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Current Account Deficit

Current Account Deficit:

According to a recent report by British brokerage Barclays, India’s trade deficit has been jumping continuously since July 2021. The widening Current Account Deficit (CAD) is driven by the massive spike in commodity prices led by crude oil.

  • The CAD is expected to reach $45 billion or 1.4% of GDP by March 2021. This will put pressure on the fragile economic recovery.
  • A current account deficit occurs when the total value of goods and services a country imports exceeds the total value of goods and services it exports.
  • The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part of ‘Current Account Balance’.

Factor involved in India’s Current Account Deficit:

  • High Oil Imports: In India, close to 85% of the oil demand is met through imports.
  • Due to this it is estimated that every $10 per barrel rise in global crude prices will widen the trade deficit by $12 billion or 35 bps of Gross Domestic Product (GDP).
  • High Gold Imports: Another force driving down the foreign exchange is gold imports.
  • Recovering domestic demand and the ongoing festive season are boosting Gold imports.
  • The World Gold Council expects gold demand this year to surpass the 2020 levels and it expects the demand for gold to remain high given the rising wealth effects and incomes.
  • Services, the Positive side: The report held that the monthly services surplus has improved from an average of $6.6 billion in 2019 to $7 billion in 2020, and to $8 billion in the first nine months of 2021.
  • The report ruled out an alarming situation and said that with record high foreign reserves, there are no major risks to macro stability or balance of payments conditions.
  • However, the widening deficit trend may continue for some time as a combination of demand recovery and rising commodity prices will continue to widen the trade deficit sharply.