India likely to have current account surplus

Balance of Payments (BoP) statistics systematically summaries the economic transactions of an economy with the rest of the World for a specific period.
BoP broadly comprises current account, capital account and changes in foreign exchange reserves.

Current account of the BoP includes merchandise (exports and imports) and invisibles.
Invisible transactions are further classified into three categories, namely
- Services-travel, transportation, insurance, Government not included elsewhere (GNIE) and miscellaneous (such as, communication, construction, financial, software, news agency, royalties, management and business services);
- Income; and
- Transfers (grants, gifts, remittances, etc.) which do not have any quid pro quo.

The main components of the capital account include foreign investment, loans and banking capital.
Foreign investment, comprising Foreign Direct Investment (FDI) and Portfolio Investment consisting of Foreign Institutional Investors (FIIs) investment, American Depository Receipts/Global Depository Receipts (ADRs/GDRs) represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital, including non-resident Indian (NRI) deposits are debt liabilities.

Chief Economic Adviser K V Subramanian said India is likely to post a current account surplus in the current financial year as there is moderation in imports due to under heating of the economy triggered by the COVID-19 crisis. The last time India’s current account balance turned positive was in 2007.
He said the COVID crisis is different from what the world witnessed during the taper tantrum. Now, India identified the nature of the crisis and treated it differently from other economic crises of the past.
Noting that COVID crisis is a crisis to demand and primarily a negative shock to demand, Mr. Subramanian said, India’s response was suitably crafted to deal with that.

In reaction to the 2008 financial crisis and ensuing recession, the U.S. Federal Reserve (Fed) executed a policy known as quantitative easing (QE), which involved large purchases of bonds and other securities to boost the economy.
Investors had come to depend on ongoing massive Fed support for asset prices through its ongoing purchases.
In 2013, the U.S. Federal Reserve announced that the Fed would, at some future date, reduce the volume of its bond purchases.
This prospective policy of reducing the rate of Fed asset purchases represented a massive negative shock to investor expectations, as the Fed had become one of the world’s biggest buyers.
Bond investors responded immediately to the prospect of future decline in bond prices by selling bonds, depressing the price of bonds as a result. This led to a surge in inflation to high double digits emerging economies.

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