India’s Current Account Deficit (CAD) for the April-June quarter (Q1 FY22) widened to 2.8% of the Gross Domestic Product (GDP) – the highest in four years, but lower than 3-3.5% forecast by many economists.
Why?
- Reasons for increased CAD —
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- While India’s trade deficit has widened, a lot of support has come from Invisibles account.
- With both IT industry and foreign remittances witnessing higher net inflows of USD 30 billion and USD 23 billion, respectively. Foreign remittance is a transfer of money from a foreign worker to their family or other individuals in their home countries.
- India’s export earnings have also started falling.
- Capital Account —
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- Capital flows from foreign investors, which helped to ensure the Balance of Payments, have also declined after global funds turned risk-averse after the US Federal Reserve System increased the interest rate.
- Net foreign portfolio investment saw outflows of USD 14.6 billion, versus inflows of USD 0.4 billion in Q1 FY22.
Current Account –
- In the external sector, it refers to the account maintained by every government of the world in which every kind of current transactions is shown—basically this account is maintained by the central banking body of the economy on behalf of the government.
- Current transactions of an economy in foreign currency all over the world are—export, import, interest payments, private remittances and transfers.
- The Current Account is further divided into two sub-parts – Trade Balance (the export and import of physical goods) and Invisibles Trade (trade in services, e.g., banking, insurance IT, tourism, transport etc.). Recently, India had a trade deficit (import>export) but a surplus in the Invisibles trade. However, since the trade deficit was bigger than the surplus on the Invisibles trade, the overall current account of India is also in negative or deficit. This is called the Current Account Deficit (CAD).
- India had surplus current accounts for three consecutive years (2000–03)— the only such period in Indian economic history. Recently, in the year 2020 too, India has witnessed current account surplus after a period of 17 years.
Capital Account –
- It shows the capital kind of transactions of the economy with outside economies.
- Every transaction in foreign currency (inflow or outflow) considered as capital is shown in this account—external lending and borrowing, foreign currency deposits of banks, external bonds issued by the Government of India, FDI, PIs (Portfolio Investments) and security market investment of the Qualified Foreign Investors (QFIs) (Rupee is fully convertible in this case).
- There is no deficit or surplus in this account like the current account.
Balance of Payments (BoP) –
- The outcome of the total transactions of an economy with the outside world in one year is known as the balance of payment (BoP) of the economy. These transactions could be –
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- Trade (export or import) of goods or services.
- Investments, such as an Indian buying some land in the US or an American firm investing in the Indian stock exchanges.
- Exchange of loans between Indian and other countries of the world, etc.
- Basically, it is the net outcome of the current and capital accounts of an economy. It might be favourable or unfavourable for the economy.
- If there is a positive outcome at the end of the year, the money is automatically transferred to the foreign exchange reserves of the economy. If there is any negative outcome, the same foreign exchange is drawn from the country’s foreign exchange reserves.
- If the forex reserves are not capable of fulfilling the negativity created by the BoP, it is known as a BoP crisis.
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