RAS question
Current Account Deficit (CAD) includes:
Correct answer: (A) Trade in goods and services, primary income, and secondary income.
Current Account Deficit arises from the current account, which covers trade in goods and services, primary income, and secondary income between residents and non-residents.
Explanation
RBI's BPM6-based presentation of the balance of payments defines the current account as flows of goods, services, primary income and secondary income between residents and non-residents. That is why CAD cannot be reduced to only the merchandise trade deficit: the goods balance is just one part of the current account. Services, such as IT and tourism receipts or payments, are also counted. Primary income covers items such as investment income and compensation, while secondary income covers transfers such as remittances and grants. India's current account position is therefore shaped by the combined net effect of goods, services, primary income and secondary income; a trade deficit may coexist with a services surplus.
Why the other options are wrong
- (B) Only the merchandise trade deficit leaves out services, primary income and secondary income, so it is narrower than CAD.
- (C) FDI and FPI flows are foreign investment flows, which the RBI places outside the current account rather than inside CAD.
- (D) External borrowings are loans or borrowing flows, not current-account flows of goods, services, primary income or secondary income.
Concept
This tests the balance of payments classification under Indian Economy. RAS repeats it because candidates often confuse the current account with merchandise trade or with capital and financial flows.