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Mar 28, 2013, 07.04 PM IST | Source: Moneycontrol.com

Sky high Q3 current account deficit: What you need to know

India’s current account deficit for October-December climbed to a record high of USD 32.6 billion, or roughly 6.7 percent of the GDP, compared to 5.4 percent during the July-September quarter. In a nutshell, this means that more foreign exchange is flowing out of the country than coming into the country.

Moneycontrol Bureau

India’s current account deficit for October-December climbed to a record high of USD 32.6 billion , or roughly 6.7 percent of the GDP, compared to 5.4 percent during the July-September quarter. In a nutshell, this means that more foreign exchange is flowing out of the country than that coming into the country.

Here are a few things you need to know about the current account deficit:

When does a country run a current account deficit?

This happens when a country's total imports of goods, services and transfers exceed its total export of goods, services and transfers.

Is current account deficit always a bad thing?

It is not a bad thing if the country’s economy is growing at a steady rate. Import bills are higher when the economy is growing.

Why is India's current account deficit widening at a rapid rate?

A combination of factors. Exports are slowing because of the sluggish global economy. Imports of oil and gold have been quite high (though gold imports have moderated somewhat because of duty restrictions). Also, the October-December CAD was aggravated by a steep drop in foreign direct investment, and decline in remittances, i.e money sent by Indians residing abroad.

How can the current account deficit be financed?

So far, India has been financing it through foreign capital flows; portfolio investments (investments into Indian equities and debt) and foreign direct investment (FDI).

Is this a sustainable solution?

Not really. Foreign money flows into equities can be quite volatile; overseas investors can withdraw their funds in a flash. Also, attracting huge foreign investments into Indian debt is also not a great idea. Because you need to pay interest on those investments. And that in turn will cause further outflow of foreign exchange.

So what is the way out?

There are no easy solutions. But the government will have to work on a long term policy measures to encourage exports, attract more FDI (which is a far more stable form of foreign capital), lower oil imports (by cutting fuel subsidy and discouraging consumption), and decrease import of gold.

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