Coping with Current Account Deficit

The following are the few ways to manage current account deficit:

a) Encourage depreciation of the exchange rate (e.g., by cutting interest rates or by currency intervention of one kind or another),

b) Measures to promote new export industries,

c) Import restrictions, quotas or duties (through the reduction in imports caused by these measures, by appreciating the domestic currency, may be offset by a reduction in exports, with the net result being little or no change in the current account balance),

d) Expenditure changing, adopting fiscal and monetary policy to reduce the level of AD. This will reduce the demand for imports.

Less obvious but more effective methods to reduce a current account deficit include measures that increase domestic savings (or reduced domestic borrowing), including a reduction in borrowing by the national government.

The following are ways adopted by Government of India in managing current account deficit:

a) Loans from foreign countries, PL480 and PL665 funds, Loans from World Bank, and withdrawals from IMF (to manage current account deficit in the Third Plan),

b) External assistance, withdrawals of SDRs and borrowing from IMF under the extended facility arrangement, use of accumulated foreign exchange reserves (to manage current account deficit in the Sixth Plan),

c) Mobilization of funds under the India Millennium Deposits (to manage current account deficit in 2000-01 year).

India had managed her current account deficit in different plan period with the following measures:

i) Loans from foreign countries,

ii) PL480 and PL665 funds,

iii) Loans from World Bank,

iv) Withdrawals of SDRs and borrowing from IMF under the extended facility arrangement,

v) External assistance,

vi) Use of accumulated foreign exchange reserves,

vii) Mobilization of funds under the India Millennium Deposits, and so on.