CURRENT ACCOUNT DEFICIT (CAD) (Syllabus: GS Paper 3 – Economy)

Context: The near-13 year high services trade surplus in February has prompted economists to scale down their projections of India’s current account deficit (CAD) for the current financial year.

Current Account Deficit (CAD)

• About: 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.
• Current Account Deficit Formula: Current Account Deficit = Total value of Imports – Total value of Exports
• Current Account includes: Net income, such as interest and dividends, and transfers, such as foreign aid.
• 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 Components: Trade Balance, Services Balance, Income Balance, and Transfers Balance.
• Recent Status of India’s CAD: 1.0 per cent of GDP

Significance of Current Account Deficit

• Indicator of Competitiveness: The current account deficit serves as a crucial indicator of a nation's competitiveness, reflecting the balance between imports and exports.
• Economic Imbalance Indicator: A large current account deficit often signals economic imbalance, necessitating corrective measures like exchange rate depreciation or enhancing competitiveness over time.
• Capital Inflows and Foreign Ownership: Financing the current account deficit entails attracting capital inflows, often through foreigners purchasing domestic assets, consequently leading to a greater foreign claim on assets and dividends.