{"id":229157,"date":"2023-02-28T20:14:54","date_gmt":"2023-02-28T14:44:54","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=229157"},"modified":"2023-02-28T20:14:54","modified_gmt":"2023-02-28T14:44:54","slug":"why-india-needs-stable-capital-flows","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/why-india-needs-stable-capital-flows\/","title":{"rendered":"Why India needs stable capital flows"},"content":{"rendered":"\n

Source<\/strong>– The post is based on the article \u201cWhy India needs stable capital flows\u201d <\/strong>published in The Indian Express <\/strong>on 28th February 2023<\/strong>.<\/p>\n

Syllabus: <\/strong>GS3- Indian economy and mobilisation of resources<\/p>\n

Relevance:<\/strong> External sector of economy<\/p>\n

News- <\/strong>As per the RBI\u2019s quarterly statistics, the current account deficit widened to 4.4% of GDP in the second quarter of 2022-23, down from 2.2% in the preceding quarter.<\/p>\n

What is the performance of other indicators of the external sector of the economy?<\/strong><\/h2>\n

The overall trade deficit<\/strong> has declined to $37.73 billion in the third quarter, from $49.1 billion in the second quarter of 2022-23. There was a sharp decline in the trade deficit to $1.27 billion in January.<\/p>\n

Remittances and services exports<\/strong> have provided a counter-balance to rising merchandise trade deficits<\/strong>. In the first half of 2022-23, services exports <\/strong>recorded a growth of 32.7 % over the same period last year. Remittances<\/strong> have reached $48 billion in April-September 2022<\/p>\n

What are the implications of higher CAD for the Indian economy?<\/strong><\/h2>\n

Large and persistent CADs are not good if they show poor export competitiveness and are financed by unstable financing<\/strong>.<\/p>\n

Large and persistent CADs expose India to the risks associated with its financing. If CADs can be financed by stable capital inflows<\/strong>, such as FDI, they are desirable.<\/p>\n

If deficits are financed by volatile capital flows<\/strong> such as portfolio flows, there may be a cause of concern. Portfolio flows are more susceptible to reversals in case of any global financial shock<\/strong>.<\/p>\n

FDI inflows have been weak in the current fiscal year. FDI and portfolio inflows each only financed about 18% of CADs in the second quarter of 2022-23. So, there is a financing issue.<\/strong><\/p>\n

The countercyclical nature of India\u2019s CAD<\/strong> is a matter of concern. The country\u2019s CAD rises when output falls rather than when demand rises. It indicates the dominance of external shocks<\/strong>. For instance, if oil prices rise, it raises the cost of production and leads to a fall in economic growth.<\/p>\n

What is the way forward for economic policy in this scenario?<\/strong><\/h2>\n

Over the medium term, policymakers need to arrest the negative impacts of slowdown in global trade <\/strong>on merchandise exports.<\/p>\n

Further rate hikes by the US Fed may lead to capital outflows<\/strong>. It will generate imported inflation.\u00a0 <\/strong>Policy measures to facilitate exports by focusing on structural reforms t<\/strong>o improve trade competitiveness<\/strong> are needed. The government must sign free trade agreements.<\/strong><\/p>\n

India is currently facing the twin-deficit problem<\/strong> of high fiscal and CADs. Aggressive fiscal consolidation may be undesirable amid the fears of global slowdown.<\/p>\n

A comfortable external environment<\/strong> can be maintained by ensuring stable financing<\/strong>. Exchange rates should be used as a shock absorbe<\/strong>r to manage the\u00a0 adverse global economic situation<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Source– The post is based on the article \u201cWhy India needs stable capital flows\u201d published in The Indian Express on 28th February 2023. Syllabus: GS3- Indian economy and mobilisation of resources Relevance: External sector of economy News- As per the RBI\u2019s quarterly statistics, the current account deficit widened to 4.4% of GDP in the second… Continue reading Why India needs stable capital flows<\/span><\/a><\/p>\n","protected":false},"author":10320,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10500],"class_list":["post-229157","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-indian-express","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/229157","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10320"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=229157"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/229157\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=229157"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=229157"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=229157"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}