What is Current Account Deficit?

By on November 1, 2018
What is Current Account Deficit

The modern Indian banks bring some exclusive current account features which make business a hassle free experience. Current Account Deficit (CAD) is an important word associated with Current Account. It is one of the most heard financial terminologies in the financial world. What is it? Let us checkout.

What is Current Account Deficit (CAD)?

Current Account Deficit refers to the excess of imports over exports. When CAD is negative it means India has spent more than the amount that it has earned.

Some Statistics

This year has not been quite good for the CAD of India. The value of Indian Rupee has depreciated considerably this year leading to an increased Current Account Deficit; there has been a 12% dip in the INR as compared to US dollar. The scenario improved a bit in the 2nd quarter when the CAD became 2.4% from 2.5%. It is forecasted that the CAD might again reach 2.8% due to the recent hike in crude oil prices. Also, the increase in imports is due to the rise in the demand of foreign brands by the upper middle class and affluent society of the country. Civil aviation, tourism cost to foreign countries and students pursuing education in other countries also lead to an increased CAD.

Another recent issue has been the US decision to reduce imports. Almost 15% of Indian foreign trade (jewellery, gemstones, pharmaceuticals) is dependent on American demand and this decision is taking a toll on the country’s Current Account Deficit. The curtailing of H1- B Visas and a pause on Green card extensions has further hampered the service exports (which was 55% last financial year.)

Current Account Deficit

So what is the solution?

India is extremely dependent on foreign supply of goods and services. This is the major reason why CAD is rising and preventing the country from being a developed economy. While countries like China and South Korea have opted to increase their product sale in foreign countries to improve CAD, India has the option to cater to the domestic market. With a population of hundred crores, if the economy fulfils its domestic demand, the gap in Current Account Deficit will shrink.

Current Account Deficit

Source: Livemint

Another important remedy is bringing changes in policies and structures. For example, though there is still enough availability of coal in the country, still it is imported from other countries. Why? Because the technology used to extract coal in India is unproductive, leading to more sulphur content in coal. Affordable apparels and products are imported (like the Chinese products) and so enough jobs are not created in the country. So this is a chronic cycle of problems and the government must intervene to bring a balance and curb the issue of Current Account Deficit.

Some recent measures taken to reduce CAD are

  • Review of the existing infrastructure loans borrowed from External Commercial Borrowing (ECB).
  • 20% exposure limit on investments made by foreign portfolio investors to the corporate groups.
  • Indian banks are now permitted to become market makers for masala bonds with underwriting.

Current Account Deficit is directly related to the economic status of a country. It is the parameter on which the strength of the economy is judged. So if India has to move forward to become a developed country, this problem has to be addressed on urgent basis.

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