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1st October 2024 (12 Topics)

India’s CAD widens to 1.1% of GDP

Context

India’s current account deficit (CAD) has slightly increased to 1.1% of GDP, amounting to $9.8 billion in the first quarter (Q1) of FY25, up from $8.9 billion (1% of GDP) in the same period last year. This rise is primarily due to an increase in the merchandise trade deficit.

Key-highlights:

  • CAD occurs when a country's imports of goods and services exceed its exports. In Q1 FY25, India recorded a merchandise trade deficit of USD 65.1 billion, compared to USD 56.7 billion in the same quarter last year.
  • The country had a surplus of USD 4.6 billion (0.5% of GDP) in the previous quarter (Q4 FY24).
  • Factors Influencing the CAD
    • Net Service Receipts: Increased to $39.7 billion in Q1 FY25 from USD 35.1 billion a year ago, boosted by growth in service exports like computer, business, travel, and transportation services.
    • Private Transfers: Remittances from Indians working abroad rose to USD 29.5 billion from USD 27.1 billion in the same quarter last year.
    • Primary Income Outgo: Payments for investment income went up to USD 10.7 billion from $10.2 billion.
  • Foreign Investments
    • Foreign Direct Investment (FDI): Net inflows increased to USD 6.3 billion from USD 4.7 billion a year ago.
    • Foreign Portfolio Investment (FPI): Moderated significantly to USD 3.9 billion from $15.7 billion.
  • Other Financial Indicators
    • External Commercial Borrowings (ECBs): Net inflows fell to USD 1.8 billion from USD 5.6 billion a year ago.
    • Non-Resident Indian (NRI) Deposits: Increased to USD 4 billion, up from USD 2.2 billion.
  • Foreign Exchange Reserves: India’s foreign exchange reserves grew by USD 5.2 billion in Q1 FY25, compared to a larger increase of USD 24.4 billion in the same quarter last year.

Fact Box: What is Current Account Deficit (CAD)?

  • Current Account Deficit (CAD) is the shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations.
    • Current account maintains a record of the country's transactions with other nations.
  • If the value of goods and services (import) exceeds the value of those export, the country is said to be in a deficit, and the difference in the two values is CAD.
  • The current account includes net income, including interest and dividends, and transfers, like foreign aid.
  • India’s current account position is largely on the deficit side because of the country's dependence on oil imports.

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