EMERGING CURRENT ACCOUNT DEFICIT

 In a highly globalized society war or any other crisis in any part of the world is bound to impact other countries depending on their proximity and economic social and political interactions especially trade and financial movements. For the last two years we had a comfortable balance of payment position. Prevailing global situation in terms of rise in prices of commodities, petroleum  and metals and Supply bottlenecks and Russia Ukraine war are impinging BOP in general and Current account in particular 

A country's Balance of payment (BOP) is a systematic record of the financial transaction with the rest of the world. Any transaction that causes in money flow into the country is a credit to its BOP account, and any transaction that causes money to flow out is a debit. Generally BOP account is divided into two 1. Current Account and 2.Capital Account. Current Account consists of receipts from export and imports of goods and services  Income flows like profits interest and dividends,and transfers like remittances and gifts.Capital Account on the other hand refers to net changes in national assets and liabilities due to movement of foreign direct investment (FDI),securities like stocks and bonds, gold and foreign exchange reserves ,borrowings and other liabilities Economic Survey 2021-22 observed that"Despite all disruptions caused by Global Covid19 pandemic India's balance of payment remained in surplus throughout last 2 years .This allowed us to keep accumulating foreign exchange reserves(FER) which stood at US$634 billion on 31st December 2021.This is equivalent to 13.2 months of imports and higher than country's external debt." India was the 4th largest FER holder after  China, Japan and Switzerland. This has led to improvements in external vulnerabilty indicators like FER to total external debt, short-term debt to FER etc. Compared to 2013 taper episode import cover and FER are more than double in December 2021.Currently India's FER declined marginally by $1.425 billion to $631.527 billion in February 25th 2022 due to a decline in currency assets. 

With regard to current account,trade account comprising of value of exports and imports of goods and services play a significant role. While USA followed by UAE and China remained the top export destinations during April November 2021, China UAE and USA were the largest import sources of India during the same period. The period also witnessed robust software and business earnings with both receipts and payments crossing pre pandemic levels. Sharp increase in shipments of engineering goods, petroleum products, gems and jewelry and chemicals pushed our exports by 21.88% to $33.81 billion in February 2022.Total goods exported in April-February period stood at $374.05 billion an increase of over 45.8% over the same period previous year ,Closer to the meeting the commerce Ministry's target of $ 400 billion in the year 2021-22. The conflict between Russia and Ukraine is creating uncertainties about continued exports of engineering goods,pharmaceutical products, tea, coffee, apparel and textiles etc.to Russia .In financial year 2020-2021 Indian exports to Russia stood at $2.6 billion while our imports stood at $5.5 billion. Among the CIS countries Russia is the biggest market for India particularly for engineering goods.Due to sanctions imposed by USA and western countries exclusion of Russia from SWIFT payment system would mean delayed realisation of payments for exporters.Value of total imports during the period April-February stood at $ 550.12 billion which were 59.21% higher than that in the same period previous year. Major items of imports were petroleum, electronics, gold,coal and chemicals. While value of non petroleum exports in February was $29.70 billion recording 18.04% growth, non petroleum imports stood at $ 39.96 billion accounting for 20% growth over February 2021.Imports of edible oil and fertilizers are matter of concern. Curtailment of natural gas supply from Russia will certainly push up ammonia and urea prices. Sunflower oil is the fourth largest cooking oil after palm,soybean and mustard oil.Country imports 98% Sunflower of which 93% come from Russia and Ukraine, Soybean is imported from Argentina and Brazil and palm oil from Indonesia and Malaysia. While Indonesia has imposed restrictions on palm oil exporters Malaysia has substantially increased palm oil prices. 

Rising costs of imports relative to exports is bound to increase trade deficit and consequently create current account deficit. As mentioned earlier current account is the sum of balance of trade(exports- imports of goods and services)net factor income ( like interests and dividends )and net transfer payments (like remittances and foreign aid ).According to Finance minister" our forecast of a modest current account deficit (CAD) of 1.3% of GDP in financial year 2021-22 after a temporary surplus of 0.9% in financial year 2020-2021itself is well below the CAD of over 4% GDP witnessed during the taper tantrum of 2013".Taper tantrum refers to a situation where the economy is stressed and there is a liquidity crunch necessitating the central bank to buy a predetermined amount of government bonds and other assets in order to flush the economy with cash. It may be noted here that in August 2013 financial analysts from Morgan Stanley  used the ter "Fragile  Five" comprising of emerging market economies of Turkey, Brazil, India, South Africa and Indonesia that have become too dependent on unreliable foreign investment to finance their development. Recently the Finance minister observed that 'India's external vulnerabilities have diminished. Robust exports have helped to offset pressure from rising oil imports, We expect the CAD to continue to widen slightly but remain contained at close to 2% of GDP over next few years.' An examination of the CAD over the last few years showed that year 2012 -13 witnessed highest CAD of-4,followed by-1.7,2013,-1.3 2014,-1.1 2015,-0.6 2016,-1.8 2017,-2.1 2018,-0.9 2019, and + 0.9 in 2020- 21.During the period july-september 2021-22 India recorded CAD of $ 9.6 billion which was equivalent to 1.3% of GDP compared with a surplus of $ 15.3 billion in the same period previous financial year. 

 IMF has already warned that a surge in energy and commodity prices have piled on the inflationary hike that the world was already experiencing as economies recover from pandemic ."Should the  conflict escalate, the economic damage would be all the more devastating ".In  India existing studies have shown that hike in oil prices, gold demand and swelling import bill will broaden both trade deficit and CAD.Trade deficit shot up to $21.2 billion in February and is expected to remain high consequently CAD could widen 2.6% of GDP in 2022-23 from 1.7 in this year. A 10% rise in global oil prices would widen India's CAD by 0.3% of GDP .  Calibrated monetary, fiscal and trade policies can be also effectively utilized to check widening current account deficit. In any case currently our economy is not as much fragile in the external sector as in 2013.