Current Account Deficit, Meaning, Formula, Example, Causes

What is Current Account Deficit?

The Current Account Deficit (CAD) is a key economic indicator that shows whether a country is spending more on foreign goods, services, income, and transfers than it earns from them. It is part of the Balance of Payments (BoP) which records all transactions between residents of a country and the rest of the world. 

When total imports exceed total exports along with other income outflows, the result is a deficit in the current account. A moderate CAD is manageable for a growing economy, but persistent deficits can strain foreign exchange reserves and affect currency stability.

Current Account Deficit Calculation

The Current Account Deficit (CAD) is calculated by comparing a country’s total foreign exchange earnings with its total foreign exchange payments under the current account. When total payments exceed total receipts, the result is a current account deficit.

Formula: Current Account Balance = (Exports of Goods + Exports of Services + Net Income + Net Transfers) − (Imports of Goods + Imports of Services)

Example: Suppose a country exports goods and services worth ₹100 crore, earns ₹10 crore as net income and transfers, but imports goods and services worth ₹125 crore.

Current Account Balance = (100 + 10) − 125 = −₹15 crore, which means the country has a Current Account Deficit of ₹15 crore.

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Trends in India’s Current Account Deficit

In financial year 2024–25, India’s current account deficit narrowed significantly, reflecting strong services exports, rising remittances, and moderation in the merchandise trade gap. For the full year, the current account deficit was USD 23.3 billion, or about 0.6 % of GDP, lower than USD 26 billion (0.7 % of GDP) in FY2023–24, showing an improvement in external balance.

These trends indicate that while trade imbalances remain, strong performance in services and transfers helped moderate the current account deficit in 2024–25.

Current Account Deficit Causes

• High Crude Oil Import Bill: India’s merchandise trade deficit remained elevated partly due to the high cost of crude oil imports. In FY 2024-25, crude oil imports were a major component of the overall import bill, about USD 166.73 billion, reflecting continued dependence on foreign energy sources.
• Large Merchandise Trade Deficit: The goods trade gap widened in 2024-25. For example, India’s merchandise trade deficit was substantial in key months (e.g., $26.42 billion in April 2025), showing that imports of goods consistently exceeded exports.
• Gold Imports: Gold continues to drive up the import bill. Over the first 11 months of FY 2024-25, India imported about USD 53.53 billion worth of gold, adding significantly to the overall deficit.
• Electronics & Machinery Imports: High imports of electronic goods, machinery, and technology components persist due to limited domestic production capacity, increasing foreign exchange outflows and the trade gap.
• Weak Merchandise Exports Relative to Imports: Even though exports increased modestly, merchandise exports in several months lagged behind import growth—e.g., exports around $35–$38 billion against imports over $60 billion in mid-2025—keeping the goods trade deficit large.
• Global Commodity Price Volatility: Rising global prices of energy and other commodities elevated import costs, putting pressure on the current account. External shocks, such as crude price surges, can widen the CAD further.

How India Can Moderate Current Account Deficit?

• Boost Merchandise Exports: Improve competitiveness of manufacturing sectors like electronics, textiles, chemicals, and engineering goods through better infrastructure, logistics, and export incentives.
• Promote Services Exports: Strengthen high-value services such as IT, fintech, healthcare, education, and tourism, which generate large foreign exchange earnings.
• Reduce Crude Oil Import Dependence: Expand renewable energy, ethanol blending, electric mobility, and domestic exploration to lower the oil import bill.
• Encourage Import Substitution: Support domestic production of electronics, defence equipment, and capital goods to reduce reliance on foreign imports.
• Control Gold Imports: Promote financial alternatives such as digital gold, sovereign gold bonds, and other investment options to curb physical gold demand.
• Diversify Export Markets: Reduce dependence on a few regions by expanding trade with Africa, Latin America, and emerging Asian economies.
• Improve Ease of Doing Business: Simplify regulations and reduce compliance costs to attract investment and boost export-oriented industries.
• Maintain Adequate Forex Reserves: Use reserves prudently to manage external shocks and ensure confidence in external sector stability.