Evaluating India's Current Account position

Sum evaluates the following questions:
Why Emerging Economies like India have Current Account Deficit?
How Capital Account Surplus Balances out the Current Account Deficit?
What are the Risks inherint in India's Current Account Deficit?

Current Account Deficit is one of the most misunderstood concepts among the common folklore. India has a Current Account Deficit (Exports – Imports) and this is often frowned upon when ever the numbers are out. Current Account Deficit (CAD) is common for an emerging economy wherein the economy is on a high growth trajectory and domestic infrastructure and resources are insufficient to support the high growth. This results in more imports than exports. The domestic industry in the emerging economy is in a rapid growth stage and it looks for imports particularly of capital equipments to boost domestic production. The production possibilities frontier shifts to the right and the resource gap is bridged by imports. So far so good, high real growth makes imports more than exports and thus a current account deficit. But how does a country spend more than it earns or in other words how is the current account deficit balanced?
The current account gets balanced with capital inflows i.e. when the foreigners buy real assets in the economy. Capital Inflows finances the current account deficit and the equation balances out. So an emerging economy with a stable investment climate and investment grade sovereign ratings on domestic currency attracts capital inflows which finances the excess of imports over exports required by the economy to maintain its high growth trajectory.

This all sounds so good and rosy for an emerging economy and there is no cause of worry as of now. But what happened with Thailand (during Asian crisis) in a similar situation is what India needs to be aware and wary of. During Asian Crisis, Capital Inflows into Thailand suffered because of which its current account deficit was exposed and the balance of payment equation went haywire. The current account deficit could not be financed out of capital account surplus and the reserves were inadequate to cover the gap. Result was large depreciation of Thai Bath in the Foreign Exchange market. The depreciation of Thai Bath led to further widening of current account deficit in the short run but made Thai Exports competitive in the long run and thus Thai Exports increased and Imports decreased thus once again restoring the Balance of Payment Equation with a Current Account Surplus, Neutral Capital Account and Creation of Reserves. The Asian Crises and the events that led to huge depreciation of Thai Bath left a bad taste in the mouth and destabilized the economy from a high growth trajectory to a subsistence level of growth.

Can it happen to India? I hope not, but I would not be surprised if some extraordinary events precipitated by external / internal forces initiate a flight of capital from India thus threatening capital account surplus to support current account deficit and depleting our resources. The policy response needed to avoid such a situation is to channelize the capital inflows into the productive sectors of the economy which fuel real factor growth and improve productivity. Such real growth makes current account deficit and capital account surplus sustainable productive. In the long run current account will be in surplus, capital account in deficit and reserves will be created.