As per the data in 2012, this presentation discusses trends in the current account deficit of India and remedies to it.

1. By:
Sumanth Patlolla (50A)
Sanjeev Kumar (42A)
Pratik Godhane (35A)
Nikhil Indla (29A)
Gukan K (18A)
Anand Savur (8A)
-----------------------------------
Vidooshi Joshi (55A)
Sachin Gupta (38A)
Manasi Jain (23A)
Devansh Doshi (16A)
Aniruddh Srivastava (9A)
Abhay Sharma (1A)

2. Agenda
AboutCAD
Definition
History
Past trends
Factors
High imports
Weak exports
Twin deficit
Growth and GDP
Implications
Depletion of forex
Rupee
Depreciation
Weakening
Investment
sentiment
Inflation
Monetary policy
Measures&
Results
Suggested
Remedies

3. About CAD
BRIEF INTRODUCTION AND LOOKING AT THE PAST
TRENDS

4. Definition
Current Account – sum of
◦ Balance of Trade - export minus import of goods and services
◦ net factor income such as interest and dividends
◦ net transfer payments such as foreign aid.
Current Account Deficit
◦ Associated with trade deficit of a country (Imports > Exports)
◦ Represents a net negative sales abroad
◦ For developing economies, transfer payments are important in terms of
◦ Donations, Workers’ remittances, Grants and aids, Official Assistance

5. History of CAD in India
1991 crisis is remembered as the BOP crisis but it was essentially a Twin
Deficit problem
India was unable to finance its CAD through capital inflows being a
closed economy
Symptoms & challenges –
◦ A CAD larger than the debt inflows
◦ Import cover nose dived to a mere 2 weeks in 1990-91
◦ Fiscal deficit was at a high of close to 9 percent with persistently high
revenue deficits
◦ Inadequacy of external funds to boost investment at a time when the
government deficit had “crowded out”
◦ The production sector unable to help in reducing the deficits.
The twin deficits created a much bigger BOP issue which forced India to
take assistance from IMF and Bank of England.

6. Past trends
The sharp decline in CAD in the past
years is alarming because of –
• instability of Foreign Institutional
Investment
• slowing down of FDI
• threat of recessionary trends in the
developed economies
Source: Voice of Research; Paper by Sachin N. Mehta

7. Past Trends
Average (1949 –
2013) : - 1.62
USD bn
All-time high
(March 2004) : 7.36
USD bn
All time low
(December 2012) : -
31.86 USD bn
Source: www.tradingeconomics.com
1991
-92
1992
-93
1993
-94
1994
-95
1995
-96
1996
-97
1997
-98
1998
-99
1999
-00
2001
-02
2002
-03
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
Current Account -22. -128 -36. -106 -196 -163 -209 -168 -203 164. 306. 639. -122 -437 -444 -635 -127 -179 -219 -376 -479
-6000
-5000
-4000
-3000
-2000
-1000
0
1000
AxisTitle
Current Account

8. Factors
MAJOR REASONS FOR HIGH CURRENT ACCOUNT DEFICIT
IN INDIA

9. High imports – Crude oil
Oil imports leapt
by 40% in
2011-12 due to
◦ Weak rupee
◦ High rates of
crude oil in Int’l
Markets
◦ High demand in
domestic
markets
Oil imports
constitute a
third of India’s
imports and half
of its CAD
Source: Ministry of Petroleum & Natural Gas

10. High Imports - Gold
Constant rise in –
◦ Value of gold imports
◦ Share of gold imports
◦ Amount of gold imports
This was because, people
started investing in physical
assets such as gold and real
estates to hedge their risk
against price rise

11. High Imports

12. Weak exports
Global economic slump and
general deceleration in world
trade saw a drop in exports of
India in 2008-09
Iron Ore –
◦ India exported 117 mt in 2009-10
but only 18 mt in 2012-13. 2013-
14 is likely to see India becoming a
net importer of Iron ore
◦ Shift from third largest exporter to
importer mainly due to
◦ Cap in production in Karnataka
◦ Ban in Goa
◦ Strict environment regulation in Orissa
due to SC rulings and State interventions
Invisibles, or services which
dampened CAD until recently
have also lowered
Rise due to recession in developed
countries leading to fall in rupee

