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Current Account Deficit

  • Published
    12th Mar, 2022
Context

Morgan Stanley has cut India’s GDP growth estimate by 50 basis points to 7.9 percent and raised the retail (CPI) inflation forecast to 6 per cent.

  • It also expects the current account deficit to widen to a 10-year high of 3 percent of GDP in FY23.
About

About Current Account Deficit

  • Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and the money flowing out on imports. 
  • Current Account Deficit (or Surplus) measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.

How to Calculate Current Account Deficit?

  • The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. 
    • Although these components make up only a small percentage of the total current account.
  • Current Account Deficit is measured as a percentage of GDP.
    • Trade gap = Exports – Imports
    • Current Account = Trade gap + Net current transfers + Net income abroad
  • A country with rising CAD shows that it has become uncompetitive, and investors are not willing to invest there.
    • They may withdraw their investments.

Current Account and Capital Account

  • The balance of payments, or BoP for short, records all the transactions, be they in goods, services or assets, of the concerned country with the rest of the world.
  • All such transactions over a specified time period, usually a year, are kept track of in this way.
  • The current account and the capital account are the two main accounts in the BoP.
  • Current Account: Imports and exports in goods, the trade in services and transfer payments are recorded in the current account.
  • Capital Account: While, all international purchases and sales of assets such as money, stocks, and bonds, etc. are recorded in the capital account. Foreign investments and loans are also included in the capital account.
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