Widening CAD led by rising demand
18th Jan, 2022
External factors coupled with higher domestic demand has begun to put pressure on India’s current account deficit, which is expected to widen further, but it may not be an immediate cause of worry.
What is the Current Account Deficit?
- The current account measures the flow of goods, services, and investments into and out of the country.
- It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
- There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
- A nation’s current account maintains a record of the country’s transactions with other nations that includes net income, including interest and dividends, and transfers, like foreign aid.
- A country with rising CAD shows that it has become uncompetitive, and investors may not be willing to invest there.
- In India, the Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
- Current Account Deficit and Fiscal Deficit (also known as "budget deficit" is a situation when a nation's expenditure exceeds its revenues) are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.
Data on India’s CAD
- As per the latest RBI data, India’s current account balance posted a deficit of $ 9.6 billion in the second quarter ended September 2021 (Q2Fy22), forming 1.3 per cent of the country’s gross domestic product (GDP) and reflecting a rise in overseas trade.
- The deficit was mainly due to widening of trade gap to $ 44.4 billion from $ 30.7 billion in the preceding quarter and an increase in net outgo of investment income.