A surplus India is happy to do without – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/a-surplus-india-is-happy-to-do-without/articleshow/84045002.cmsSynopsis

For a lower middle-income, capital-scarce economy, it makes perfect sense to run up a current account deficit (CAD), investing more than domestic savings.

To many people, a current account surplus is a sign of sound economic health, and a deficit, one of vulnerability. This is a misperception. For a lower middle-income, capital-scarce economy, it makes perfect sense to run up a current account deficit (CAD), investing more than domestic savings. The CAD is equivalent to the excess of domestic investment over domestic savings. The excess draws on the rest of the world’s savings. The world is only too happy to deploy its savings in a fast-growing economy, so long as its macroeconomic parameters remain stable. That means keeping the CAD below 3% of GDP.

The current account balance notched a surplus of 0.9% of GDP in 2020-21. It shows that amidst Covid-induced severe contraction of economic activity, for the entire last fiscal, we squeezed our imports badly, and India turned a net creditor to the rest of the world, merrily exporting capital! The recent current account surplus, which occurred after 17 years, was indeed anomalous, due to lacklustre domestic demand and better-than-expected exports. The world has been only too eager to invest in India, pouring in much debt, portfolio equity and direct investment. Net foreign portfolio investment (FPI) surged by as much as $36.1 billion in 2020-21, compared to a mere $1.4 billion in inflows under the head a year ago.

The overall balance of payments ended in a surplus of $87 billion last fiscal, thanks to strong capital inflows, the bulk of it foreign direct investment (FDI) and portfolio flows. Given that interest rates are at record lows in the mature markets, we do need to step up capital raising abroad. As economic activity gains speed, and project imports and other crucial inputs to capital formation flow in, the surplus is assured to turn negative.

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