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- India’s Current Account Deficit (CAD) increased to $23 billion (2.7 percent of GDP) in the third quarter (Q3) of 2021-22 from $9.9 billion (1.3 percent of GDP) in Q2 of 2021-22 and $2.2 billion (0.3 percent of GDP) in Q3 of 2020-21.
- The widening of CAD in Q3 of 2021-22 was mainly on account of higher trade deficit.
Current Account Deficit(CAD )
- It is the shortfall between the money flowing in on exports, and the money flowing out on imports.
- It measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.
- It is slightly different from the Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services.
- Whereas, the current account also factors in the payments from domestic capital deployed overseas.
- For example, rental income from an Indian owning a house in the UK would be computed in the Current Account, but not in the Balance of Trade.
- Causes:
- Existing exchange rate, consumer spending level, capital inflow, inflation level, and prevailing interest rate.
- For the Current Account Deficit in India, crude oil and gold imports are the primary reasons behind high CAD.
- Existing exchange rate, consumer spending level, capital inflow, inflation level, and prevailing interest rate.
- Implications:
- Current Account Deficit may be a positive or negative indicator for an economy depending upon why it is running a deficit.
- It may help a debtor nation in the short term, but it may worry in the long term as investors begin raising concerns over adequate return on their investments.
- Method to dea:
- It could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
- Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help.
- The government and RBI could also look to review debt investment limits for FPIs, among other measures.
What is a Current Account?
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Source:IE
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