Increase in Trade & Current Account Deficit

In News

• India’s trade deficit, which shot back up to $21.2 billion, is expected to stay elevated in coming months and the current account deficit could widen to 2.6% of GDP in 2022-23 from 1.7% of GDP this year.

What is Trade Deficit?

• It refers to a situation where the country’s import dues exceed the receipts from the exports.
• Trade deficit arises in the course of international trade when the payments for imports exceed the receipts from export trade.
• A trade deficit is also referred to as a negative balance of trade.

What is 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.

Reasons of Surge in TD & CAD

• The surge in oil prices, amid a pickup in domestic demand, will significantly enhance India’s import bill.
• Aided by the broader rise in commodities and fertilizers.
• Anticipation that gold imports will remain high as investors look to hedge against market volatility and inflation.
• The situation is especially aggravated by the ongoing Russia-Ukraine conflict.

Source: TH