After nearly a decade, India registered a Current Account Surplus of $600 million in the January-March 2020 quarter. However, experts do not consider it much significant or fruitful for India. Let’s check out why!
Crux of the Matter
Reasons And Impact Of Surplus
In the same period last year, the current account of India was in deficit of $4.6 billion or 0.7% of GDP. Amidst Coronavirus crisis, India’s economy came to a grinding halt and due to a slump in consumption, both, imports and exports were low. Moreover, lower prices of crude oil brought the import bill down.
In addition to that, income from Services increased in the quarter and remittances by Indians employed overseas and other private transfers rose 14.8% from a year ago. Experts say that this surplus is not a result of the economic growth of the country but due to the above factors which were circumstantial. When a country grows economically with an increase in exports and a gradual decrease in imports, then the surplus is considered to be good.
In theory, for developing economies, a current account deficit is considered good if it imports machinery or goods and services to grow. But a persistent deficit, however, is a red signal. The current account balance also affects the nation’s currency. Current Account Surplus usually results in appreciation of the country’s currency, whereas deficit results in depreciation.
Understanding Different Accounts Of The Government
So far we have talked about current account surplus and deficit but you might think what does the current account of a nation actually include? Or you might wonder that, are there any other national accounts? The answer is yes!
There are three types of national accounts i.e. Current account, Financial account, and Captial account.
i) Current Account has three components i.e. good and services, income, and current transfers. The goods and services measures the exports and imports of goods and services, income accounts for the government’s income and spending on financial investments, and current transfers include one-way gifts and remittances made in the country. If the sum of these three components is less than zero then the current account is in deficit and if greater than zero then the current account is in surplus.
ii) Capital account refers to capital transfers between foreign entities and domestic entities.
iii) Financial account refers to investment by foreign entities in domestic entities and by domestic entities in foreign entities. It consists of a reserve account, direct investments, portfolio investments, and other investments.
Current account + capital account + financial account should equal zero. Theoretically, if a current account is in surplus, then financial and capital accounts are in deficit and vice-versa. When a country’s current account is in deficit, it borrows money from other nations – financial & capital accounts are hence in surplus. And when a country’s current account is in surplus, it generally lends money – financial and capital accounts hence are in deficit.
- Adam Smith was a Scottish economist, philosopher, and author as well as a moral philosopher, a pioneer of political economy, and is also known as “The Father of Economics”. His classic work, “The Wealth of Nations”, is considered his magnum opus and the first modern work of economics.
- The balance of trade or commercial balance, is the difference between the monetary value of a nation’s exports and imports over a certain time period. Sometimes a distinction is made between a balance of trade for goods versus one for services.
- Modern banking in India originated in the last decade of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791. The largest and the oldest bank which is still in existence is the State Bank of India.