13. Twin deficit
High CAD and Fiscal
Deficit worsen each other
Can be proved by –
◦ Mundell-Flemming
Model
◦ High Govt. spending = Upward
pressure on Interest rates
◦ More inflow of foreign capital
◦ Currency appreciation
◦ Fall in Net Exports = Trade
Deficit
◦ Keynesian Theory
◦ X-M = (S-I) + (T-G)
Fiscal deficitTrade deficit

14. Growth & GDP
Indian CAD is
counter-cyclical i.e. it
rises when output falls
and not when demand
rises
Due to low
growth, imports have
risen mainly to meet
domestic demand
instead of supporting
economic growth
This has put the
economy on dangerous
footing

15. Implications
BIGGEST IMPACTS IN IN THE INDIAN SCENARIO FUELLED
BY HIGH CAD

16. Depletion of Forex Reserves
Deficit on current account means net outflow of
foreign capital i.e. $ outflow in India’s case
Without equal or more amount of inflow, a
deficit puts strain on a country’s foreign
exchange reserves
Which is why, India is so keen on FDI as it needs
the foreign inflows to keep it’s current account
deficit in check
Due to existence of CAD, rupee has depreciated
as a result of inflows being lesser than outflow of
foreign capital
Source: RBI

17. Depreciation of
Rupee
First and foremost implication, as we
have been observing in the past
couple of years is the depreciation of
rupee which, in turn, results in a
number of consequences as listed in
the adjoining diagram – resulting in a
viscous internal cycle.
While depreciation boosts exports, the
effects are quite delayed and
uncertain.

18. Currency fluctuations
Source: www.tradingeconomics.com

19. Weak Investment Sentiment
2013 saw a capital flight
out of India, especially in
2Q of 2013-14
This was due to
weakening rupee
It is important to
maintain this inflow as it
is currently responsible
for maintaining the
current account balance
A high CAD has also led
to decline in India’s
credit rating, directly
affecting investment
0.00
500.00
1000.00
1500.00
2000.00
2500.00
3000.00
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Total Foreign Direct Investment in India
Source: RBI

20. Inflation
A simultaneous and add-on affect of high
fiscal deficit on CAD and a weakening rupee
Inflation caused a steep decline in
household savings in 2008-09 – and a rise in
savings of physical assets, thus reducing the
liquidity in the market
This, in turn, resulted in greater demand for
gold – raising its imports and fuelling an
already soaring CAD

21. Impact on Interest Rates
India has one of the
highest interest rates in
the world
Interest rates have been
raised since 2010 in
order to curb inflation
Hence, it is an indirect
implication of a high
CAD
Growth has been
sacrificed in the process

22. Measures taken
HOW GOI MANAGED TO BRING DOWN CAD

23. Measures & Results
Measures –
◦ Govt. increased taxes on gold in the world’s biggest user of the metal 3 times to balance the trade level
which weighed down rupee
◦ Steep fall in rupee boosted exports
◦ Merchandise exports picked up
◦ Concessional dollar swaps for lenders to spur inflows in order to support rupee after the steep fall in
August
Results –
◦ CAD has reduced significantly and is more manageable now
◦ Hence, movement of Rupee is no longer about CAD but capital inflows – dependent on the behavior of
global markets

24. Results quantified
Source: RBI

25. Suggestions &
Remedies
WHAT ELSE CAN BE DONE?

26. -6
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-1
0
1
2
3
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000 2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
petroleum import CAD
Address the Petroleum Issue
80% oil Imported
Net Oil Import : $109 billion
Trade deficit $196 Billion
CAD: $88 Bn, 4.8% of GDP
Increase Energy efficiency levels:
Case In Point JAPAN
Share of Oil has decreased from
77.4 % in 1973 to about 45%
now
Deregulation of oil prices:
Slowly remove the subsidy
51%
14%
13%
18%
4%
Transport Industry Commercial
Domestic Agriculture
$12 Bn Subsidy 2012
Govt. has started steps
Innovation & conservation

