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It is expected that the current account deficit of India can widen to a 10- year high of 3 % of gross domestic product in FY23 because of the ukraine War

·        Balance of Payments Balance of Payments (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world throughout a specific period typically one year.

·        For preparing BoP accounts, economic transactions between a country and therefore the rest of the world are grouped under – current account, Capital account and Errors and Omissions.

·        It also shows changes in Foreign Exchange Reserves.

·        Current Account: It shows export and import of visibles (also called merchandise or goods – represent trade balance) and invisibles (also called non-merchandise). Invisibles include services, transfers and income.

·        Thus, The balance of trade in goods The balance of trade in services.

·        Net current income e.g. profit from overseas investment.

·        Transfer payments e.g. payments to the EU.

·        The balance of exports and imports of products is referred to as the balance of trade.

·        Balance of trade could be a a part of ‘Current Account Balance’.

·        Capital Account: It shows a capital expenditure and income for a country.

·        It gives a summary of the net flow of both non public and public investment into an economy.

·        External commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc type a part of capital account.

·        Errors and Omissions: Sometimes the balance of payments does not balance.

·        This imbalance is shown in the BoP as errors and omissions.

·        It reflects the country’s inability to record all international transactions accurately.

·        Changes in Foreign Exchange Reserves: Movements in the reserves comprises changes in the foreign currency assets control by the reserve bank of India (RBI) and also in Special Drawing Rights (SDR) balances.

·        Overall the BoP account is a surplus or a deficit.

·        If there is a deficit then it can be bridged by taking money from the Foreign Exchange (Forex) Account Current Account DeficitIt is expected that the current account deficit of India will widen to a 10-year high of 3 percent of GDP in FY23 due to the Ukraine War A current account deficit occurs when the total value of merchandise and services a country imports exceeds the entire value of products and services it exports..

·        If  theres a deficit on the current account, therell be a surplus on the Financial/Capital account to compensate for the net withdrawals.

·        The size of current account deficit/surplus is affected by several factors including: Overvalued exchange rate-If the currency is overvalued, imports will be cheaper, and therefore there will be a higher quantity of imports. Exports will become uncompetitive, and therefore there will be a fall in the quantity of exports Economic growth-If there is an increase in national income, people will tend to have more disposable income to consume goods.

·        If domestic producers cannot meet the domestic demand, consumers will have to import goods from abroad.

·        Saving rates – influencing the level of the import spending, thus increasing the deficit.

·        Decline in competitiveness/export sector-In the united kingdom, there has been a decline in the exporting producing sector as a result of its struggled to compete with developing countries in the far east.

·        This has led to be a persistent deficit in the balance of trade.

·        Higher inflation-If India’s inflation rises faster than our main competitors then it will make UK exports less competitive and imports more competitive.

·        However, the inflation may also lead to a depreciation in the currency to offset this decline in competitiveness.

·        Recession in other countries-If India’s main trading partners experience negative economic growth, then they will buy less of our exports, worsening India’s current account.

·        Borrowing money-If countries are borrowing money to invest e.g. third world countries, then this will lead to deterioration in current account position.

·        Financial flows to finance the current account deficit.-If a country can attract more financial flows (either short-term portfolio investment or long-term direct investment), then these flows on the financial account can enable the country to run a bigger current account deficit.

·        Impact for the economy price Push inflation- because of supply shortage Rise in import bill Decline in forex reserve Rise capital inflows- If theres a deficit on the current account, therell be a surplus on the Financial/Capital account to compensate for net withdrawals.

However, capital flows are the current to be less than the present account deficit because of war led outflows. Higher external borrowing. 

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