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CURRENT ACCOUNT DEFICIT (CAD)

Why is it in the news?

  • India’s current account deficit (CAD) for the April-June quarter of the fiscal year widened to $9.2 billion, which is 1.1% of the GDP, a significant increase from the preceding quarter where the CAD was $1.3 billion, equivalent to 0.2% of GDP.
  • In the same quarter of the previous fiscal year (2022-23), the CAD was $17.9 billion, making up 2.1% of GDP.

More about the news

  • The primary reason for the widening CAD on a quarter-on-quarter basis was a higher trade deficit.
  • Net services receipts decreased due to a decline in exports of computer, travel, and business services, although they were still higher year-on-year.
  • The fall in remittances and rising oil prices were noted as worrisome factors that could affect CAD.
  • The estimate for CAD in the current fiscal year was projected to be 1.8% of GDP.
  • It was estimated that the CAD would widen further in the second quarter to $19-21 billion (-2.3% of GDP) due to higher merchandise trade deficit and rising crude oil prices.
  • The annual projection for CAD in FY24 was expected to be $73-75 billion (-2.1% of GDP) compared to $67.0 billion (-2.0% of GDP) in FY23. This projection considered an average crude oil price of $90/barrel in H2 FY24.
 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 ‚Äď the enemies of the stock market and investors.

·       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.

¬∑¬†¬†¬†¬†¬†¬† If the current account ‚Äď the country‚Äôs trade and transactions with other countries ‚Äď 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.

·       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.

·       The Current Account Deficit can be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.

About the ‚ÄúCurrent Account‚ÄĚ

·       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 ‚Äď Imports.

·       Current Account = Trade gap + Net current transfers + Net income abroad.

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