What does our current account deficit show?

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Data on the country’s current account balance for the fourth quarter of FY2021-22 shows a decline in the deficit to 1.5% of gross domestic product (GDP) from 2.6% of GDP in the third quarter of FY2021-22. Mint analyzes the situation.

What does current account deficit mean?

A checking account is a key component of the balance of payments, which is the account of transactions or exchanges between businesses in a country and the rest of the world. These include a country’s net trade in products and services, its net receipts from cross-border investments, including interest and dividends, and its net transfer payments such as remittances and foreign aid. A current account deficit (CAD) arises when the value of imported goods and services exceeds the value of exports, while the trade balance refers to the net balance of export and import of goods or trade in goods.

What was the recent trend?

In Q4 FY2021-22, CAD improved to 1.5% of GDP or US$13.4 billion from 2.6% of GDP in Q3 FY2021-22 (US$22.2 billion ). The difference between the value of imported and exported goods fell to US$54.48 million in Q4 FY2021-22 from US$59.75 million in Q3 FY2021-22. However, due to the robust performance of computing and business services, services net revenue increased both sequentially and year-on-year. Remittances from Indians abroad also increased. The trade deficit widened in 2021-22 and the current account balance for FY2021-22 recorded a deficit of 1.2% of GDP versus a surplus of 0.9% in FY2020-21.

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CAD trends

What are the reasons for the current account deficit?

Rising geopolitical tensions and supply chain disruptions leading to rising global crude oil and commodity prices are putting upward pressure on the import bill. A rise in the prices of coal, natural gas, fertilizers and cooking oils has added pressure on the trade deficit. However, as global demand grew, so did exports of goods.

How does a large CAD affect the economy?

A large CAD leads to an increasing demand for foreign currencies and thus to a devaluation of the home currency. Nations balance CAD by attracting capital inflows and creating a surplus on capital accounts through increased foreign direct investment. However, a deterioration in the CAD will put pressure on capital inflows. However, if an increase in the import bill is due to technology upgrade imports, it would help long-term development.

Should CAD expansion worry policymakers?

Data shows that the trade deficit widened to $24.29 billion in May 2022, from $6.53 billion a year ago. Exports of goods increased by 20.55% in May 2022 compared to May 2021, while imports of goods increased by 62.83%. However, if increasing imports are accompanied by an expansion of industrial production, this is a sign of economic development. Immediately after the Covid-19 lockdown, the country recorded a current account surplus after a long time.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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