India’s CAD widens to a 9-year high

Context

India's current account deficit (CAD) surged to an all-time high of $36.4 billion in July-September, as per the Reserve Bank of India (RBI).

What is a Current Account Deficit (CAD)?

The current account balance is the difference between the value of exports of goods and services and the value of imports of goods and services, according to International Monetary Fund (IMF).
A deficit means that India is importing more goods and services than it is exporting.
The current account also includes net income, such as interest and dividends, and transfers from abroad such as foreign aid, which are usually a small fraction of the total, according to the IMF.
India typically runs a current account deficit as it is a developing economy which relies on imports of several commodities like crude oil.

Balance of Payment (BoP)

That notebook, or slate or ledger, is called the Balance of Payment, or BoP. The BoP has two parts.
- Capital account: This includes all types of trading in the capital. In other words, all investments inside and outside the country are recorded here.
- Current Account: Here, all the trade in goods and services is noted down. It has two specific sub-parts:
  - Import and Export of goods- “trade account”
  - Import and export of services- “invisible account”

Causes

Dis-balance between the import and export values
Higher currency value, cheaper imports: As the domestic currency value is higher, importing products is inexpensive, so the nations prefer buying from other economies.
Higher national income: In such a situation, consumers spend more and if the domestic products do not satisfy their requirements, they would demand goods from overseas, leading to increased imports.
Inflation: During inflation, people refrain from buying them from their own nation.
Deteriorating dominance of the export sector: When a country’s manufacturing sector cannot beat the developing nations, it disturbs the balance of trade, causing CAD.

What are the effects of such an economic phenomenon?

Good impact	Bad impact
Nation works in retaining their economic stability It helps the domestic economy to build business and infrastructure	Reduction in domestic currency value Loss of confidence in domestic assets Lack of demand Affects the standard of living of residents Reduces the expenditure from the public, thereby hampering the global economy