Related Topics: Indian Economy, Foreign Trade
- According to the data released by Reserve Bank of India (RBI), India’s current account deficit (CAD) narrowed to 2% of GDP, or $14.3 billion, in the first quarter of the current financial year from 2.3% of GDP, or $15.8 billion, reported during the same period of the previous year,
- However, the gap was bigger than the preceding quarter which was $4.6 billion, or 0.7% of GDP.
Why there is reduction in India’s CAD?
- The CAD contracted on a year-on-year basis, primarily on account of higher invisible receipts at $31.9 billion as compared with $29.9 billion a year ago.
- The net foreign direct investment was $13.9 billion in Q1 of 2019-20, up from $9.6 billion last year.
- Software receipts and private transfers have gone up.
- Trade deficit has been lower due to lower crude oil prices.
- Net inflow on account of external commercial borrowings was $6.3 billion against an outflow of $1.5 billion a year ago.
- Net services receipts rose 7.3%, mainly on the back of a rise in net earnings from travel, financial services and telecommunications, computer and information services.
What is Current Account Deficit?
- The current account measures the flow of goods, services and investments into and out of the country.
- Current account includes net income, including interest and dividends, and transfers, like foreign aid.
- Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and the money flowing out on imports.
- Current Account Deficit (or Surplus) measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.
- A current account deficit indicates that a country is importing more than it is exporting.
Is Current Account Deficit, bad for an Economy?
- It may be a positive or negative indicator for an economy depending upon why it is running a deficit.
- Foreign capital is seen to have been used to finance investments in many economies.
- Current Account Deficit may help a debtor nation in the short-term, but it may worry in the long-term as investors begin raising concerns over adequate return on their investments.
Current Account Deficit in India
- CAD exists due to a host of factors including existing exchange rate, consumer spending level, capital inflow, inflation level, and prevailing interest rate.
- In India, crude oil and gold imports are the primary reasons behind high CAD.
- The Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
- Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help.
- The government and RBI could also look to review debt investment limits for FPIs, among other measures.