What does Current Account Deficit mean?

The current account position refers to the net current position of cross-border transaction of goods and services of a country. Both government and private payments are included in the calculation. If outflows outstrip inflows, the economy is said to be facing a current account deficit, and vice-versa. It is called current account because goods and services are generally consumed in the current period.


It is different from capital account since current account inflows are permanent and irreversible while capital inflows are reversible depending on the nature of such inflows, like whether they are for long term (FDIs, external commercial borrowings, long-tenor NRI deposits) or short term (portfolio flows, short-term trade credit).


Senior policy makers believe that it is fine for a growing economy to have a current account deficit of up to 2.5% of GDP. This is just a thumbrule though.