Description
Let's understand the terms used in economics parlance linked to balance of trade. Balance of trade doesn't mean imports and exports get balanced, rather it could be positive or negative. The balance could be measured on different counts like goods, services, goods and services. A trade deficit is defined as imports of goods and services in a country exceeding its exports of goods and services during a given period. Similarly, other way round is defined as trade surplus.
Components of Current Account
The current account consists of four components: trade, net income, transfers of capital and income from assets. Trade in goods and services comprises lion's share of the current account. In other words, trade deficit alone could be sufficient to neutralize any surplus in net income, direct transfers, and income from assets. Net income is defined as income earned by country's residents reduced by income paid to foreigners. This could be interest and dividends earned on foreign assets as well as income earned by country's residents working abroad. Similar logic gets applied to income of foreigners working in that country. Transfer of capital means inward remittances by workers to home country, Government's receiving direct foreign aid, foreign direct investments (>10% of capital) inflow, and bank loans inflow to foreigners and vice-versa for outflows. Asset income comprises net increase or decrease in holding of assets such as bank deposits, the central bank, and government reserves, securities, and real estate.
Indian Context
India's current account turned into surplus in the Q4FY19-20 for the first time in 13 years due to enhanced private transfers and software services income. The previous current account surplus was recorded in Q4FY06-07. The FY19-20 current account deficit dipped to 0.9% of the GDP as compared to 2.1% of GDP in FY18-19. The fall in current account deficit in FY19-20 could be primarily attributed to trade deficit dipping to US$ 152.88 billion as compared to US$ 184 billion in FY18-19. According to the initial data released by RBI, imports accounted for US$ 467.19 billion declining by 9.12% whereas exports accounted for US$ 314.31, registering a decline of 4.78%. India's exports have been hovering around US$ 300 billion since FY11-12, touching a high of US$ 330.08 billion in FY18-19, which is a cause for concern. One of the objectives of this blog post was to understand difference in trade deficit/surplus vis-a-vis current account deficit/surplus.
Keep watching this space for more updates on the Indian economy!
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