Current Account – UPSC Prelims

What is Current Account?
  • Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
  • This account goes into a deficit when money sent outward exceeds that coming inward.
What does Current account constitute? 
The current account constitutes:
  • net income,
  • interest and dividends
  • transfers such as foreign aid, remittances, donations etc.
It is measured as a percentage of GDP.

Current Account = Trade gap + Net current transfers + Net income.
Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
  • A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
  • A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
What is Current Account Deficit?
  • It means the value of imports of goods/services/investment incomes is greater than the value of exports.
  • It is sometimes informally referred to as a trade deficit.
  • The major contributor to India’s Current Account Deficit (CAD) has been imports of Gold and Crude Oil.
Impact of CAD
  • Sustained period of CAD has led to currency depreciation, high rates of inflation which further effects the incoming foreign investment.
  • Fall in gold imports and lower oil import bill in recent time led to shrinkage in the deficit.
  • A current account surplus means an economy is exporting a greater value of goods and services than it is importing.
  • There is no hard and fast rule about what will happen if a country has a current account surplus. It depends on the size of the current account and the reasons for the current account surplus.
  • In the case of India, slow growth in imports, reflecting the persisting weakness in the investment sentiment, is the prominent reason behind this.
Previous Year Questions:
Q 1.) Consider the following actions which the Government can take: (2011)
  1. Devaluing the domestic currency.
  2. Reduction in the export subsidy.
  3. Adopting suitable policies which attract greater FDI and more funds from FIIs.
Which of the above action/actions can help in reducing the current account deficit?
(a) 1 and 2
(b) 2 and 3
(c) 3 only
(d) 1 and 3
Ans: (d)
Q 2.) With reference to Balance of Payments, which of the following constitutes/constitute the Current Account? (2014)
  1. Balance of trade
  2. Foreign assets
  3. Balance of invisibles
  4. Special Drawing Rights
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4
Ans: (c)

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