Suraj and Vipin travel together to work by train every day. As a usual morning practice, Vipin was reading a business paper when he came across the term ‘Current Account Deficit’.
He wondered what it meant and asked Suraj to explain.
Suraj tells him that if he answers a few questions, the meaning of the term Current Account Deficit will get clear.
Suraj asks Vipin to name the sources of his income.
Vipin identifies sources of income as Salary, Interest income from Fixed Deposits and Dividends from Mutual Funds.
On hearing this, Suraj says, “Ok. But how about festival grants and birthday gifts received in cash?”
Vipin agrees “Yes, sometimes”.
Suraj then asks Vipin to list his expenses?
On hearing this Vipin promptly responds, “Monthly house expenses, Children’s school fees, Birthdays & Anniversary, occasional shopping and medical expenses.”
Suraj then explains, “Now assume your expenses exceed your income this month. Then what will you do?”
Vipin after a pause says, “Oh… then I will have to borrow money from someone.”
Suraj continues to say, “Exactly. When your expenses exceed income, it is known as ‘Deficit’. And then you become indebted to the lender who lends you money.”
“Ok. That is easy to understand.” says Vipin.
Suraj continues explaining, “Similarly, Current Account for a country is expressed as the difference between the value of EXPORT of goods and services and the value of IMPORT of goods and services.
In this context exports are “earnings” while imports are like “expenses”.
A deficit then means that the “expenses” of the country are more than the income.
In other words, the country is importing more goods and services than it is exporting.
Current account also includes net income (such as interest and dividends from Capital Inflows or Outflows) and transfers from abroad (such as Workers’ Remittances, Foreign Donations, Aids & Grants and Official Assistance), which are usually a small fraction of the total.
A deficit implies that India is a net debtor to the world.
The formula of the Current Account Balance (CAB)
CAB = X – M + NI + NCT
X = Exports of goods and services
M = Imports of goods and services
NI = Net income abroad [Salaries paid or received, credit / debit of income from FII & FDI etc.]
NCT = Net current transfers [Workers’ Remittances(unilateral), Donations,Aids & Grants, Official Assistance and Pensions etc.]
