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Context:

• 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.

Finding of the report:

• every $10 per barrel rise in global crude prices widens the trade deficit by $12 billion or 35 bps of GDP, as close to 85% of the oil demand is met through imports.
• the brokerage has raised its current account deficit forecast to $45 billion for FY22, from $35 billion earlier.
• It said that with record high foreign reserves, there is no major risks to macro stability.
• the pace of oil demand is likely to accelerate in the coming months.
• Another force driving down the foreign exchange is gold imports which have been on a faster clip for months.

About Current Account :

• Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and the money flowing out on imports.
• Current Account Deficit (or Surplus) measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.

Difference from Balance of Trade:

• Current Account Deficit is slightly different from Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services. Whereas, the current account also factors in the payments from domestic capital deployed overseas.
• For example, rental income from an Indian owning a house in the UK would be computed in Current Account, but not in Balance of Trade.

Calculation of Current Account Deficit

• The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.

• Trade gap = Exports – Imports
• Current Account = Trade gap + Net current transfers + Net income abroad

Impact of Deficit:

• A country with rising CAD shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
• Current Account Deficit may help a debtor nation in the short-term, but it may worry in the long-term as investors begin raising concerns over adequate return on their investments.

Means to deal with Current Account Deficit:

• For the Current Account Deficit in India, crude oil and gold imports are the primary reasons behind high CAD.
• The Current Account Deficit could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
• Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help.
• The government and RBI could also look to review debt investment limits for FPIs, among other measures.

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