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What Is The Current Account Deficit?

Context:   

State Bank of India has pencilled in a lower current account deficit for India at 3% for this fiscal as against the minimum consensus of 3.5%, citing rising software exports, remittances and a likely $5-billion jump in forex reserves via swap deals.

Relevance:

GS III- Indian Economy (Growth and Development)

Dimensions of the Article:

  1. What is the Current Account Deficit?
  2. What is Balance of Payments?
  3. What has been the recent trend?
  4. What are the reasons for the current account deficit?

What is the Current Account Deficit?

  • A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
  • The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part of ‘Current Account Balance’.
  • According to an earlier report of 2021, High Oil Imports, High Gold Imports are the major driving force, widening the CAD.

What is Balance of Payments?

  • BoP of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period, usually one year.
  • Purposes of Calculation of BoP:
    • Provides information about a country’s financial and economic situation.
    • Can be used to evaluate whether the value of a country’s currency is appreciating or depreciating.
    • Assists the government in making budgetary and trade policy decisions.
    • Provides crucial data for analysing and comprehending the economic dealings of a country with other countries.

Components of the Balance of payments (BOP)

  • Current account: It includes the financial transactions dealing with the export and import of goods, services, unilateral transfers, investment income etc.
  • Capital account: It includes the financial transactions dealing with assets such as foreign direct investment, foreign portfolio investment, foreign loans etc.
  • Official reserve transactions: It conducted by the central bank in case of the BOP deficit or BOP surplus.
  • Errors and omissions: It is the element of BOP (other than the current account and the capital account) which refers to the balancing items reflecting the inability to record all the international financial transactions.

What are the reasons for the current account deficit?

  • Intensifying geopolitical tensions and supply chain disruptions leading to crude oil and commodity prices soaring globally have been exerting upward pressure on the import bill.
  • A rise in prices of coal, natural gas, fertilizers, and edible oils have added to the pressure on trade deficit.
  • However, with global demand picking up, merchandise exports have also been rising.

-Source: The Hindu


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