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Sunday, Jan 04, 2004

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What is current account surplus?

B. Venkatesh

RESERVE Bank of India (RBI) statistics show that India has a current account surplus. But what does current account mean?

We do business with other countries in goods and services and this is collectively called as current account transaction.

Besides such activity, Indian firms invest abroad. Similarly, foreign companies and individuals invest in India. The income received or paid on such investments also forms part of the current account transaction.

Just as we struggle to balance our individual receipts and payments every month, the country seldom balances its current account. There is either a current account surplus or a deficit. Current account surplus means that a country's export of goods and services is more than its imports.

Current account is also closely related to capital account. The latter refers to transactions with foreigners involving real estate, stocks, bonds and loans. Both current and capital accounts constitute a country's balance of payments.

Suppose a country is running a current account deficit, its imports are more than exports.

How will the country pay for the excess imports? It will either sell assets to foreigners or borrow abroad. Both form part of the capital account.

As the country will have cash inflows from sale of assets or borrowings, we say that the country runs a capital account surplus. Typically, a country with a current account deficit will have a capital account surplus.

All countries also have foreign currency and gold reserves. So, current account deficit of, say, Rs 50,000 crore need not be offset by a capital account surplus of Rs 50,000 crore.

The government can use its reserves and/or gold to pay for the excess imports. This is similar to an individual dipping into her savings to pay for excess expenditure.

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