Topics: Economics, Sustainability, Macroeconomics Pages: 1 (366 words) Published: February 4, 2014
several measures are proposed to reduce the CAD during 2013
Sustainability level and measures
Check http://planningcommission.nic.in/plans/planrel/fiveyr/9th/vol1/v1c2-3.htm sustainability of CAD refers to the ability of a nation to finance its current account gap on an ongoing basis by normal capital flows. Thus, the level of CAD that could be financed on a continuous basis without resulting in any pressure on the economy is termed as the sustainable level. While, there are various measures of sustainability of CAD, most commonly, it is assessed in terms of net external liabilities relative to the size of the economy. The level of CAD that stabilizes the net external assets/ liabilities relative to the size of the economy could be termed as sustainable. Sustainability of the CAD could also be seen in terms of ‘Solvency’ If a country remains solvent in terms of its capacity to repay its external liabilities, it also generally implies that CAD deficit being run by the nation is sustainable however the converse may not necessarily hold. That is, while solvency also generally means sustainability but sustainable level do not necessarily implies solvency The sustainable level of India’s Current Account Deficit (CAD) would be in the range of 2.4 to 2.8 per cent of GDP over the medium term. This will be on the assumptions that GDP growth ranges between 6.0 and 8.0 per cent, inflation is around 5.0 per cent and interest rate and size of capital flows broadly follow their trends in the recent past. Excessive current account deficit (CAD) tends to make an economy vulnerable to external debt or currency crisis which in turn leads to financial instability and causes substantial output and welfare losses. CAD averaging around 2.7 per cent of GDP during 2008-09 to 2010-11 did not cause any stress on the economy, CAD exceeding 4.0 per cent of GDP caused net drawdown of reserves of US$ 12.8 billion in 2011-12. Noting that the sustainable level of CAD in India is...
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