Current Account Deficit

In Context

• According to Morgan Stanley, the current account deficit is likely to hit a 10-year high  of 3 percent of GDP in FY23. 
  • The key channel of impact for the economy will be higher cost-push inflation, feeding into broader price pressures, which will weigh on all economic agents — households, business and the government.

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.
• 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 deal: 
  • 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.

Source:IE