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.