Current account deficit

Also called: CAD · Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

A current account deficit (CAD) is when a country's current payments to the rest of the world (for imports of goods and services, income paid out, and transfers sent) are more than its current receipts from the world.

Current account balance (CAB) = Balance of trade (BoT) + Net invisibles. A negative CAB is a CAD.

Another way to write it is CA = S − I, where S is national saving and I is domestic investment. So a CAD means the country invests more than it saves.

Why it matters: a country with a CAD is a net borrower from the world, and every CAD has to be paid for. If the money comes from risky sources, a large CAD can lead to a balance of payments crisis, as India saw in 1991.

Explanation

How the current account is built

• Balance of payments (BoP): the record of all transactions between a country's residents and the rest of the world, usually over one year. Residents are people and firms whose main economic interest is in the country. Citizenship does not decide it.
• Current account: the part of the BoP that records flows of income and spending today. These flows create no claim that must be repaid later. It has three parts:
• Trade in goods. This gives the balance of trade (BoT) = goods exports − goods imports. It covers goods only.
• Trade in services. Examples are software, shipping, banking, insurance and tourism.

• Income and transfers.

  • Income means earnings on labour and capital: wages, interest, dividends and profits.
  • Transfers are receipts for which nothing is given back: gifts, grants and remittances (money that citizens working abroad send home).

• Invisibles = services + income + transfers. They are called "invisible" because nothing physical passes through customs.

• Credit (+) means money comes in (exports, remittances received). Debit (−) means money goes out (imports, dividends paid abroad).
• CAD: current receipts < current payments. The nation is a borrower.
• Current account surplus: current receipts > current payments. The nation is a lender, because it builds up claims on other countries.

Worked example (NCERT Table 6.1, US$ million)

Item	Value
Exports (goods)	150
Imports (goods)	240
Trade balance	−90
Non-factor services	30
Income	−10
Transfers	32
Net invisibles	52
Current account balance	−38

• Step 1: BoT = 150 − 240 = −90.
• Step 2: Net invisibles = 30 + (−10) + 32 = 52.
• Step 3: CAB = −90 + 52 = −38. So the CAD is 38.
• NCERT trap: the table labels the trade balance "[2 – 1]". The correct formula is exports − imports, which is row 1 − row 2 = −90.

How a CAD is paid for

• The BoP always balances in accounting terms, because every transaction is recorded twice (double entry). So a CAD is always matched by one of these:
• a capital account surplus, meaning foreign investment or loans come into the country, or

• running down forex reserves, meaning the RBI spends its stock of foreign currency.

• Quality of financing matters:

• FDI (foreign direct investment, long-term money for factories and firms) is stable.
• FPI (foreign portfolio investment, money put into shares and bonds) and short-term debt can leave quickly. They are risky.

The saving-investment view and what moves the CAD

• CA = S − I. A CAD means I > S, and foreign savings fill the gap.
• Worked example: GDP = ₹100 lakh crore, S = ₹30 lakh crore, I = ₹32 lakh crore.
• CA = 30 − 32 = −₹2 lakh crore.

• That is a CAD of 2% of GDP.

• A CAD is not always bad:

• If it pays for productive investment, it can help growth.

• If it pays for consumption or gold, it is riskier.

• What widens the CAD:

• Higher oil prices.
  • India imports more than 80% of its crude oil.
  • So the import bill rises directly.
  • Each US$ 10/barrel rise is commonly estimated to widen the CAD by about 0.3-0.4% of GDP. This estimate should be checked against current data.
• A gold import boom.
  • Inflation or uncertainty goes up.
  • People buy gold as a safe store of value.
  • Gold imports rise and the CAD widens.
• Slower services exports or lower remittances.

• Higher interest and profit payments to foreign investors.

• What narrows the CAD: strong services exports, strong remittances, lower oil prices, higher national saving, and a smaller fiscal deficit.

In India

• Who measures it: the RBI publishes quarterly BoP data. Its table follows the IMF's BPM6 (Balance of Payments Manual, 6th edition): goods, services, primary income (factor income) and secondary income (transfers).
• Structure: India's large goods deficit is mostly offset by invisibles.
• Merchandise trade deficit: US$ 337.3 bn in 2025-26, up from US$ 286.9 bn in 2024-25 [2].

• Net invisibles in 2025-26: −25.2 − (−337.3) = about +US$ 312 bn. Invisibles covered roughly 93% of the goods gap [2].

• CAD figures:

• 2024-25: US$ 22.9 bn (0.6% of GDP) [2]
• 2025-26: US$ 25.2 bn (0.6% of GDP) [2]

• 2012-13: a record 4.8% of GDP. High oil prices and a gold import boom hit at the same time. The government raised the import duty on gold to cut demand.

