Hello User
Sign in
Hello
Sign Out
Subscribe
Next Story
Business News/ Economy / What does our current account deficit show?

What does our current account deficit show?

The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22. Mint analyses the situation.

Photo: Mint

The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22. Mint analyses the situation.

The data for the country’s current account balance for the fourth quarter of FY 2021-22 shows a decrease in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22. Mint analyses the situation.

What does current account deficit mean?

Hi! You’re reading a premium article! Subscribe now to continue reading.

Subscribe now
Already subscribed?

Premium benefits

  • 35+ Premium articles every day
  • Specially curated Newsletters every day
  • Access to 15+ Print edition articles every day
  • Subscriber only webinar by specialist journalists
  • E Paper, Archives, select The Wall Street Journal & The Economist articles
  • Access to Subscriber only specials : Infographics I Podcasts

Unlock 35+ well researched
premium articles every day

Access to global insights with
100+ exclusive articles from
international publications

Get complimentary access to
3+ investment based apps

TRENDLYNE Get One Month GuruQ plan at Rs 1
FINOLOGY Free finology subscription for 1 month.
SMALLCASE 20% off on all smallcases

5+ subscriber only newsletters
specially curated by the experts

Free access to e-paper and
WhatsApp updates

What does current account deficit mean?

A current account is a key component of balance of payments, which is the account of transactions or exchanges made between entities in a country and the rest of the world. This includes a nation’s net trade in products and services, its net earnings on cross border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid. A current account deficit (CAD) arises when the value of goods and services imported exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or merchandise trade.

What has been the recent trend?

In Q4 FY 2021-22, CAD improved to 1.5% of GDP or $13.4 billion from 2.6% of GDP in Q3 FY 2021-22 ($22.2 billion). The difference between the value of goods imported and exported fell to $54.48 million in Q4FY 2021-22 from $59.75 million in Q3 FY2021-22. However, based on robust performance by computer and business services, net service receipts rose both sequentially and on a year-on-year basis. Remittances by Indians abroad also rose. The  trade  deficit  widened in 2021-22 and the current account balance for FY 2021-22 recorded a deficit of 1.2% of GDP against a surplus of 0.9% in FY 2020-21.

CAD trends

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.

How will a large CAD affect the economy?

A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency. Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments. However, worsening CAD will put pressure on inflow under the capital account. Nevertheless, if an increase in the import bill is because of imports for technological upgradation it would help in long-term development.

Should a widening CAD worry policymakers?

Data shows the trade deficit widened to $24.29 billion in May 2022 from $6.53 billion a year ago. Merchandise exports in May 2022 rose by 20.55% over May 2021, while merchandise imports rose by 62.83%. However, if increasing imports is accompanied by an expansion in industrial production, it is a sign of economic development. Immediately after the covid-19 lockdown, after a long time, the country experienced a current account surplus.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.