Current Account Deficit (CAD)

Subject – Economy

Context – CAD seen at 1.4% by March as crude soars

Concept –

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:
Trade of goods,
Services, and
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:

Current Account = Trade gap + Net current transfers + Net income abroad

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.