Current Account Deficit Narrows Down

Lower trade deficit helped narrow India’s current account deficit (CAD) in the July-September quarter to $3.4 billion as against $8.5 billion in the year-ago quarter.

Current Account Deficit which occurs when a country’s total imports of goods, services and transfers exceed exports, in the reporting quarter was, however, much higher than the $0.3 billion of preceding quarter.

Current Account Deficit: Latest Data

As a percentage of gross domestic product (GDP), CAD was 0.6 per cent in the reporting second quarter (Q2) as against 1.7 per cent of GDP in the year-ago quarter. It was 0.1 per cent of GDP in the preceding quarter.

According to the RBI, the contraction in CAD on a year-on-year (y-o-y) basis was primarily on account of lower trade deficit ($25.6 billion) brought about by a larger decline in merchandise imports relative to exports.

current account deficit

The net services receipts moderated on y-o-y basis, primarily owing to the fall in earnings from software, financial services and charges for intellectual property rights.

Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $15.2 billion, having declined by 10.7 per cent from a year ago.

Net inflows of both foreign direct investments and portfolio investments were significantly higher in the reporting quarter on y-o-y basis.

Non-resident Indian (NRI) deposits declined to $2.1 billion in Q2 of 2016-17 from $4.2 billion in Q2 of 2015-16. Net loans availed by banks witnessed a net repayment of $9 billion in Q2 of 2016-17 as against net borrowing of $3.1 billion in Q2 of 2015-16.

Current Account Deficit: Meaning

Current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.

The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components make up only a small percentage of the current account when compared to exports and imports.

The current account is essentially a calculation of a country’s foreign transactions and, along with the capital account, is a component of a country’s balance of payment.

Managing a Current Account Deficit:

A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution industrialization or policies that improve domestic companies’ global competitiveness.

The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, since this makes a country’s exports less expensive.

While a current account deficit can be considered akin to a country living “outside of its means,” having a current account deficit is not inherently bad.

If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit.

If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.