Answer:
A current account deficit (CAD) refers to a situation where the country’s total imports of goods, services, and transfers are greater than its total exports of goods, services, and transfers. In other words, it means that a country is spending more on foreign trade and investments than it is earning. It is a crucial economic indicator for India.
Factors influencing India’s CAD:
• Merchandise and service trade balance: India’s CAD is significantly influenced by its trade balance, particularly the import-export disparity. With India importing more than it exports, especially in commodities like gold and electronic goods, the trade deficit directly impacts the CAD.
o For example, the overall trade deficit was $72.24 billion in April-February 2023-24, which contributed significantly to the CAD.
• Remittances from abroad: A significant positive contributor to India’s CAD is the inflow from private transfer receipts, primarily consisting of remittances from Indians employed overseas.
o For example, in Q2 of 2023-24, private transfer receipts, including remittances, amounted to US$ 28.1 billion.
• Investment income payments: An important factor influencing India’s CAD is the net outgo on the primary income account, which primarily consists of payments related to investment income like dividends, returns on other financial investments, etc.
o For instance, in Q2 of 2023-24, net outgo on the primary income account increased to $ 12.2 billion from $ 11.8 billion a year ago as per the RBI.
• Global commodity prices: Fluctuations in global commodity prices, especially oil, significantly affect India’s CAD. As a major oil importer, lower oil prices can help reduce the import bill and, consequently, narrow the CAD.
o For example, every 10-dollar rise in Brent crude prices widens India’s current account deficit by 0.5 percent.
Impact of high CAD on the Indian economy:
• Exchange rate volatility: A high CAD can lead to the depreciation of the rupee, making imports more expensive and potentially leading to a vicious cycle of widening the deficit further.
• Imported inflation: Depreciation of the rupee due to high CAD increases the cost of imported goods, leading to imported inflation. This situation can escalate into broad-based inflation, affecting the overall cost of living and economic stability.
• Investor confidence: Persistent high CAD can dampen investor confidence, leading to reduced investment inflows. This can strain India’s foreign exchange reserves.
• Economic growth: A sustained high CAD coupled with fiscal deficit can impact public spending and overall economic growth. It might also lead to higher borrowing costs for the government and the private sector.
Reducing the CAD in India is vital for maintaining the country’s economic stability and ensuring sustainable growth. By addressing this crucial economic indicator through policy measures, India can better navigate global economic fluctuations and secure its financial health.