According to recent data from the Reserve Bank of India (RBI), India’s current account deficit (CAD) widened marginally to $9.7 billion (1.1% of GDP) in Q1 FY25, which reflects India’s balance of payments (BoP). CAD occurs when the total value of goods and services imported by a country exceeds the total value of goods and services exported by it.
Balance of Payments
- Balance of Payments (BoP): The balance of payments (BoP) is a record of all international transactions made by the residents of a country. It measures the relative demand for the rupee against foreign currencies, which significantly affects exchange rates and economic stability.
- Components of Balance of Payments: The current account and the capital account are the two main components of the balance of payments.
- Current Account: It includes transactions that do not change a country’s asset or liabilities position.
- Merchandise Account: It includes physical import and export trade reflecting the trade balance. A deficit indicates more imports than exports.
- Invisibles: It includes services (e.g., banking, insurance IT, tourism, transport, etc.), transfers (e.g., gifts, grants, remittances, etc.) and factor income (e.g., income earned from investments).
- Capital Account: It shows the net change in a country’s assets and liabilities in a specific period.
- Assets: It reflects investments such as foreign direct investment and foreign institutional investors (FIIs), which are essential for economic growth and stability.
- Liabilities: It also reflects factors such as commercial borrowings, loans and capital.
India’s efforts to reduce current account deficit
- Boosting exports: Foreign Trade Policy (FTP), 2023 aims to increase India’s exports to US$2 trillion by 2030. This can balance imports and reduce the current account deficit.
- Promoting import substitution: Aatmanirbhar Bharat Abhiyan is being pursued prominently and domestic manufacturers are being given incentives for domestic production of goods. For example, production based incentive scheme.
- Increasing productivity: Increasing productivity and competitiveness in the domestic economy can help boost exports and reduce trade deficit. For example, ‘future-ready’ skill building, innovation, etc.