Lessons from India’s recent Current Account Balance Surplus

Making-India-a-CAB-surplus-economy | ChineeKum

For the first time in 13 years, India has posted a current account balance surplus. This was announced by RBI in a recent press release that read like this: India’s current account balance (CAB) recorded a marginal surplus of US$ 0.6 billion (0.1 per cent of GDP) in Q4 of 2019-20 as against a deficit of US$ 4.6 billion (0.7 per cent of GDP) in Q4 of 2018-19 and US$ 2.6 billion (0.4 percent of GDP) in the preceding quarter, i.e., Q3 of 2019-20. The surplus in the current account in Q4 of 2019-20 was primarily on account of a lower trade deficit at US$ 35.0 billion and a sharp rise in net invisible receipts at US$ 35.6 billion as compared with the corresponding period of last year.

The press release has a lot of economic mumbo jumbo in it for obvious reasons. So, that’s why our team at ChineeKum thought it would be a good idea to help you understand what it actually means. We will discuss the technical terms one by one and also give you some insights into how this affects our nation as a whole. It may sound a bit too ‘gyan-ish’ but it will help you get a better understanding of how our economy works and what we can do to make it better.

What does it all mean?

What is a Current Account Balance (CAB)? In oversimplified terms, it means the balance between what we earn and what we spend as a country. So here, a surplus would mean that India now has a little more money in hand than what it spends. As mentioned in the statement, in the fourth quarter (January – March of 2020) India had a surplus of USD 600 million. Considering the size of our economy, this is only 0.1 percent of our GDP.

Trade Deficit is the next term that is prominently mentioned. It simply signifies the difference between how much we import and how much we export. For example in 2019-20, India exported goods worth USD 16.6 Billion to China. In the same period we imported goods worth USD 65.3 Billion from China. So, when compared to China we exported less goods worth USD 48.7 Billion. This figure here is the trade deficit. And mind you, these are actual figures. India imports way more than it exports to China, and this can have grave consequences.

Moving ahead, we come across the term ‘Net Invisible Receipts’. This is an economic term for the income we have generated through ‘Invisible Trade.’ Here invisible trade means the kind of trade that doesn’t involve shipping of actual goods. It can be anything from software development to online travel services that India offers to the rest of the world.

CAB is important not just for economists

So, why is a current account balance surplus so important? Countries with CAB surpluses are regarded as strong economies that can lend to others and can add value to the global economy. It is one of the biggest indicators of a country’s healthy and growing economy. For decades India has always been importing more than what it can export. In case of a deficit, India will be perceived as an uncompetitive economy where people buy cheaper foreign goods while ignoring local manufacturers. 

The recent surplus was the result of our spends standing at USD 35 Billion and our income standing at USD 35.6 Billion. Again, this is an oversimplification. In reality, the surplus is due to extraordinary circumstances like COVID-19 and also due to the decline in economic activity. 

Most economies keep a check on their CAB deficit by attracting foreign capital. But in the long term it could also mean foreign companies owning many assets in India. This also makes us more vulnerable to the uncertainties in the global economy. This is ‘the’ most important reason why everyone should rally behind recent initiatives like Make in India, and Atmanirbhar Bharat Abhiyan. A CAB surplus economy can ensure a better and more stable future for every Indian. 

We need a CAB surplus. But how?

When economic activity picks up, as responsible Indian citizens, we should do everything in our power to ensure that we are consuming and promoting local goods. Our behaviour as consumers is one of the reasons why India has always had to struggle with a CAB deficit. As we start encouraging local goods and manufacturers, India will import less and less, which in turn will help keep the CAB in check. 

Secondly, we should work on goods and services that can be easily exported to various parts of the world. Anything from a Kolhapuri chappal to an accounting software can help India attract more foreign exchange. As perhaps the youngest country in the world, we have enough and more talent in our workforce to exponentially increase our national income through the export of software and technology. 

Thirdly, at the local, state and national level we need to work with the government as individuals and organisations. Our inputs can help government bodies formulate guidelines that can boost exports and also increase our foreign exchange reserves. This should be looked at as something that goes beyond political lines. Our proactive approach in this area will help India grow to become one of the world’s top three economies.

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