
rate at the short end and this has contained the depreciation of the rupee to some extent. However to
contain the CAD, there is necessity to reduce volatility in the currency market and to stabilise the rupee.
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The measures that are taken to reduce the CAD include:
(i) Compression in import of gold and silver
(ii) Compression in demand for oil
(iii) Compression in certain imports (non-essential nature)
We will also take measures to enhance the capital inflows into India and these will include:
(i) Public sector Financial Institutions to raise quasi-sovereign bonds to finance long term infrastructure
(ii) Liberalising ECB guidelines
(iii) PSU oil companies to raise additional funds through ECBs and trade finance
(iv) Liberalising NRE/FCNR deposit schemes
As a result of these measures it is expected that the CAD will be contained while the inflows will increase
to a level that will be sufficient to finance the CAD.