Current Account Deficit

WHY IN NEWS?

The country’s current account deficit (CAD) narrowed to 0.9% of the gross domestic product (GDP) at $6.3 billion in the quarter ended September 2019 as imports slowed down due to lower demand.

ABOUT 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. It comprises of following components:

1. Trade of goods,
2. Services, and
3. Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.

• It is measured as a percentage of GDP. The formulae for calculating CAD is:

1. Current Account = Trade gap + Net current transfers + Net income abroad
2. Trade gap = Exports – Imports

• 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.

Prelims Question

Q. Consider the following statements regarding Current Account Deficit:

1.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.
2.There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
3.It is measured as a percentage of GDP.

Which of the statements given above is/are correct?
a)1 only
b)1 and2
c)2 and 3
d)All of the above

Answer to the Prelims Question