Current Account Deficit (CAD) – A Concern for Indian Economists

The December quarter of fiscal 2012-13's external trade position number revealed that India is fast slipping into a danger territory. Record high current account deficit (CAD) - excess of spending overseas than earnings - makes the policy makers into a concern. Such high CAD defeats the argument that India's large foreign exchange reserves are an indication of Her external strength and of the success of reforms. The deficit also suggests that as and when growth occurred, it was driven by domestic demand rather than external stimuli such as the country's much celebrated service exports success. The matter of concern is the way such huge deficit is financing. Much of the deficit is backed by capital inflows especially the foreign institutional investors (FIIs) flows through equity route and debt financing and external commercial borrowings (ECBs) - all of which are associated with future payment commitments in foreign exchange, a large part of which can quickly flow out of the country. Even they could turn around any moment, depending on their perception of risk rather than the trust on them by the policy makers. A CAD above the sustainable level, year after year, is a macroeconomic problem as it indicates that the country is unable to meet the external payment obligations and undermine the confidence of the potential lenders and investors. This paper tries to highlight the reasons for such unprecedented CAD and trace out the suggestive measures to overcome the situation permanently