Current Account Deficit (CAD) Explained
The Current Account Deficit (CAD) occurs when the value of a country's imports of goods, services and transfers exceeds the value of its exports — meaning it is a net borrower from the rest of the world.
The Current Account Deficit (CAD) occurs when the value of a country's imports of goods, services and transfers exceeds the value of its exports — meaning it is a net borrower from the rest of the world.
What the current account records
The current account records trade in goods (merchandise), services (like software and tourism), and net income and transfers (such as remittances). A deficit means outflows exceed inflows on these items.
Why it matters
A high CAD can pressure the rupee and draw down foreign-exchange reserves, so it is watched closely. It is often financed by capital inflows like FDI and FPI.
Why it matters for UPSC
The current account, CAD and its financing via the capital account are core Economy topics that recur in Prelims statement-based questions.
Practise related UPSC PYQs
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Practise PYQs →Frequently asked questions
What is a Current Account Deficit?
It arises when a country's imports of goods, services and transfers exceed its exports — a net outflow on the current account.
How is a CAD financed?
Usually through capital-account inflows such as foreign direct investment (FDI) and foreign portfolio investment (FPI).