Economy
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.
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Net current income e.g.
profit from overseas investment.
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Transfer payments e.g.
payments to the EU.
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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.
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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.
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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.
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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.
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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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