Current Account Deficit - Indian Economy

A nation's short-term transactions, or the gap between savings and investments, are covered by the current account. Because of the real effects that the movement of goods and services has on income, output, and employment levels in the economy, these are often referred to as actual transactions. 

 

•    The flow of investments, goods, and services into and out of a nation is tracked by the current account. It records all of the transactions that the nation has with foreign nations.

 

•    The nation runs a deficit if the value of goods and services imported exceeds the value of those exported.

 

•    Consumption is equal to domestic consumption plus investment plus government spending when an economy has a current account deficit.

 

•    Only if the economy is losing its foreign assets, such as its official foreign currency reserve, or if other economies are lending it their money (through loan or direct or portfolio investment in the economy), can this occur.

•    A rising CAD suggests that a nation has lost its competitive edge, and investors may be hesitant to make investments there.

 

•    Not all current account deficits are detrimental. A current account deficit that is created by the private sector is unimportant since it results from agents in the private sector participating in commerce that is mutually beneficial.

 

•    Current Account = Trade Gap (Trade Gap = Exports - Imports) + Net Current Transfers + Net Income Abroad.

 

•    In the current account, payments for imports of goods, services, and unilateral payments are recorded as debits, whereas receipts from exports of goods, services, and unilateral payments are recorded as credits or positive items.

 

•    The difference between the credit and debit balances is the current account balance.

 

•    When credit items outnumber debit items, a current account surplus results. It stands for the net foreign exchange inflow.

 

•    When debits outweigh credits, a current account deficit results. It represents the overall net outflow of foreign exchange.

 

•    Economic Survey: Current Account Balance, 2021–2022.

 

•    India's current account balance evolved into a deficit of US$ 3.1 billion (0.2 percent of GDP) in H1: FY 22 as a result of a significant increase in the merchandise trade deficit.

 

•    However, this current account deficit was less than the pre-pandemic deficit of US$ 22.6 billion that was recorded in H1 of FY 20.

•    In terms of quarterly movement, the widening of the trade deficit and a rise in net investment income outgo caused the current account balance to go from a surplus to a deficit in Q2: FY 22 compared to the prior quarter. 

 

•    A crucial indicator of competitiveness as well as the volume of imports and exports is the current account deficit.

 

•    A significant current account deficit typically signals an economic imbalance that must be resolved over time by depreciating the currency and/or increasing competitiveness.

 

•    The closing of a current account deficit requires luring capital inflows, such as foreigners investing in domestic assets. Foreigners now have a stronger claim to assets and dividends, according to this.

 

•    The current account deficit enables higher levels of domestic consumption since we are purchasing from overseas.

 

•    Diverse capital inflows, such as portfolio investments, external commercial borrowings, foreign direct investments, and NRI deposits, are used to finance current-account deficits. The local currency could be under strain if CAD receives insufficient funding.

 

•    The greatest strategy to fill the current account deficit is via non-debt producing long-term inflows, like foreign direct investment. The stability of the external sector balance sheet may be threatened by erratic inflows, such as portfolio investments or "hot money."

 

•    By raising exports and decreasing imports of non-essential goods like gold, mobile phones, and electronics, the current account deficit of India could be minimized.

 

India's current account deficit has lately increased after being in surplus for a while. The rupee's value against the US dollar has also significantly declined as a result of insufficient capital inflows. A CAD of no more than 2.5 percent of India's GDP is seen as sensible because there is little that can be done to lower the current account deficit if import prices are rising and exports are not increasing. The objective of the government is to develop policies that will boost exports while lowering unneeded imports, such as imports of gold.