Current Account Deficit

In Context 

• India’s Current Account Deficit (CAD) for the quarter ended March 22 was sequentially narrowed to 1.5 percent of GDP as remittances from overseas Indians as well as software exports surged .

About Current Account Deficit

• It is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports. 
  • The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account. 
  • The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).

• Current Account Deficit is slightly different from 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. 
• 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.
• Impacts
  • CAD may be a positive or negative indicator for an economy depending upon why it is running a deficit. 
  • Foreign capital is seen to have been used to finance investments in many economies. 
  • 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.
• Ways to handle 
  • The Current Account Deficit 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:ET