According to recent data released by the Reserve Bank of India (RBI), the Current Account Deficit (CAD) of India stood at 2% of GDP in the first quarter of the current financial year (April 2019- June 2019). This shows a reduction from the previous year’s figure of 2.3% of GDP for the same period. The RBI attributes this decline in CAD on a year-on-year basis to several factors.
Invisible Account and its Role in Reducing CAD
A key factor contributing to the decrease in CAD is the “Invisible Account”, which reported higher invisible receipts at $31.9 billion, compared to the $29.9 billion recorded a year ago. Examples of these unseen earnings include net income from the service sector such as travel, financial services, and telecommunications, computer and information services.
Trade Visible: A Look at Trade Deficit
Another important contributing factor to a reduced CAD has been a lower trade deficit. This can be attributed to the recent drop in crude oil prices, coupled with declining demand. A nation’s trade deficit, which is a part of the Current Account, indicates that the country is importing more goods, services and capital than it is exporting.
Role of Private Transfers (Remittances)
Private transfers, or remittances, have also seen an upward trend, further helping in reducing the CAD.
Understanding Current Account Deficit (CAD)
Essentially, the current account measures the flow of goods, services, and investments into and out of a nation. It captures a country’s foreign transactions and, along with the capital account, forms an integral part of a country’s Balance of Payments (BOP).
The current account records a deficit if the value of the goods and services imported exceeds that of those exported. It keeps track of a nation’s transactions with other countries, covering net income (including interest and dividends) and transfers such as foreign aid.
Components of the current account include trade in goods, services, net earnings on overseas investments and net transfer of payments over a period, such as remittances. It is measured as a percentage of GDP.
The formula for calculating CAD is:
Current Account = Trade gap + Net current transfers + Net income abroad
Trade gap = Exports – Imports
A rising CAD can indicate that a country has become unattractive to investors.
| Factors | Description |
|---|---|
| Invisible Account | Earnings from service sectors such as travel, financial services, and telecommunications, computer and information services. |
| Trade Deficit | Occurs when a country imports more goods, services, and capital than it exports. |
| Private Transfers (Remittances) | Transfer of money by foreign workers to their home countries. |
CAD & Its Impact on the Fiscal Deficit
The relationship between Current Account Deficit and Fiscal Deficit – also known as “budget deficit” (a situation where a nation’s expenditure exceeds its revenues) can be described as twin deficits. Both often reinforce each other; a high fiscal deficit can lead to a higher CAD and vice versa.
Reducing the CAD in India could be achieved by boosting exports and putting a curb on non-essential imports such as gold, mobiles, and electronics. The reduction of the CAD is essential in maintaining investor interest and ensuring a sustainable economic environment.
