Explained: Current Account Deficit

The current account of country shows its profile in goods and services trade. Technically, the current account of the balance of payments explains the money value of goods and service (services is contained under invisibles) exported and imported by the country during an accounting period.

To understand the Current Account Deficit (CAD), we should have an idea about Balance of Payments.

What is balance of payments (BoP) account?

Usually citizens and companies of a country make several types of transactions with other countries. Basically, there are three types of transactions: trade in goods, trade in services (or in a broader sense invisibles) and capital transactions.  

Balance of payment account of India is a systematic statement of all economic transactions between the residents of India and the residents of the rest of the world in an accounting period (say one year).

The BoP as a classification format, classifies the BoP account into two:

• Current account transactions that involves exports and imports of goods and services (services are incorporated under invisibles). And
• Capital account transactions that involve the flow of investable money to and from India.

What are the components of current account?

Current account has two components – exports and imports of goods and export and imports of invisibles (include services). Hence the current account has two subcomponents:

1. Merchandise trade account ( for exports and imports of goods) and
2. Invisible account ( for services, remittances and income)

Merchandise trade account: gives the money value of India’s exports and imports of goods. When we often mention exports and imports, it is about the merchandise account.

Invisible account: indicate India’s

 (a) Service exports and imports (software exports, tourism revenues, etc, various service imports)

(b) Remittances (private remittances from abroad and payment to foreign countries)

 (c) Income (income earned by MNCs from their investment in India).

India’s current has some common trends during many years. First is that the country has a strong trade deficit. This means that exports of goods are significantly lower than imports of goods. Second, India has a reasonably good invisible surplus (because of software exports and remittance inflows). But for most years, the trade deficit will be higher than invisible surplus.  This in turn produces a current account deficit for the country in most years.  

The following table shows a typical current account situation for India. Minus sign indicates deficit whereas the plus sign indicates surplus.  

The Current Account

                                                                                  In US $ billion

  1. Trade balance (A+B)                                                  -190

  2. Invisible balance(C+D)                                              +100

  3. Current account balance (1+2)                                   -90

The table shows that the country has a current account deficit of $ 90 billion.

(The figures in the table are approximation of the 2012-13 figures for India; Source: RBI)

           As per the table, India had a trade deficit and invisible surplus for the year. Considerable invisible surplus helped India to offset most of the big trade deficit. But since the invisible surplus was lower than trade deficit, the current account of the country registered a deficit of $90 bn.

Since, balance of payment indicates transactions with other countries, it holds some extra importance. Most importantly the transactions are done through foreign currencies. We call such currencies as hard currencies or international reserve currencies (eg. US $). Hence, the export and imports of goods and services or capital inflow or outflow that takes place from and to India are expressed in terms of US $ in India’s balance of payment account.

A bit about Trade Facilitation Agreement

Trade facilitation is an agreement signed under WTO’s Bali Ministerial Conference in 2013. The agreement aims to simplify and speed up customs procedure by member countries for enhancing trade.

What is trade facilitation?

The trade facilitation decision is a multilateral deal to simplify customs procedures by reducing costs and improving their speed and efficiency. It will be a legally binding agreement and is one of the biggest reforms of the WTO since its establishment in 1995. The TFA will come into existence once two third of the WTO members ratify it. As on January 24, 2016, sixty four countries out of the 162 WTO members ratified it.

The objectives of Trade Facilitation Agreement are: to speed up customs procedures; make trade easier, faster and cheaper; provide clarity, efficiency and transparency, reduce bureaucracy and corruption, and use technological advances. It also has provisions on goods in transit, an issue particularly of interest to landlocked countries seeking to trade through ports in neighboring countries.

It is expected that once customs procedures on imports and exports are simplified, it will quicken international trade volume.

What is its significance?

Significance of the Trade Facilitation Agreement is that it is the first major new agreement reached by the member countries after the establishment of the WTO in 1995. Because of the conflicting stand of the member countries on different issues, no noticeable agreement was reached before the Bali MC except few less important ones like that on financial services, IT products, and on telecommunication.

The TFA has made the WTO a significant institution for promoting trade liberalization. It was one of the three components of the ‘Bali Package’.

Part of the deal involves assistance for developing and least developed countries to update their infrastructure, train customs officials, or for any other cost associated with implementing the agreement.

It is expected that after the implementation of the TFA, it will give a benefit between $ 400 billion and $1 trillion to the world economy by reducing costs of trade by between 10% and 15%. Increased trade flows, revenue collection, stable business environment and enhanced foreign investment etc are supposed to be the other benefits of the TFA.

