Alright so I got a job as a Sell-side Analyst... Miles to go from here. It is what I wanted, I just wanted to get in, and I am still not happy as I know there is so much more to achieve now.. Least I got in.
Anyway, now that I am reading Fundamental, PESTEL, PORTER, SWOT Analysis of companies.. I figured something.
They say a country's Inflation Rate, CAD, Interest Rates affect a country's GDP. Well, true.
But how true is Trade Deficits / Current Account Deficits (CAD) are bad news for a country's economy?
I believed India's currency was stable AFTER we got a grip of our CAD in 2014 by narrowing down oil imports worth billions (As in Aug 2013, USD/INR went to a whooping USD 1/ Rs 69 ).
But then is it the CAD affecting our economy, GDP, Exchange rate? Or is it other factors like Political Stability (Modi Wave for instance), Interest Rates and FIIs?
Investments in Stock Market by FIIS definitely helped our markets to rise... Did they invest because they would have made more money in the exchange or did they do so because they realized it was not one of the "Fragile 5" anymore? Either way, the more FIIs (for any reason) = the more demand for INR; the more demand, that boosts the currency.
What are Current Account Deficits?
Difference between a country's exports and imports. If the country has spent more on Imports than earned on Exports, it's called a deficit; and if a country has generated more revenue from Exports, it is called Surplus.
LOGIC 1:
It definitely makes sense that the more money earned is better than more money spent. How logical is it to spend 400 dollars when you are earning 120? How beneficial is it anyway? How can it strengthen you economically? Of course not.
LOGIC 2:
But what if the country is dependent on imports? Or what if consumers want to enjoy the imported food, cars, etc? It means we have reached higher quality of living than before! It also means we are losing jobs to foreigners as we are buying foreign products, and unknowingly increasing denand for their workers. CAD could be a good thing if we are borrowing capital/monetary benefits or anything that is expensive in our country (or even non existent!)
Take for eg, borrowing heaps of money from a country with lower interest rate than yours, Also hedging foreign Exchange Rate (to pay back), for a very beneficial investment that you know shall pay double (or more) the time?!
Look at the chart below and watch the numbers fail LOGIC 1:
Year
|
GDP
|
USD/INR
|
CAD
|
||
1999
|
8
|
45.9
|
-4.1
|
||
2000
|
4.15
|
45.7
|
-2.7
|
||
2001
|
5.39
|
47.7
|
3.4
|
||
2002
|
3.88
|
48.4
|
6.3
|
||
2003
|
7.97
|
45.9
|
14.1
|
||
2004
|
7.05
|
45
|
-2.5
|
||
2005
|
9.48
|
44.3
|
-9.9
|
||
2006
|
9.57
|
45.2
|
-9.6
|
||
2007
|
9.32
|
40.2
|
-15.7
|
||
2008
|
6.72
|
46
|
-27.9
|
||
2009
|
8.59
|
47.4
|
-38.2
|
||
2010
|
8.91
|
45.6
|
-45.9
|
||
2011
|
6.69
|
48.1
|
-78.2
|
||
2012
|
4.47
|
54
|
-88.2
|
||
2013
|
4.86
|
61.5
|
-36.8
|
(Source: CSO, RBI, EAC to PM, Ministry of Finance
http://planningcommission.nic.in/data/datatable/1203/table_1.pdf)
Take for eg, 2011 - massive Trade deficit of 78.2, yet better GDP than 4.1 deficit of 1999, 6.3 surplus of 2002, 36.8 deficit of 2013, etc.
Massive CAD, yet better and stronger USD/INR exchange rate of USD1/INR48 than a plummeting exchange rate witnessed in 2013 (where it even dropped to a USD/INR 69).
Let's also take US, for example, whose economy is highly dependent on Imports:
Figure
1: U.S. Trade Deficit Vs. GDP (1980-2007)
|
|||||
Year
|
Trade
Deficit
|
GDP
|
Year
|
Trade
Deficit
|
GDP
|
1980
|
-19
|
5,161.7
|
1994
|
-98
|
7,835.5
|
1981
|
-16
|
5,291.7
|
1995
|
-96
|
8,031.7
|
1982
|
-24
|
5,189.3
|
1996
|
-104
|
8,328.9
|
1983
|
-57
|
5,423.8
|
1997
|
-108
|
8,703.5
|
1984
|
-109
|
5,813.6
|
1998
|
-166
|
9,066.9
|
1985
|
-121
|
6,053.7
|
1999
|
-265
|
9,470.3
|
1986
|
-138
|
6,263.6
|
2000
|
-379
|
9,817.0
|
1987
|
-151
|
6,475.1
|
2001
|
-365
|
9,890.7
|
1988
|
-114
|
6,742.7
|
2002
|
-423
|
10,048.8
|
1989
|
-93
|
6,981.4
|
2003
|
-496
|
10,301.0
|
1990
|
-80
|
7,112.5
|
2004
|
-607
|
10,675.8
|
1991
|
-31
|
7,100.5
|
2005
|
-711
|
11,003.4
|
1992
|
-39
|
7,336.6
|
2006
|
-753
|
11,319.4
|
1993
|
-70
|
7,532.7
|
2007
|
-700
|
11,566.8
|
Source: U.S. Census Bureau
|
|||||
CONCLUSION:
CAD maybe does not solely affect the GDP, but a weaker currency (INR) definitely affects CAD.
For eg, when Rupee falls, the same volume of goods require more INR than they were before (due to Exchange Rate volatility). More money spent (than before) on purchases than money received on exports = Trade deficit!
Only solution is either we cut down our Imported necessities, or produce more to export..
