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Home / IAS Preparation / Current Account Deficit(Cad)

Current Account Deficit - Learn Definition, Causes, and Implications of CAD for UPSC Exam!

Last Updated on Feb 22, 2023
Also Read Current Account Deficit(Cad) in Hindi
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A current account deficit indicates that an economy is consuming more than it is creating. This is only possible if other economies are giving the economy their money or if the economy is depleting its foreign assets, such as its official foreign currency reserve.

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In this article, candidates can learn about the topic “Current Account Deficit”. In this article, we will study Current Account Deficit, its definition, implications, and recent news related to CAD. This forms a major part of the UPSC IAS exam and questions related to this are seen in Mains Paper III in the Indian Economy of the UPSC exam. Testbook provides comprehensive notes and online classes for UPSC including different competitive examinations.

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Why in News
  • In contrast to a surplus of 0.9% in 2020–21, India’s current account balance showed a deficit of 1.2% of GDP in 2021–22.
  • The Reserve Bank of India anticipates CAD to have widened somewhat in the first half (April-September 2022) but decline in the second half (October 2022-March 2023). (October 2022-March 2023). Overall, CAD is projected to represent less than 3% of GDP in FY23.
  • According to a forecast made by the American financial services corporation Morgan Stanley, the current account deficit will increase in FY23 to a 10-year high of 3% of GDP.

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What is Current Account Deficit

The current account keeps track of the country’s entrance and outflow of goods, services, and investments. If the value of products and services we import exceeds the value of those we export, the nation experiences a deficit. Net income, including interest and dividends, as well as transfers like foreign aid, are included in the current account.

  • It is the difference between the revenue generated by exports and the revenue generated by imports.
  • It calculates the difference between money brought into and taken out of the country through trade in products and services, as well as money moving from domestically held production factors to foreign countries.
  • Because it exclusively accounts for the difference between revenues and expenses related to exports and imports of goods and services, it varies from the Balance of Trade.
  • The current account deficit of a nation, which happens when imports of goods and services outweigh exports, is a key indicator of its level of commerce.
  • Even though they only make up a minor portion of the total current account, net income, including dividends and interest, and transfers, such as international aid, are included in the current account.
  • The current account, which is a component of a country’s balance of payments and shows the country’s international transactions, is similar to the capital account (BOP).

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Causes of CAD

The causes of the Current Account Deficit can be divided into two parts

  • Structural
    • Under Investment
    • Relatively Low Productivity
    • Persistently High Inflation
    • Inadequate R&D and Inflation
    • The emergence of lower Cost Competition
  • Cyclical
    • Over- Valued Exchange rate
    • The boom in Domestic demand
    • Recession in the key exports market
    • The slump in global prices of exports
    • Increased demand for imported technology

Implications of CAD

There are both positive and negative effects of the circumstance. The following is a list of such an economic phenomenon’s effects:

  • The borrowing countries are better able to maintain their economic stability when their deficit is low. It is one of the benefits associated with the current account deficit.
  • The development of businesses and infrastructure benefits the domestic economy.
  • The value of the native currency and investor confidence in domestic assets decline as a result of declining exports and rising imports. As a result, there is little demand for the products.
  • It has an impact on the locals’ quality of life. One of the most concerning drawbacks of CAD is that it decreases government spending, which hurts the world economy.
  • If investors start to express concerns about receiving enough returns on their investments, it can be advantageous to a debtor country in the short term but cause problems in the long run.
  • Bond yields rise as foreign investors withdraw their capital. The value of the local currency decreases when compared to foreign currencies. The assets thus have a lower value in the stronger currency of the foreign investors. As a result, there is a further decline in investor interest in the country’s assets. Investors may finally reach a tipping point where they are willing to sell their holdings for any price.

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DEA Method
  • By raising exports and decreasing imports of non-essential goods like electronics, gold, and mobile phones, it might be minimized.
  • Making it simpler for manufacturing enterprises to access foreign capital and engaging in currency hedging may also be beneficial.
  • The government and RBI may think about revisiting the restrictions on FPI debt investments, among other things.

Conclusion

A long-term solution is necessary for the huge CAD since it is a long-term issue. The two most significant macroeconomic issues facing India, lowering the high CAD and ensuring swift, sustainable growth, may be resolved by implementing the outlined method.

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UPSC Previous Year Question on Current Account Deficit

Concerning the Balance of Payments, which of the following constitutes the Current Account? (2014)

  1. Balance of trade
  2. Foreign assets
  3. Balance of Invisible
  4. Special Drawing Rights

    5. Select the correct answer using the code given below:

    1. 1 only
    2. 2 and 3
    3. 1 and 3
    4. 1, 2 and 4

    Ans: (c)

More Articles for IAS Preparation

Current Account Deficit FAQs

CAD stands for Current Account Deficit

Because they typically reinforce one another, current account deficit and fiscal deficit—both of which arise when a nation's spending exceeds its income—are referred to as twin deficit problems.

When the value of imports (of goods, services, and investment income) exceeds the value of exports, a current account deficit results. There will be more imports if the currency is overvalued since they will be less expensive.

AutoCAD is software that stands for Computer Aided Drafting Whereas CAD is an economic term standing for Current Account Deficit.

A country that has a current account deficit imports more than it exports. Developed nations typically have deficits, whereas emerging economies frequently have surpluses. An economy may benefit from a current account deficit if an external debt is utilized to fund profitable investments.
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