      

 India's stand on TFA:

  

India backed from its previous 
stand, but for better reasons. TFA is most likely to help developed nations though it is projected to help developing and underdeveloped nations better. If the betterment of developing and underdeveloped nations was the major intention, stress should be on passing the agreements on other aspects related to agriculture (food security) and LDC. It seems India backed out for better bargaining power. Had India signed the deal on TFA, there might not arise the urgency to find a permanent solution to food security. The present peace clause will end in 2017, and the new impositions may turn unfavorable to India. Having clubbed food security along with TFA, India now asserts that the Bali Package can be voted only together. Let’s wait and see how things unfold in future.

GST- A brief Analysis.

GST-2014

One of the biggest taxation reforms in India -- the Goods and Service Tax (GST) -- is all set to integrate State economies and boost overall growth.

GST will create a single, unified Indian market to make the economy stronger.

Finance Minister Pranab Mukherjee while presenting the Budget on July 6, 2009, said that GST would come into effect from April 2010.

(Goods and Services Tax in India is set to be implemented from 01/04/2016.)

The implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods and services, et cetera, thus avoiding multiple layers of taxation that currently exist in India.

But just what is GST all about and how will it impact you?

• What is GST?

Goods and Services Tax -- GST -- is a comprehensive tax levy on manufacture, sale and consumption of goods and services at a national level.

Through a tax credit mechanism, this tax is collected on value-added goods and services at each stage of sale or purchase in the supply chain.

The system allows the set-off of GST paid on the procurement of goods and services against the GST which is payable on the supply of goods or services. However, the end consumer bears this tax as he is the last person in the supply chain.

Experts say that GST is likely to improve tax collections and boost India's economic development by breaking tax barriers between States and integrating India through a uniform tax rate.

• What are the benefits of GST?

Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.

It is expected to help build a transparent and corruption-free tax administration. GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets).

Currently, a manufacturer needs to pay tax when a finished product moves out from a factory, and it is again taxed at the retail outlet when sold.

• How will it benefit the Centre and the States?

It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth. It will divide the tax burden equitably between manufacturing and services.

• What are the benefits of GST for individuals and companies?

In the GST system, both Central and State taxes will be collected at the point of sale. Both components (the Central and State GST) will be charged on the manufacturing cost. This will benefit individuals as prices are likely to come down. Lower prices will lead to more consumption, thereby helping companies.

• What type of GST is proposed for India?

India is planning to implement a dual GST system. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction.

All goods and services, barring a few exceptions, will be brought into the GST base. There will be no distinction between goods and services.

• Which other nations have a similar tax structure?

Almost 140 countries have already implemented the GST. Most of the countries have a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments.

France was the first country to introduce GST system in 1954.

• Will this be an extra tax? 

It will not be an additional tax. CGST will include central excise duty (Cenvat), service tax, and additional duties of customs at the central level; and value-added tax, central sales tax, entertainment tax, luxury tax, octroi, lottery taxes, electricity duty, state surcharges related to supply of goods and services and purchase tax at the State level.

• What will be the rate of GST?

The combined GST rate is being discussed by government. The rate is expected around 14-16 per cent. After the total GST rate is arrived at, the States and the Centre will decide on the CGST and SGST rates.

Currently, services are taxed at 10 per cent and the combined charge indirect taxes on most goods is around 20 per cent.

• Will goods and services cost more after this tax comes into force?

The prices are expected to fall in the long term as dealers might pass on the benefits of the reduced tax to consumers.

• Why are some States against GST; will they lose money?

The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the information technology systems and the administrative infrastructure will not be ready by April 2010 to implement GST. States have sought assurances that their existing revenues will be protected.

The central government has offered to compensate States in case of a loss in revenues.

Some States fear that if the uniform tax rate is lower than their existing rates, it will hit their tax kitty. The government believes that dual GST will lead to better revenue collection for States.

However, backward and less-developed States could see a fall in tax collections. GST could see better revenue collection for some States as the consumption of goods and services will rise.

• How will GST be implemented?     

                           

The empowered committee is likely to finalize the details of GST by August. But States have to sort out several issues like agreement on GST rates, constitutional amendments and holding talks with industry associations. Experts feel the drafting of legislation and the implementation of law will take time.

• What are the items on which GST may not be applied?

Alcohol, tobacco, petroleum products are likely to be out of the GST regime.

Unbeatable GS Issues