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Mint Explainer: What the widening current-account deficit means for the economy
Summary
- The current account deficit widened to $9.2 billion or 1.1% of GDP in the April-June quarter and is expected to widen further in the coming months
New Delhi: India's current account deficit (CAD) widened in the April-June quarter to $9.2 billion or 1.1% of GDP from $1.3 billion in the preceding three months. The September quarter is expected to see a substantial widening of the deficit as the trade balance has been worsening sequentially, oil and higher core imports are rising, and services exports are slowing further. Mint explains the relevance of the data in the context of the Indian economy
What is CAD? How is it different from balance of payments?
The current account measures the flow of trade, including goods and services and investments in and out of a country. Net income, including interest and dividends, as well as transfers like foreign aid, are also included in the current account.
Balance of payment on the other hand is the difference in the value of payments into and out of a country over a period. While the current account is the sum of net income from abroad, net current transfers, and the balance of trade, balance of payments includes the current account and the capital account.
Why did India's CAD widen during June quarter?
The widening was due to a growing trade deficit, reduced net services surplus, and decreased private transfer receipts. The trade deficit, the largest component of the CAD, occurs when the value of a country’s imports exceed the value of its exports.
What does this mean for the economy?
A country may need to borrow money to close the gap if it is unable to finance its current-account deficit through investments. This may result in higher levels of debt, which is detrimental to the economy. A large deficit can lead to reduced government spending, lower investment and higher inflation, all of which can hamper economic growth. Also, when a country's imports exceed its exports, it can lead to a decrease in demand for its currency and thus depreciation. This can in turn fuel inflation and reduce purchasing power.
What can India do to narrow the deficit?
There are several measures a country can take to narrow its current-account deficit. These include boosting exports by providing incentives for exporters, easing export regulations, and negotiating better trade deals with other countries. The government can also help reduce import by providing incentives to domestic manufacturers and implementing tariffs and duties on certain imports. Other measures include improving productivity and competitiveness of domestic manufacturers through policy interventions that could help increase exports in the long term.
What is India's CAD outlook for the coming quarters?
Economists have warned that sustained increases in the price of crude oil – of which India is a net importer – will exert considerable pressure on the rupee, given that inflows have weakened due to rising US interest rates and the strengthening of the dollar. The current account deficit is expected to widen in the coming quarter if crude prices continue to rise. Economists at the Bank of Baroda expect the CAD to be in the region of 1.5-1.8% of GDP for the year.