27. Address the Petroleum Issue
Put more tax on excessive use of oil:
Bring in Incremental Pricing
More incentives for growth of
renewable sources of energy: a level
playing field
Reduce incentives/increase taxes for
the transportation industry:
Innovation
Alternative sources in Shale gas and
oil, Bio fuels, Bio Gas
32%
68%
Shale Oil & Gas Non-Shale
coal
42%
oil
29%
natural gas
9%
hydro
power
3%
nuclear
power
2%
other
15%
coal oil
natural gas hydro power
nuclear power wind power
other
Bio Fuel Programme
Pricing of Ethanol
Bio Diesel
Shale Gas:
Assam, Arunachal
Pradesh, Nagaland And
Manipur

28. Reduce Gold Demand
0
100
200
300
400
500
600
700
800
0
50
100
150
200
250
Jan 21: Import raised from 4% to 6%
Jun 5: Import raised
from 6% to 8%
Aug 13: Import raised
from 8% to 10%
About 400 tonnes of recycled gold to enter
the market this fiscal year to March
2015, compared with normal rates of
about 130 tonnes, according to Thomson
Reuters GFMS data
Review gold/gold doré import on a quarterly basis to set
the agenda
Promoting national savings to fund investment.
Schemes like the Rajiv Gandhi Equity Savings Scheme
(RGESS) and the recently implemented Inflation
Indexed Bonds (IIBs) to wean away investors from gold
Allocate
quarter import
quota to
agencies and
let them bid
for the gold on
quarterly basis
.
0
5000
10000
15000
20000
25000
0
5000
10000
15000
20000
25000
30000
sensex gold

29. Export Diversification
Economic Risks
Short term: Volatility and instability
in foreign
exchange markets
Long term: Unpredictable declining
terms of trade trends
Political Risks: Poor
governance, risk of civil war
• Reduce dependence on a few
geographical entities
• Expanding opportunities for
export and improvement of
backward and forward linkages to
domestic inputs and services
West Asia- GCC 16.9952 North Africa 1.8914
EU Countries 16.7848 Southern African
Customs Union (SACU)
1.7579
North America 13.2556 Other European
Countries
1.3988
NE Asia 13.1117 Other CIS Countries 1.0424
ASEAN 10.9881 East Asia (Oceania) 0.9097
South Asia 5.0302 Other South African
Countries
0.6279
Latin America 4.5 European Free Trade
Association (EFTA)
0.4587
Other West Asia 3.7803 Central Africa 0.3099
East Africa 2.9425 CARs Countries 0.1835
West Africa 2.1716 Total 100

30. 0 20 40 60 80
India
China
Philippines
Mexico
Nigeria
Egypt
Banglade…
Pakistan
Vietnam
Ukraine
Remittances ($ billion)
Remittance is the act of transmitting money to a distant location to fulfill an obligation. International remittances are
transfers of funds by foreign workers—remitters—who are living and working in other countries typically to their
families who are still living in their home countries
• From a BOP perspective, remittances are permanent foreign
currency inflows and help finance the current account, unlike NRI
deposits which are repatriable
• Part of these inflows get invested in stocks, bonds, fixed deposits
and real estate
• India received an estimated $71 billion (around Rs.4.4 trillion) in
remittances last year (up from $69 billion in 2012) and much
higher than China’s $60 billion
• In India, remittances are larger than the earnings from IT exports
and just under three times of the FDI received in 2013
• Weakening of the Indian rupee is usually followed by a surge in
remittances since NRIs are expected to take advantage of the
cheaper goods, services and assets back home
Sources: Reserve Bank of India, IMF Balance of Payments and Bank staff estimates
Foreign Remittances

31. Attract FDI
FDI inflows are long term investments by overseas company setting up manufacturing and
other commercial enterprises in India and hence represent more stable and dependable
form a finance
• Match FDI policy with Import duties, in such a way that rise in import duties acts as incentives to foreign
direct investment in that particular sector
• India also needs to focus on long-term foreign direct investment, which is sticky
FDI inflows into India
contracted by 38 per cent
to $22.42 billion in 2012-
13 compared with $35.12
billion of FDI inflows the
country witnessed in 2012
Source: DIPP

