Context

Recently, RBI revealed in its data that India’s current account deficit (CAD) narrowed to $10.5 billion, or 1.2 % of gross domestic product (GDP), in the third quarter (October-December) of FY2024.

Key Highlights of RBI Data

• Current Account Deficit narrowed down to $10.5 billion in the 3rd Quarter from $16.8 billion, or 2% of GDP, in the year-ago quarter.
  • In the second quarter of FY2024, the country CAD stood at $11.4 billion, or 1.3 per cent GDP.
• Merchandise trade deficit was marginally higher at $71.6 billion (in Q3 FY2024)  than $71.3 billion during Q3 FY2023. 
• Services exports grew by 5.2 % on a y-o-y basis due to the rising exports of software, business and travel services.
  • Net services receipts increased  from a year ago that helped cushion the current account deficit. 
• Private transfer receipts (representing remittances by Indians employed overseas) amounted to $31.4 billion, an increase of 2.1 per cent over their level during the corresponding period a year ago.
• Foreign direct investment recorded a net inflow of $4.2 billion as compared with a net inflow of $2 billion in Q3 FY2023. 
• Foreign portfolio investment recorded a net inflow of $12 billion, higher than $4.6 billion during Q3 FY2023. 
• External commercial borrowings to India recorded a net outflow of $2.6 billion in Q3 FY2024 as compared with a net outflow of $2.5 billion a year ago. 
• Non-resident deposits recorded a higher net inflow of $3.9 billion than $2.6 billion a year ago. 
• Increase in Foreign exchange reserves (on a balance of payment (BoP) basis) to the tune of $6 billion.

What is the Current Account Deficit and Its Trends? 

• Current account deficit is the difference between exports and imports of goods and services. 
  • It is a key indicator of the country’s external sector.
• Components: It is the sum of Balance of Trade (Export minus Imports of Goods and Services) + Net Factor Income from Abroad (Interest income and Dividends, etc) and Net Transfer Payments ( Eg- Foreign Aid) 
• Formula: Current Account = Trade Balance+Net factor income+Net transfer payments 
• “Twin deficit” : The situation in which one nation has a current account deficit (trade deficit) and Fiscal deficit at the same time.
  • Fiscal Deficit= Total Expenditure- Total Receipts (excluding borrowings).

Causes of Current Account Deficit

Implication of Current Account Deficit

• Depreciation of Rupee: A large current account deficit for a continued period of time can lead to depreciation of rupee, and the demand for foreign currency (especially dollars) will see a rise.
• Inflation: Depreciation of rupee, as a result of continued deficit in the country’s current account, will see prices of imported goods becoming costlier, and in turn pushes the country towards inflation.
• Elevated Interest Rates: It will affect the investment & consumption cycle of the economy.
• Economic Growth: Persistent CAD affects economic imbalances which further hinders sustainable growth prospects of the country.
• Trade Balance: Due to Current account deficits Competitiveness & stability of Domestic Industries will get affected.

How can India Moderate Current Account Deficit?

Following are the factors that can moderate India’s current account deficit: 

• Reduce the price of commodities.
• Appreciation of rupee.
• Lessen debt taken from developed nations.
• Reduce foreign ownership of assets.
• Improve the quality of imported goods.
• Reduce non-essential imports of gold, mobiles, and electronics.
• Increase value of exports.

Balance of Payment and Its Components

• Definition: Balance Of Payment (BOP) is a bookkeeping system that summarizes the country’s economic transaction with other countries of the world for a particular period. 
• Impact: BoP keeps track of the trade and investments and transfers in a country with the rest of the world. 
• Components: The BoP is composed of Capital and Current Accounts.