Source: ET
Context:
The Reserve Bank of India (RBI) reported that India’s current account deficit (CAD) fell sharply to $2.4 billion (0.2% of GDP) in Q1FY26 (April–June 2025), compared to $8.6 billion (0.9% of GDP) in Q1FY25. This came after a current account surplus of $13.5 billion (1.3% of GDP) in Q4FY25.
What is Current Account Deficit?
- The Current Account records a country’s trade in goods & services, net income from abroad, and net transfers (remittances).
- Current Account Deficit (CAD) means India’s import of goods, services, and transfers > export earnings + remittances.
- Formula:
CAD = (Imports + Net Income Payments + Net Transfers) – (Exports + Remittances)
Key Components of Current Account
- Merchandise Trade Balance → Exports vs Imports of goods (e.g., oil, gold, machinery).
- Services Balance → IT, BPO, tourism, shipping.
- Primary Income → Interest, dividends, profits paid to foreign investors.
- Secondary Income (Transfers) → Remittances by Indians abroad.
Causes of CAD in India
- High Import Bill: Crude oil, gold, electronics.
- Weak Export Growth: Low competitiveness in manufacturing.
- Global Slowdown: Weak demand for IT/services exports.
- Rupee Depreciation: Raises cost of imports.
- High Outward Investment Returns: Profits repatriated by foreign companies.
Impact of CAD on India
| Positive (Short-term) | Negative (Long-term) |
|---|---|
| Can support domestic consumption & growth via imports (oil, machinery) | Weakens rupee (depreciation pressure) |
| Indicates demand for capital goods (industrial growth) | Higher external debt as CAD financed by borrowing |
| May attract FDI/FPI to finance gap | Rising inflation (imported oil & goods) |
| Shows integration with global economy | Reduces forex reserves if persistent |
RBI and Government Role
- RBI Tools:
- Use of forex reserves to stabilize rupee.
- Monetary policy (repo rate changes).
- Managing external debt flows.
- Government Measures:
- Boost exports via Foreign Trade Policy.
- Reduce gold imports (higher duties, gold bonds).
- Incentives for manufacturing (PLI scheme).
- Atmanirbhar Bharat push for domestic production.
Acts & Provisions
- FEMA, 1999 (Foreign Exchange Management Act) → Governs foreign exchange and external payments.
- RBI Act, 1934 → RBI manages forex reserves & balance of payments.
- Customs Act, 1962 → Governs import duties affecting trade balance.
