Current Account

The current account measures the flow of goods, services, and investments into and out of the country. It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).

A nation’s current account maintains a record of the country’s transactions with other nations that includes net income, including interest and dividends, and transfers, like foreign aid.

It comprises of following components -

Visible trade - Export and import of goods,
Invisible trade - Export and import of services
Unilateral transfers
Investment - Income from factors such as land or foreign shares

Current Account Deficit

There is a deficit in the Current Account if the value of the goods and services imported exceeds the value of those exported. It is measured as a percentage of GDP, the formulae for calculating CAD is as follows

Current Account = Trade gap + Net current transfers + Net income abroad

Trade gap = Exports – Imports

A country with rising CAD shows that it has become uncompetitive, and investors may not be willing to invest there.
Current Account Deficit and Fiscal Deficit are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.
For the fiscal year 2019-20, the current account deficit narrowed to 0.9% of the GDP, compared with 2.1% in FY2018-19.

Source: PIB

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