CURRENT ACCOUNT DEFICIT - ECONOMY
News: Current
account deficit widens to nine-year high on back of greater trade deficit
What's in the news?
● India’s
current account balance recorded a deficit
of $36.4 billion (or a nine-year high of 4.4% of GDP) in the quarter ended
September, rising from $18.2 billion (2.2% of GDP) in the previous quarter.
● Deficit
for the year-earlier period came in at $9.7 billion (1.3% of GDP), according to
data released by the Reserve Bank of India (RBI) on December 29.
Current Account Deficit (CAD):
● The
current account measures the flow of
goods, services and investments into and out of the country.
Components of Current Account:
Current
Account Deficit (CAD) = Trade Deficit + Net Income + Net Transfers
1. Trade Deficit:
● Trade
deficit is an economic measure of a negative balance of trade in which a country’s imports exceed its exports.
● A
trade deficit represents an outflow of domestic currency to foreign markets.
● Trade
Deficit = Imports – Exports
● A
Country is said to have a trade deficit when it imports more goods and services
than it exports.
2. Net Income:
● When
foreign investment income exceeds the
savings of the country’s residents, then the country has a net income deficit.
● This
foreign investment can help a country’s economy grow. But if foreign investors
worry they won’t get a return in a reasonable amount of time, they will cut off
funding.
● Net
income is measured by the following things:
○ Payments
made to foreigners in the form of dividends of domestic stocks.
○ Interest
payments on bonds.
○ Wages
paid to foreigners working in the country.
● Net
Income = Income Earned by MNCs from their investments in India.
3. Net Transfers:
● In
Net Transfers, foreign residents send back money to their home countries. It
also includes government grants to foreigners.
● It
Includes Remittances, Gifts, Donation etc
Significance of Current account Deficit:
● Current
account balance measures the external
strength or weakness of an economy.
● A
current account surplus implies the country is a net lender to the rest of the
world while a current account deficit indicates it is a net borrower.
● For
the Current Account Deficit in India, crude oil and gold imports are the
primary reasons behind high CAD.
● The
Current Account Deficit could be reduced in India by boosting exports and
curbing non-essential imports such as gold, mobiles and electronics.