Current Account Deficit (CAD)
Context:
India's Current Account Deficit (CAD) moderated to $12.3 billion (1.3% of GDP) in Q2 FY26, down from $20.8 billion (2.2% of GDP) in Q2 FY25.
The moderation was largely driven by a lower merchandise trade deficit ($87.4 billion) and a rise in net services receipts.
Basics of Current Account Deficit (CAD):
A current account deficit occurs when a country's total value of goods and services it imports exceeds the total value of products it exports.
It represents a country's foreign transactions and consists of the balance of trade (goods and services), net income (such as interest and dividends from investments abroad), and net transfers (such as foreign aid or remittances).
The formula is as follows:-
Causes of CAD:
Cyclical Causes:
Strong economic growth can lead to higher consumer spending on imports, widening the deficit.
Structural Causes:
Under-competitive Industries:
High labor costs or low productivity can make domestic goods expensive compared to imports.
Overvalued Currency:
A strong currency makes exports expensive for foreign buyers and imports cheaper for domestic consumers.
Demographics:
An aging population might reduce the workforce and export capacity
Implications:
Currency Depreciation:
A persistent deficit implies an excess supply of the country's currency in foreign exchange markets, putting downward pressure on its value.
Foreign Ownership:
To finance the deficit, a country may have to sell assets to foreign investors, leading to a loss of economic sovereignty.
Economic Instability:
If investors lose confidence in a country's ability to finance its deficit, it can lead to capital flight and a balance of payments crisis.