The current account of a country depicts its relationship with other countries in terms of the trade of products, services, and other transfers such as aid and payments to foreign investors. Foreign exchange receipts are classified as credits, while payments are classified as debits. When inflows exceed outflows, a country has a current account surplus; when the opposite occurs, the country has a current account deficit. For the majority of its history, India has ran a current account deficit, with imports frequently exceeding exports.
India’s current account balance as a % of GDP
However, the tide has shifted in the recent few years, with India reporting a surplus in the fourth quarter of 2019-20 (after a 13-year hiatus), propelled by a decreased trade deficit and a growth in receipts of covert. The country then reported a 3.1 percent GDP surplus in the first half of fiscal year 2020-21, owing to a decrease in item imports and reduced outflows for travel services.
While most governments strive for current account surpluses, this surplus was troubling for a number of reasons. The drivers of this surplus were not higher exports or higher foreign exchange inflows, but rather lower outflows. Imports declined more than exports, indicating that demand was shrinking. India's commercial activities had suffered greatly as a result of the Government's lockdown, which was one of the harshest in the world. Furthermore, the government stimulus was just about 2% of GDP, which was among the lowest in the world. Japan enacted a stimulus of 20% of GDP, whereas the United States enacted an immediate stimulus of 10% of GDP, which included one-time payments to adults and children, as well as unemployment compensation.
It may appear contradictory, but an economic relationship indicates that a current account surplus equals the sum of private and government savings. A surplus indicates that there are excess funds in an economy. While having a surplus of assets is beneficial, these monies must eventually be spent in lucrative ventures in order to stimulate economic growth and development. When an economy is in a slump, it is investment and government spending that help it recover.
Fortunately, as the fiscal year comes to a conclusion, the country has seen substantial capital inflows, both FDI and FPI (they reached an all-time high of USD 586.1 billion on January 8, 2021), which has helped restore the economy and markets. Furthermore, prior to the budget, there were proposals for higher R&D spending. This, particularly the research component, is desperately required in our country. By the end of the fiscal year, India's current account surplus is expected to be around 2% of GDP.
India’s net FDI inflow as % of GDP. Source: World Bank.
India is still a developing country, and its revenues must be used to stimulate growth and economic activity. The importance of this is underscored now, when the pandemic's future remains uncertain, despite initiatives such as mass immunisation.
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