What is the current account deficit?

A prolonged war in Ukraine has pushed the prices of crude oil beyond $100 a barrel. And due to it, the trade deficit in June soared to a high of $25.63 billion. It stood at $9.61 billion in the same month last year. A trade deficit is the difference between the value of goods imported and the value of goods exported.

And not just the trade deficit, India’s current account deficit too is ballooning due to the global headwinds. Some reports say that it might double in the current financial year.

Current account deficit implies the country is importing more goods and services in value than the exports. The country could also be in current account surplus if the value of exports exceeds the imports.

So the current account deficit is the shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations. Similar to the balance of trade, the current account maintains a record of the country’s transactions with other nations. It includes net trade balance of goods and services, net earnings on overseas investments, and payments such as remittances and foreign aid.

So, what happens if the current account deficit keeps worsening? If the current account widens, foreign investment outflows could be severe and the rupee could depreciate further. For the currency to be stable, it is important to keep the current account deficit in check. Usually, the current account deficit widens due to higher trade deficits.

Why are concerns growing around India’s current account deficit? The Nomura report has forecast India’s current account deficit at 3.3% of GDP in the current financial year.

That is more than double that of 1.2% in the previous fiscal. The surge in crude oil prices and higher gold imports is putting pressure on India’s current account. Adding to pressure is the heavy selling of foreign investors. Overseas investors have sold nearly $29 billion worth of Indian equities till date in 2022, marking the largest ever outflow on record so far.

This has brought the rupee under severe pressure and the outlook is further clouded due to aggressive rate hikes. The government on its part raised the import duty on gold and imposed a levy on the export of petroleum products to reduce the pressure on the current account and the rupee.