Context:
India’s current account deficit likely at below 1% of GDP in FY24
What Is a Current Account Deficit?
- The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
- The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
- The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).
What is the Causes of CAD:
- Trade Deficit: This is the largest component of the current account deficit and occurs when a country imports more goods than it exports.
- Net Foreign Investment: If a country invests more abroad than foreign entities invest in the domestic economy, it contributes to the deficit.
- Foreign Aid: Sending more aid than receiving it can widen the deficit.
Impact:
- Exchange Rate: A large and persistent deficit can put downward pressure on the currency, potentially making imports more expensive.
- Economic Growth: It can act as a source of investment for developing economies, but a large deficit can raise concerns about sustainability and external debt.
- Interest Rates: Higher deficits may lead to higher interest rates as the government borrows to finance it.
Other key points about CAD:
- The impact of a current account deficit depends on various factors, including its size, cause, and the overall health of the economy.
- Some argue that moderate deficits can be beneficial for economic growth, while others warn against the risks of excessive debt accumulation.
- Understanding the current account deficit is crucial for policymakers and individuals to assess a nation’s economic health and vulnerability.