• Quarterly swings:

• Q1 2025-26: CAD of US$ 2.4 bn (0.2% of GDP), down from US$ 8.6 bn (0.9%) in Q1 2024-25 [3].

• Q4 2025-26: a surplus of US$ 7.1 bn (0.7% of GDP), compared with US$ 13.7 bn (1.4%) in Q4 2024-25 [2]. Q4 is often in surplus because services exports and remittances peak then.

• What holds up the invisibles:

• Net services receipts: US$ 60.4 bn in Q4 2025-26, up from US$ 53.3 bn a year earlier [2]. These come from software, business services and global capability centres (GCCs), which are offshore units of multinational companies located in India.
• Personal transfer receipts (secondary income): US$ 43.5 bn in Q4 2025-26, up from US$ 33.9 bn in Q4 2024-25 [2].

• India is the world's largest remittance recipient, at US$ 135.4 bn in FY25 [4].

• The drag: primary income is a net outflow, because foreign investors take home interest and profits. Net outgo was US$ 12.8 bn in Q1 2025-26 [3] and US$ 11.1 bn in Q4 2025-26 [2].

• Financing: forex reserves fell by US$ 23.6 bn on a BoP basis in 2025-26 [2]. In Q1 2025-26 they rose by US$ 4.5 bn [3].
• Comfort limit: a CAD of about 2.5-3% of GDP is widely seen as safe. India's recent CAD is well within it.
• The 1991 lesson:
• Large CADs were financed by short-term borrowing.
• Reserves fell to about two weeks of imports.
• India faced a BoP crisis, devalued the rupee and began the 1991 reforms.

Don't confuse with

• Trade deficit: covers goods only (imports > exports). The CAD also includes services, income and transfers. India had a trade deficit of US$ 337.3 bn in 2025-26 but a CAD of only US$ 25.2 bn [2].
• Fiscal deficit: the gap between the government's spending and its receipts. The CAD is the whole nation's gap with the rest of the world. They are linked through CA = S − I: a higher fiscal deficit lowers national saving and can widen the CAD.
• BoP deficit: the BoP as a whole always balances because of double entry. "BoP deficit" refers to one part of the accounts, usually the fall in reserves, not the total. A CAD can exist while reserves are rising, if capital inflows are larger than the CAD.
• Capital account: records trade in assets (FDI, FPI, loans), which create claims to be repaid. Remittances are transfers in the current account, not capital account flows.

Prelims Hooks

• CAB = BoT + net invisibles, where invisibles = services + income + transfers. A negative CAB is a CAD.
• CA = S − I. A CAD means domestic investment is greater than national saving, so the country is a net borrower. A current account surplus makes it a lender.
• BPM6 labels: factor income = primary income; gifts, grants and remittances = secondary income. Remittances are not services and not in the capital account.
• A CAD is financed by a capital account surplus or by drawing down forex reserves.
• India's CAD: US$ 22.9 bn (0.6% of GDP) in 2024-25 and US$ 25.2 bn (0.6%) in 2025-26 [2]. The record is 4.8% of GDP in 2012-13.
• NCERT Table 6.1 trap: trade balance = exports − imports = 150 − 240 = −90, not "[2 – 1]". CAB = −90 + 52 = −38.

Mains Points

• India's CAD is structural but manageable.
• The goods deficit was US$ 337 bn in 2025-26, yet invisibles held the CAD to 0.6% of GDP [2].
• Those invisibles depend on IT and GCC services and on remittances. Both are exposed to global slowdowns, AI automation and visa rules in host countries.

• Diversifying goods exports, such as electronics under the PLI (Production Linked Incentive) scheme, reduces this risk.

• Oil and gold are the weak points, and how the CAD is financed matters as much as its size.

• Oil price shocks pass straight into the CAD.
• Policy responses:
  • renewable energy and ethanol blending to cut oil imports
  • Sovereign Gold Bonds and gold monetisation to cut gold imports
• The 4.8% CAD of FY13 and the 2013 "taper tantrum" show the risk. The taper tantrum was a sudden outflow of foreign money when the US Federal Reserve signalled it would slow its bond buying.

• Stable FDI is safer than FPI or short-term debt, which is the lesson of 1991. Reserves fell by US$ 23.6 bn in 2025-26 [2], which shows these buffers are actively being used.

• The S − I lens (GS-III).

• A moderate CAD lets investment run ahead of domestic saving and can support growth.
• Raising household financial saving and cutting the fiscal deficit narrows the CAD without choking investment.

Related concepts

• Balance of payments
• Current account (balance of payments)
• Balance of trade
• Trade deficit
• Invisibles
• Non-factor services
• Income account (balance of payments)
• Remittances

Read more

• Balance of payments I: the current account