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CAD to widen to 2.5% of GDP: Moody’s
Why in the news ?
- According to Moody's and other experts, India's current account deficit (CAD) will widen to 2.5 per cent of the GDP in the current fiscal due to higher oil prices that has been accentuated by rupee depreciation.
Details
- Rupee last week dropped to a record low of 70.32 to a US dollar as political turmoil in Turkey and concerns about China's economic health continues.
- While the weaker rupee will benefit exports at the margins, it is unlikely to reverse the trade deficit, which hit a five-year high of USD 18.02 billion in July 2018.
- Net oil imports accounted for 2.6% of GDP in FY 2017-18 and will increase further in fiscal 2019.
- U.S. Fed monetary policy tightening has resulted in dollar appreciation against many other currencies globally.
- The rupee weakness also reflects India’s widening current account deficit as higher world oil prices have pushed up oil import costs.
- Costly oil import would seep into the economy via higher inflation, make infra and other projects, which have a large import content, expensive and will even make critical imported defence items more expensive.
- Number of economic crises in large emerging markets including Argentina, Venezuela and Turkey, have made global investors more cautious about emerging markets.
Current Account Deficit (CAD)
- The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.
- The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
- The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments.
- While a current account deficit can imply that a country is spending “beyond its means," having a current account deficit is not inherently disadvantageous.
- If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit.
Source
The Hindu.