If a country records a current account surplus, it means that it is exporting a greater value of goods and services than it is importing. Of course, other factors affect the current account too, apart from trade values. This is why there is no fixed rule how a current account surplus impacts a country. It depends on various factors such as the size of the current account and the reasons for the surplus. India has run a current account deficit for most of its independent history. Things are changing now, however.
Here are some important things to know about India’s current account:
This quarter, India is poised to post its first current account surplus in nine years. The last time we witnessed a surplus was in 2007. Many analysts and trade pundits welcome this development as it can give a much-needed shot in the arm to investor confidence in the country as well as the Indian currency.
A current account surplus has a direct positive impact on the rupee. The current account reflects all payments between countries for goods, services, dividends and interests. A surplus in the current account means that the country is expected to receive payment in rupees. This means other countries are likely to buy rupee and sell foreign currencies. This means the rupee could appreciate in the near future.
While a current account surplus is welcome, it is important to understand how the surplus has been achieved. A current account surplus occurs partly due to an increase in exports. This leads to a stronger economy and an increase in consumer spending.
On the other hand, it could also be a result of weak domestic demand. This could result in lower consumer spending and decrease in imports. Meaning, exports did not rise, but imports fell. Hence, analysts in some quarters feel that a surplus indicates a weak economic growth in the country.
Some analysts feel that a current account surplus is not a cause for celebration as it reflects weak investment demand in the country. This directly impacts the pickup of imports from the country. In the last four months itself, imports fell by 16.33% due to lower gold and oil imports. This reflects poorly on the investment opportunities in the country.
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