Current Account Deficit


    In News 

    • 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.
    • 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?

    • 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
    • This account goes into a deficit when money sent outward exceeds that coming inward.
    • Calculation:
      • It is measured as a percentage of GDP.
        • Trade gap = Exports – Imports
        • Current Account = Trade gap + Net current transfers + Net income abroad