32. Factors holding back FDI investment in
India
Tepid economic growth
Lack of transparency
Lack of consistency in FDI policies
Regulatory hurdles
Infrastructure Deficiencies
Foreign investment into India falls under
one of two FDI routes:
Government Route: For investment in
business sectors requiring prior approval
from the Foreign Investment Promotion
Board (FIPB).
Automatic Route: For investment in
business sectors that do not require prior
approval from the government, but the
filing of a notification after the
incorporation of the company and issue of
initial shares.
Government efforts to increase FDI
include:
1) SEZs/EHTP/STP/BTP/NIMZ’z etc
2) Raising FDI cap in sectors like multi
brand retail
3) Increasingly shifting the approvals
under automatic route
Solutions
Open up new sectors like insurance
and pension funds
Ease regulatory hurdles through
administrative reforms

33. Significant investor segment of the Indian capital markets, accounting for on an
average 20% of the turnover in both the Indian equity and debt markets
Increasingly been bridging the funding gap on the country's current account
deficit. Also widely accredited for the high-speed growth in the Indian capital
markets i.e. the equity market segment
RBI’s enhancement on the limit of investment in government securities (G-Secs) by
foreign institutional investors (FIIs) and long- term investors by $5 bn to $25 bn
from $20 bn
RBI’s change in rules to make it easier for foreign and NRI promoters to raise
stake in listed Indian companies
SEBI’s permission for FIIs to buy government bonds without purchase permits
from it until overall investment reaches 90%
Attract FII

34. At a time of 'global risk aversion', when investors are fleeing
to safe havens, it becomes difficult to attract equity flows
to a country like India, especially one with a weak
currency, shaky current account, and uncertain
macroeconomic outlook. Attracting investment through the
ECB route becomes an instrument of choice.
-8
-6
-4
-2
0
2
4
6
Recovery
EU GDP% US GDP%
The US Federal Reserve Chairperson Janet Yellen has
made it clear that tapering will be linked to economic
conditions. The positive economic conditions is likely to
lead to a tapering of its quantitative programme.
External Commercial Borrowings

35. External commercial borrowing
•As the name suggest: ECB when Indian
company borrows money from external
(non-Indian / foreign) sources.
•Money is borrowed from non-resident
lenders.
•Via bank loans, fixed rate bonds, non-
convertible shares, optionally convertible
or partially convertible preference shares
etc.
•For minimum average 3 years.
Who is allowed ?
Automatic Route:
• Companies except financial intermediaries
• Units in Special Economic Zones
• NGOs engaged in micro finance activities
Approval Route:
• Infrastructure or export finance companies
such as IDFC, IL&FS, Power Finance
Corporation,
IRCON, Power Trading Corporation and EXIM
Bank.
• Bank and Financial institutions which
participated in the textile or steel restructuring
package.
• NBFCs to finance import of infrastructure
equipment for leasing.
• Multistate Co-operative society engaged in
manufacturing activities
ECB money cannot be used for?
•share market or real-estate speculation.
•Acquiring another company
•Working capital, general corporate
purpose and repayment of existing rupee
loan
Agency 2013-14
( Projected)
2014-15
(Projected )
World Bank 4.8% 6.2%
IMF 4.6% 5.4%
UN WESP 5.3% 5.7%
Risk: Companies will have trouble repaying their
debt denominated in foreign currency
Acceptable because economic growth to increase
“Rather than administer shock therapy to a
weak economy, the RBI prefers to disinflate
over time rather than abruptly”- Raghuram
Rajan, Governor, RBI
Reasons for ECB’s
Stable Exchange Rate
12,17011,915
23,006
33,319
22,517
16,738
23,828
36,605
30,249
34,530
0
10,000
20,000
30,000
40,000
ECB
Issues
Rising Trend in ECB:
Sectors like
aviation, telecommunication, infrastructure
are in dire need of funds
Interest rates are lower, even though
they are rising

36. Others
Reducing Fiscal Deficit
1. Reduction in payments on
external debt
2. Increase in investment by
foreign investors.
Increase Import duties on
Luxury goods and non-
essential items
Examples: Luxury
cars, televisions, laptops, high-
end mobile phones, exotic
foods etc.
Luxury tax will mean increase in
import price while relaxation in
FDI norms will mean more
capital investments.
We import around $ 2.1 bn but
at the same time that has a
dampening effect on local
markets
Reduce Revenue expenditure
and increase expenditure on
capital/technology, thus
increasing export
Revenue
Expenditure
86%
Capital
Expenditure
14%
Import most of technical
intensive equipment be it
mechanical appliances or
electrical

37. Thank You!