04 November 2023

MAINS DAILY QUESTIONS & MODEL ANSWERS

Q1. What are the consequences of a widening current account deficit? Discuss the causes of the elevated CAD as well.

GS III – Economy-related issues

Introduction:

• One part of a nation’s balance of payments (BOP) is its current account. It keeps track of the products and services that a nation imports and exports. A country’s trade is measured by its current account deficit (CAD), which occurs when the value of the goods and services it purchases is more than the value of the products it exports. At 4.4% of GDP, India’s CAD is at a nine-year high. The Economic Survey 2022–2023 emphasised the importance of closely monitoring India’s CAD.

Consequences of growing CAD:

• Depreciation of the rupee: As the current account deficit widens, the rupee will face more pressure to appreciate relative to the US dollar. The rupee has lost more than 8% of its value in relation to the US currency this fiscal year.
• Costlier imports: As the rupee’s value declines, imports become more expensive. India imports expensive goods and commodities, such as semiconductors, electrical equipment, and crude oil. As a result, the exchequer is facing an increasing burden, which is driving up the current account deficit.
• Depletion of Forex: The depletion of foreign exchange reserves is a consequence of the expanding CAD and the depreciation of the rupee. The Deloitte research claims that as a result of outflows of foreign institutional investment (FII), India’s foreign exchange reserves fell from 13 months’ worth of import cover at the start of 2021 to eight months.
• The spike in imported inflation can be attributed to various factors, including the escalation of oil costs and the disruption of global supply chains caused by the conflict between Russia and Ukraine.

CAD has increased due to the following factors:

• Recession in other nations: India’s current account will go worse if the major trading partners expand their economies negatively and purchase fewer of our exports.
• High inflation: India’s exports may become less competitive and imports more competitive if its inflation rate increases more quickly than that of its principal rivals. Elevated inflation causes the current account to worsen.
• Economic Growth: As the national income rises, people typically have more money available to them to spend on things. Consequently, a considerable rise in imports could result from increasing levels of disposable income.
• Global demand: According to IMF projections, growth will slow down globally in 2022 and 2023. Reduced demand worldwide damages India’s exports of goods.
• Competition in exports: South Asian nations are a rival for India in a few of its competitive export goods. Vietnam and Bangladesh are known to have increased their textile exports to other countries in recent years. This will have an effect on India’s export revenue.
• The expansion of CAD is a chronic issue that calls for a thoughtful strategy. Correcting supply-side constraints, boosting exports, reducing non-essential imports, and monitoring rupee volatility are a few ways to address the current account deficit.

Q2. “Green Growth” has been identified as one of the key priorities in the Union Budget 2023. Talk about the key tenets of the budget’s quest for green growth.

GS III – Economy related issues

Introduction:

• Green growth is the process of promoting economic expansion and development while preserving the resources and environmental services that nature provides that are essential to our survival. One of this year’s seven budget goals is “Green Growth,” citing India’s efforts to achieve net zero carbon emissions by 2070 as a means of launching a green industrial and economic revolution.

The primary constituents of Budget’s green growth initiative are:

• The Green Hydrogen Mission aims to lower reliance on imported fossil fuels, accelerate the economy’s shift to a low-carbon economy, and establish the nation as a leader in both technology and market share in this emerging industry.
• PM-PRANAM initiative: To encourage States and Union Territories to support alternative fertilisers and the balanced use of chemical fertilisers, a new “PM Programme for Restoration, Awareness, Nourishment and Amelioration of Mother Earth” would be introduced.
• GOBARdhan scheme: To encourage a circular economy, 500 new “waste to wealth” units will be built as part of the GOBARdhan (Galvanising Organic Bio-Agro Resources Dhan) scheme.
• It focuses on handling and producing compost, biogas, and bio-CNG from solid waste and animal dung on farms.
• These will consist of 300 community- or cluster-based plants and 200 compressed biogas (CBG) plants, of which 75 will be located in urban areas.
• Bhartiya Prakritik Kheti Bio-Input Resource Centres: 10,000 Bio-Input Resource Centres will be established nationwide to support the adoption of natural farming by one crore farmers over the course of the next three years. This will provide a distributed network for the production of pesticides and micro-fertilizers at the national level.
• The “Mangrove Initiative for Shoreline Habitats & Tangible Incomes” (MISHTI) initiative was introduced in order to build on India’s achievements in afforestation.
• With the help of the Compensatory Afforestation Fund Management and Planning Authority (CAMPA) Fund, MGNREGS, and other sources, it will concentrate on mangrove plantations along the coast and salt pan lands.
• Wetlands are essential habitats that support biological diversity, according to Amrit Dharohar. Through the Amrit Dharohar programme, the government will promote their distinctive conservation values.
• This will be put into practise over the course of the following three years in an effort to promote the best possible use of wetlands and improve potential for ecotourism, carbon storage, biodiversity, and local community revenue production.
• Coastal Shipping: Using PPP mode and viability gap finance, coastal shipping will be marketed as the more affordable and energy-efficient form of transportation for both passengers and goods.
• Vehicle replacement: Getting rid of outdated, environmentally harmful cars is crucial to turning our economy green. Funds were allotted to scrap Central Government vehicles in support of the auto scrapping strategy outlined in Budget 2021–2022. States will receive assistance in swapping out their outdated cars and ambulances.
• Evacuation of renewable energy: Re-evacuation enables the quick evacuation of generated power to the power system for distribution. It will be necessary to build an interstate transmission line in order to evacuate and integrate 13 gigawatts of renewable energy from Ladakh into the grid.
• Green Credit Programme: In accordance with the Environment Protection Act of 1986, a Green Credit Programme will be announced in order to promote behavioural change.
• This will encourage businesses, people, and local governments to take ecologically responsible and responsive activities.
• As a result, the projects listed above are in line with India’s Panchamrita targets that were declared during COP26. They will contribute to reaching net zero by 2070, lowering carbon intensity, increasing the use of non-fossil energy, and increasing the push towards renewable energy.