Explained: Current Account Deficit

The current account of country shows its profile in goods and services trade. Technically, the current account of the balance of payments explains the money value of goods and service (services is contained under invisibles) exported and imported by the country during an accounting period.

To understand the Current Account Deficit (CAD), we should have an idea about Balance of Payments.

What is balance of payments (BoP) account?

Usually citizens and companies of a country make several types of transactions with other countries. Basically, there are three types of transactions: trade in goods, trade in services (or in a broader sense invisibles) and capital transactions.  

Balance of payment account of India is a systematic statement of all economic transactions between the residents of India and the residents of the rest of the world in an accounting period (say one year).

The BoP as a classification format, classifies the BoP account into two:

• Current account transactions that involves exports and imports of goods and services (services are incorporated under invisibles). And
• Capital account transactions that involve the flow of investable money to and from India.

What are the components of current account?

Current account has two components – exports and imports of goods and export and imports of invisibles (include services). Hence the current account has two subcomponents:

1. Merchandise trade account ( for exports and imports of goods) and
2. Invisible account ( for services, remittances and income)

Merchandise trade account: gives the money value of India’s exports and imports of goods. When we often mention exports and imports, it is about the merchandise account.

Invisible account: indicate India’s

 (a) Service exports and imports (software exports, tourism revenues, etc, various service imports)

(b) Remittances (private remittances from abroad and payment to foreign countries)

 (c) Income (income earned by MNCs from their investment in India).

India’s current has some common trends during many years. First is that the country has a strong trade deficit. This means that exports of goods are significantly lower than imports of goods. Second, India has a reasonably good invisible surplus (because of software exports and remittance inflows). But for most years, the trade deficit will be higher than invisible surplus.  This in turn produces a current account deficit for the country in most years.  

The following table shows a typical current account situation for India. Minus sign indicates deficit whereas the plus sign indicates surplus.  

The Current Account

                                                                                  In US $ billion

  1. Trade balance (A+B)                                                  -190

  2. Invisible balance(C+D)                                              +100

  3. Current account balance (1+2)                                   -90

The table shows that the country has a current account deficit of $ 90 billion.

(The figures in the table are approximation of the 2012-13 figures for India; Source: RBI)

           As per the table, India had a trade deficit and invisible surplus for the year. Considerable invisible surplus helped India to offset most of the big trade deficit. But since the invisible surplus was lower than trade deficit, the current account of the country registered a deficit of $90 bn.

Since, balance of payment indicates transactions with other countries, it holds some extra importance. Most importantly the transactions are done through foreign currencies. We call such currencies as hard currencies or international reserve currencies (eg. US $). Hence, the export and imports of goods and services or capital inflow or outflow that takes place from and to India are expressed in terms of US $ in India’s balance of payment account.