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

Context: India’s current account deficit (CAD) narrowed to 1% of the GDP in the second quarter of the current fiscal year from 1.1% in the previous one, and a bloated 3.8% in the year-ago period, according to the balance of payments data released by the Reserve Bank of India recently.

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.

Balance of Payments (BOP)

• About: BoP documents the exchanges of goods, services, and assets occurring between a country's residents and the rest of the world within a defined timeframe, usually a year.
• Accounting Methodology: BoP adheres to the Double Entry System, systematically recording transactions with the rest of the world.
• BoP ledger comprises two sides: The Credit side and the Debit side – facilitating a comprehensive account of a country's economic interactions on the global stage.
• Accounts in the BoP includes: Current account and Capital account.