Current Account Deficit

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According to the Reserve Bank of India, India’s current account deficit narrowed to 0.2 percent of the GDP in the December quarter as against 0.4 per cent of GDP in the year-ago period.

Current Account Deficit

• In simple terms, 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).
• The Current Account Deficit (CAD) is the shortfall between the money flowing in on exports, and the money flowing out on imports.
• It is slightly different from Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services.
• A nation’s Current Account maintains a record of the country’s transactions with other nations. It comprises the following components:
  • trade of goods and services,
  • 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:
  • Trade gap = Exports – Imports
  • Current Account = Trade gap + Net current transfers + Net income abroad
• A country with rising CAD shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
• 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