Mint Explainer: What the widening current-account deficit means for the economy
New Delhi: India's current account deficit (CAD) widened in the April-June quarter to $9.2 billion or 1.1% of GDP from $1.3 billion in the preceding three months. The September quarter is expected to see a substantial widening of the deficit as the trade balance has been worsening sequentially, oil and higher core imports are rising, and services exports are slowing further. Mint explains the relevance of the data in the context of the Indian economy The current account measures the flow of trade, including goods and services and investments in and out of a country.
Net income, including interest and dividends, as well as transfers like foreign aid, are also included in the current account. Balance of payment on the other hand is the difference in the value of payments into and out of a country over a period. While the current account is the sum of net income from abroad, net current transfers, and the balance of trade, balance of payments includes the current account and the capital account.
The widening was due to a growing trade deficit, reduced net services surplus, and decreased private transfer receipts. The trade deficit, the largest component of the CAD, occurs when the value of a country’s imports exceed the value of its exports. A country may need to borrow money to close the gap if it is unable to finance its current-account deficit through investments.
This may result in higher levels of debt, which is detrimental to the economy. A large deficit can lead to reduced government spending, lower investment and higher inflation, all of which can hamper economic growth. Also, when a country's imports exceed its exports, it can lead to a decrease in demand for its currency and thus depreciation.
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