Topic: BoP
Q5. Explain the difference between Current Account and Capital Account in BoP. Why is Current Account Deficit (CAD) a concern for India’s economy? (10 M)
Difficulty Level: Medium
Reference: InsightsIAS
Why the question:
The understanding of the Balance of Payments (BoP) and its components, along with the economic implications of a Current Account Deficit (CAD) for India.
Key Demand of the question:
Explain the distinction between Current and Capital Accounts in BoP and analyze why CAD poses concerns for India’s economic stability.
Structure of the Answer:
Introduction: Briefly define Balance of Payments (BoP) and its relevance in managing external economic stability.
Body:
- Difference between Current Account and Capital Account: Present a clear tabular comparison covering aspects like definition, components, nature, and examples.
- Concerns of Current Account Deficit (CAD): Highlight the key implications, such as currency depreciation, forex reserve depletion, vulnerability to external shocks, and trade imbalances.
Conclusion:
Provide solutions like enhancing export competitiveness, attracting FDI, and diversifying energy imports to reduce CAD sustainably.
