What does our Current Account Deficit (CAD) show?

The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22.

What is Current Account Deficit (CAD)?

A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world.

This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid.

A CAD arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

Components of Current Account

Current Account Deficit (CAD) =

Trade Deficit + Net Income + Net Transfers

(1) Trade Deficit

Trade Deficit = Imports – Exports

A Country is said to have a trade deficit when it imports more goods and services than it exports.

Trade deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports.

A trade deficit represents an outflow of domestic currency to foreign markets.

(2) Net Income

Net Income = Income Earned by MNCs from their investments in India.

When foreign investment income exceeds the savings of the country’s residents, then the country has net income deficit.

This foreign investment can help a country’s economy grow. But if foreign investors worry they won’t get a return in a reasonable amount of time, they will cut off funding.

Net income is measured by the following things:

Payments made to foreigners in the form of dividends of domestic stocks.

Interest payments on bonds.

Wages paid to foreigners working in the country.

(3) Net Transfers

In Net Transfers, foreign residents send back money to their home countries. It also includes government grants to foreigners.

It Includes Remittances, Gifts, Donation etc

How does Current Account Transaction takes place?

While understanding the Current Account Deficit in detail, it is important to understand what the current account transactions are.

Current account transactions are transactions that require foreign currency.

Following transactions with from which component these transactions belong to :

Component 1 : Payments connection with Foreign trade – Import & Export

Component 2 : Interest on loans to other countries and Net income from investments in other countries

Component 3 : Remittances for living expenses of parents, spouse and children residing abroad, and Expenses in connection with Foreign travel, Education and Medical care of parents, spouse and children

What has been the recent trend?

In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion).

The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22.

However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis.

Remittances by Indians abroad also rose.

What are the reasons for the current account deficit?

Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.

A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.

However, with global demand picking up, merchandise exports have also been rising.

How will a large CAD affect the economy?

A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency.

Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments (FDI).

However, worsening CAD will put pressure on inflow under the capital account.

Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

Should a widening CAD worry policymakers?

Data shows the trade deficit widened to $24.29 billion in May 2022 from $6.53 billion a year ago.

Merchandise exports in May 2022 rose by 20.55% over May 2021, while merchandise imports rose by 62.83%.

However, if increasing imports is accompanied by an expansion in industrial production, it is a sign of economic development.

Immediately after the covid-19 lockdown, after a long time, the country experienced a current account surplus.

India’s new VPN Rules

On April 28, Computer Emergency Response Team (CERT-In) passed a rule mandating VPN (virtual private network) providers to record and keep their customers’ logs for 180 days.

What is VPN?

VPN describes the opportunity to establish a protected network connection when using public networks.

It encrypts internet traffic and disguise a user’s online identity.

This makes it more difficult for third parties to track your activities online and steal data.

The encryption takes place in real time.

How does a VPN work?

A VPN hides your IP address by letting the network redirect it through a specially configured remote server run by a VPN host.

This means that if you surf online with a VPN, the VPN server becomes the source of your data.

This means your Internet Service Provider (ISP) and other third parties cannot see which websites you visit or what data you send and receive online.

A VPN works like a filter that turns all your data into “gibberish”. Even if someone were to get their hands on your data, it would be useless.

Why do people use VPN?

Secure encryption: A VPN connection disguises your data traffic online and protects it from external access. Unencrypted data can be viewed by anyone who has network access and wants to see it. With a VPN, hackers and cyber criminals can’t decipher this data.

Disguising whereabouts: VPN servers essentially act as your proxies on the internet. Because the demographic location data comes from a server in another country, your actual location cannot be determined.

Data privacy is held: Most VPN services do not store logs of your activities. Some providers, on the other hand, record your behaviour, but do not pass this information on to third parties. This means that any potential record of your user behaviour remains permanently hidden.

Access to regional content: Regional web content is not always accessible from everywhere. Services and websites often contain content that can only be accessed from certain parts of the world.

Secure data transfer: If you work remotely, you may need to access important files on your company’s network. For security reasons, this kind of information requires a secure connection. To gain access to the network, a VPN connection is often required.

What does the new CERT-IN directive say?

VPN providers will need to store validated customer names, their physical addresses, email ids, phone numbers, and the reason they are using the service, along with the dates they use it and their “ownership pattern”.

In addition, Cert is also asking VPN providers to keep a record of the IP and email addresses that the customer uses to register the service, along with the timestamp of registration.

Most importantly, however, VPN providers will have to store all IP addresses issued to a customer and a list of IP addresses that its customers generally use.

What does this mean for VPN providers?

VPN services are in violation of Cert’s rules by simply operating in India.

That said, it is worth noting that ‘no logs’ does not mean zero logs.

VPN services still need to maintain some logs to run their service efficiently.

Does this mean VPNs will become useless?

The Indian government has not banned VPNs yet, so they can still be used to access content that is blocked in an area, which is the most common usage of these services.

However, journalists, activists, and others who use such services to hide their internet footprint will have to think twice about them.

Why such move?

Crime control: For law enforcement agencies, a move like this will make it easier to track criminals who use VPNs to hide their internet footprint.

Curbing dark-net activities: Users these days are shifting towards the dark and deep web, which are much tougher to police than VPN services.

What is GST Compensation Cess?

The Centre has extended the time for levy of GST compensation cess by almost four years till March 31, 2026.

What is the news?

The Goods and Services Tax (Period of Levy and Collection of Cess) Rules were notified in 2022 by the Finance Ministry.

The levy of cess was to end on June 30 but the GST Council, chaired by Union Finance Minister decided to extend it till 2026.

What is GST?

GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.

GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.

It is charged at the time of supply and depends on the destination of consumption.

For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

Compensation Cess under GST regime

Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.

Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.

However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.

Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

Alternatives to prevent losses

The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.

In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

Distributing GST compensation

The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.

The compensation fund so collected is released to the states every 2 months.

Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

Significance of GST compensation

States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.

GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.

Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.