What is Current Account Deficit (CAD)?

The recent current account deficit (CAD) figure that was revealed by the RBI, caused the important economic indicator to be part of the news for a few days. What is the Current Account Deficit and how does it impact our economy?

What is Current Account Deficit (CAD)?

Current account deficit is nothing but the difference in the balance of trade. That is difference between the import trade and export trade including income and expenditure. In short if the imports are more then the exports, including remittances, there is a deficit in the current account.

The deficit is usually measured as a percentage of GDP. Know more about GDP and its siginificance.

It is very well known that CAD is a major concern and the graph shows the unsuccessful attempts to curb imports and boost exports.

How it impacts the economy

Widening current account deficit will affect the movement of rupee. In fact, high CAD will negatively affect the Indian currency. This may be due to lot of outflow of forex reserves.

The other way it means the country is widening domestic saving-investment gap. Means that the country is investing more than it is saving. The decline in savings may be due to lower remittances and higher imports, particularly of gold and crude oil.

If the current account deficit has to be reduced, then demand for gold needs to come down drastically.

Conclusion

However, recent steps by government to curb gold imports and RBI's interest rate cuts may help gradual recovery in the CAD, which could moderate.

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