A widening current account deficit is both good news and bad

Source: Live Mint

Relevance: Some signs like CAD signifies economic recovery

Synopsis: current account deficit (CAD) of India is widening. It is a piece of mixed news for India.

India’s current account deficit (CAD) has widened. As per the latest data, it is around 1% of gross domestic product (GDP). It is a relief for the Indian economy because 19% growth in imports is the main factor behind that.

Why increasing CAD is mixed news for the economy?

Positives: CAD has increased mainly due to an increase in imports, especially non-oil and non-gold. It indicates that economic recovery is picking up the pace. As per experts, faster vaccination would increase the growth rate that would reflect in the CAD by an increase in imports.

Negatives: However, this increase in imports is also accompanied by a surge in key global commodity prices. From crude oil to steel, prices of most commodities have galloped in the past few months.

It would result in an increase in domestic inflationary pressures. It would complicate the work of RBI because retail inflation surged to over 6% in April.

A faster rise in the consumer price index (CPI) inflation momentum compared to the wholesale price index (WPI) shows that producers have begun to pass on their costs to consumers.

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