Current Account Deficit

• 03 Oct 2019

According to the data released by the Reserve Bank of India (RBI), the Current Account Deficit (CAD) of the country came down to 2% of GDP in the first quarter of the current financial year (April 2019- June 2019) from 2.3% of GDP, reported during the same period in the previous year (2018).

• According to the RBI, the CAD declined on a year-on-year basis, because of a number of factors such as:
  
  • Invisible Account: Higher invisible receipts at $31.9 billion as compared with $29.9 billion a year ago. For e.g., rise in net earnings from travel, financial services, and telecommunications, computer and information services.
  • Trade Visible: Trade deficit has been lower recently, due to lower crude oil prices and also due to the declining demand.
  • Rising Private transfers (Remittances).

Current Account Deficit

• The current account measures the flow of goods, services, and investments into and out of the country. It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
• There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
• A nation’s current account maintains a record of the country’s transactions with other nations, that includes net income, including interest and dividends, and transfers, like foreign aid. It comprises of following components:
  
  • Trade of goods,
  • Services, and
  • Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
• It is measured as a percentage of GDP. The formulae for calculating CAD is:
  
  • Current Account = Trade gap + Net current transfers + Net income abroad
    
    • Trade gap = Exports – Imports
• A country with rising CAD shows that it has become uncompetitive, and investors may not be willing to invest there.
• In India, the Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
• Current Account Deficit and Fiscal Deficit (also known as "budget deficit" is a situation when a nation's expenditure exceeds its revenues) are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.

Source: TH