GS Paper 3
Syllabus: Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.
Context:
CAD in India decreased to 1.5% of gross domestic product (GDP) from 2.6% of GDP in Q3 FY 2021-22.
What is CAD?
- The 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 products it exports. The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP)
What does CAD include?
- CAD includes a nation’s net trade-in products and services, its net earnings on cross-border investments including interest and dividends, and its net transfer payments such as remittances and foreign aid. A current account deficit (CAD) means the value of goods and services imported exceeds the value of exports.
Reasons for lowering India’s CAD?
- Robust performance by computer and business services, net service receipts rose.
- Remittances by Indians abroad also rose.
- Moderation of India’s trade deficit in the quarter mentioned.
- Merchandise export overcame higher import bills: Geopolitical tensions and supply chain disruptions led to crude oil and commodity prices soaring. A rise in prices of coal, natural gas, fertilizers, and edible oils has added to the pressure on the trade deficit.
- However, with global demand picking up, merchandise exports have also been rising.
How will a large CAD affect the economy?
- Rising CAD: A large CAD will result in demand for foreign currency rising, thus leading to depreciation of the home currency. Nations balance CAD by attracting capital inflows and running a surplus in capital accounts through increased foreign direct investments.
- A weaker Indian currency will drive inflation up, which is already a grave concern due to high commodity prices.
- Rising CAD is not always bad: If an increase in the import bill is because of imports for technological upgradation it would help in long-term development.
- If increasing imports is accompanied by an expansion in industrial production, it is a sign of economic development.
Future predictions:
- This decrease in CAD is temporary: India’s current account deficit is likely to widen to around 3-3.5% of gross domestic product (GDP) in 2022-23, due to FED interest rates hike and outflow of FII and FDI from the Indian market.
Insta Links:
India’s emerging twin deficit problem
Practice Questions
Q. What do you understand Current Account Deficit? Do you think a rising CAD is inherently bad and must be checked by the country’s central bank? Discuss (10M)
Q. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? (UPSC CSE 2014)
- Balance of trade
- Foreign assets
- Balance of invisibles
- Special Drawing Rights
Select the correct answer using the code given below.
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4
Answer: C
The current account includes trade in goods and services (Invisibles) and transfer payments etc. The capital account includes Foreign Direct Investment, Foreign Portfolio Investment, External Commercial Borrowings, and SDR.
Q. Consider the following actions that the Government can take: (UPSC CSE 2011)
- Devaluing the domestic currency.
- Reduction in the export subsidy.
- Adopting suitable policies which attract greater FDI and more funds from FIls.
Which, of the above action/actions can help in reducing the current account deficit?
(a) 1 and 2
(b) 2 and 3
(c) 3 only
(d) 1 and 3
Answer: D
Devaluing the currency will help increase India’s export competitiveness. A reduction in export subsidy will further decrease exports and increase CAD. Attracting FII and FDI will increase and improve CAD
Source: Live Mint
