Prolonged crisis in Iraq may push current account deficit to 2.3 per cent: SBI report- WHAT IS CURRENT ACCOUNT DEFICIT?

If the ongoing crisis in Iraq continues for some more time, the country's current account deficit for this year may widen to 2.3 per cent of GDP due to rise in oil prices, says a report by SBI Research.

WHAT IS A CURRENT ACCOUNT DEFICIT?

A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports.

A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies' global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.

Having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent.

MEANINGS:

Devaluation:

Devaluation in modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. ‘Devaluation’ means official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

In contrast, depreciation is used to describe a decrease in a currency's value (relative to other major currency benchmarks) due to market forces, not government or central bank policy actions.

Solvent and Insolvent:

Solvent means capable of meeting financial obligations.

Insolvent means unable to satisfy creditors or discharge liabilities, either because liabilities exceed assets or because of inability to pay debts as they mature

VISIT: http://articles.economictimes.indiatimes.com/2014-06-20/news/50739288_1_oil-price-oil-demand-current-account-deficit

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India should gradually reduce fiscal deficit: IMF- WHAT IS FISCAL DEFICIT?

Every year, the Government puts out a plan for it's income and expenditure for the coming year. This is, of course, the annual Union   Budget.

"A  budget   is   said   to   have   a   fiscal deficit   when   the   Government's   expenditure   exceeds it's income." 

When   this   happens,   the   Government   needs additional   funds. The Government can arrange these funds by borrowing. The   Government can borrow either from the citizens themselves or from other countries or organizations like the World Bank or the IMF. The money borrowed by a nation's Government is called   public debt. As on any other debt,   the   Government   promises   to   pay   a   certain   rate   of interest.

To pay this interest in the future, the Government has three options:

1. increase   the   amount   of   taxes   collected   by increasing the tax rates;
   
2. help   stimulate   economic   growth   so   that   tax collection automatically increases with it; or
3. print   new   currency   notes   to   pay   back   the   debt   – also called debt monetization. 

The first option is not desirable. That leaves   the   second   and   third   options.   While   the   second option sounds like the best one, it is easier  than said  done.  The third option is dangerous and can act like an unfair and invisible tax on the people of a country. The effect of debt monetization is inflation, which acts  like an invisible tax on all the people of a country.  

Fiscal deficit is not necessarily a bad thing. However, a  large and persistent fiscal deficit can be an indication of several worrying signs in the economy.  

It can   mean   that   the   Government   is   spending   money   on unproductive programmes which do not increase economic productivity.   It   can   also   mean   that   the   tax   collection machinery is not effective so that a significant proportion of people get away without paying their due taxes. 

In any case, a large fiscal deficit significantly increases  the chances of inflation in the economy  which is an invisible tax on every citizen.  In milder forms, high inflation and a large fiscal deficit lead to a weaker national currency (imports become expensive) and reduce the credit­worthiness of the country.

VISIT: 

http://www.governindia.org/resources/Fiscal%20Deficit.pdf 

http://www.thehindu.com/business/Economy/india-should-gradually-reduce-fiscal-deficit-imf-official/article6104935.ece

 

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