Moderating Current Account Deficit (CAD)

More about CAD

• Meaning:
  • When the value of the goods and services that a country imports exceed the value of the products it exports, it is called the current account deficit. 
• Twin deficits:
  • CAD and the fiscal deficit together make up the twin deficits – the enemies of the stock market and investors. 
• Difference with the Balance of Trade:
  • 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.
• Significance:
  • If the current account – the country’s trade and transactions with other countries – shows surplus, that indicates money is flowing into the country, boosting the foreign exchange reserves and the value of rupee against the dollar. 
  • These are factors that will have ramifications on the economy and the stock markets as well as on returns on investments by people.
• Indicator of Economy:
  • 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.
• India’s position:
  • India’s current account position is largely on the deficit side because of the country’s dependence on oil imports. 
• Ways of reducing CAD:
  • The Current Account Deficit can be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.

About the “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.