Current Account Deficit (CAD) refers to 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. In other words, it represents the negative balance in a nation’s trade transactions with the rest of the world.
The current account is a component of a country's balance of payments, which also includes the capital account and the financial account. The current account is divided into several sub-accounts:
Trade in Goods: This includes the balance of exports and imports of physical goods.
Trade in Services: This includes the balance of exports and imports of services such as tourism, financial services, and transportation.
Primary Income: This includes earnings and payments on investments, such as profits, dividends, and interest.
Secondary Income: This includes transfers of money, such as foreign aid or remittances.
When a country has a current account deficit, it means that it is relying on external sources to finance its excess spending compared to its income. This deficit must be balanced by a surplus in either the capital account or the financial account. In other words, the country is borrowing or selling assets to cover the gap between its imports and exports.
A sustained and large current account deficit can have economic implications. It may indicate that a country is relying heavily on external financing, which can lead to an increase in its external debt.
While some level of current account deficit is normal and can be sustainable, persistent and large deficits may raise concerns about a country's economic stability and its ability to service its external obligations.
Policymakers often monitor and analyze current account balances as part of their assessment of a country's overall economic health.
India’s FY24 Estimate: Economists predict that India’s current account deficit for the fiscal year 2023-24 (FY24) is likely to be below 1% of GDP. This optimistic outlook is influenced by a narrower trade deficit and increased services exports. Capital inflows are expected to improve, but the rupee may not strengthen significantly as the central bank aims to boost reserves.
Revised Estimates: Various financial institutions have revised their estimates for India’s CAD. For instance:
HDFC Bank expects the CAD to be lower than 1% of GDP for FY24 due to better-than-expected performance in services and merchandise exports.
IDFC First Bank has revised its estimate to 1.0% of GDP from 1.2% earlier.
QuantEco Research maintains a forecast of 1.3% of GDP for FY24 but acknowledges downside risks.
Kotak Mahindra Bank revises its FY24 estimated capital account inflows, factoring in higher net FDI inflows and banking-capital-related flows.
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