INTERVIEW FOR CSE 2019 All ForumIAS members selected for CSE 2019 Personality Test must submit their details and DAF and register below to receive further instructions and guidance from ForumIAS. Click here to register now
INTERVIEW 2020 CHANNEL ForumIAS Channel for Interview Preparation is now Active! Please join the channel by clicking here
would anyone please explain the current account and capital account in simple language?
i could understabd the definitions given on wikipedia but am getting confused when it comes to the effects of their surplus/deficit.. (it might sound an easy and simple question to you all experienced people but i have a science background and no previous knowledge on such things. )
OK I'll try to explain it in simple language using everyday terms. I can empathize with you as this topic used to bother me as well when i first started preparing.
1.) Budget consists of Revenue Account and Capital Account.
Explanation:- Union Budget of India is presented under 2 heads. Revenue (Current) Account gives us details of govt's day-to-day expenditure and receipts. Eg- maintenace costs of govt. infrastructure, salaries of employees etc. While Capital Account is a long-term account which tells us govt's capital expenditure. Eg- Cost of building infrastructure like fly-overs etc.
Now, when I use the word "Account", it simply means 2 things:- Expenditure incurred and Revenue earned by the govt. Revenue earned is called "Receipt". OK? that means:- Capital Account would talk about Capital Receipt and Capital Expenditure Revenue Account would talk about Revenue Receipt and Revenue Expenditure
2.) Now coming back to the Union Budget. As you must be aware that the purpose of Budget is primarily to show the state of Economy and what steps govt plans to take to revive it, or regulate it. The best way to show the current state would be to show whether the govt. is in overall profit or overall loss. Profit= Revenue earned - Expenditure incurred; Similarly, Loss= E-R right?
Hence, in the Budget, Govt's total Revenue earned would be:- Total Revenue earned = Revenue Receipt+Capital Receipt and total Expenditure incurred would be:- Total Expenditure incurred = Revenue Expenditure+Capital Expenditure
3.) Now, depending on the state of economy at the moment, the govt. enters into either:- Deficit or Surplus ( which in simple terms can be equated to profit or loss)
Hence, the govt. runs into deficit when its expenditure far surpasses the revenue it earns. Therefore, Deficit = Total Expenditure - Total Revenue, (This is called Budgetary Deficit) Similarly, Current Account Deficit (CAD) would be:- Current Account Deficit = Current Expenditure - Current Receipt and Capital Account Deficit would be:- Capital Account Deficit = Capital Expenditure - Capital Receipt
4.) You must have read at places that Capital Account Deficit is not too bad for the economy but Current Account Deficit is lethal. Why is it so? This is because when the govt. runs into Capital Account Deficit it simply means that the govt. has spent on infrastructure like building roads, airports, ports and stuff which is going to boost up the economy as it would contribute in large volumes of trade. (Better roads-> faster travel+ better connectivity-> more trade). So, capital account deficit, in long run, is not bad for the economy as the infrastructre created is "Productive" i.e it is going to reap benefits in times to come. Current Account Deficit, on the other hand, is crippling for the economy. It simply means that the govt. is spending on non-productive assets like day-to-day expenditures which aren't going to yield anything productive in the times to come.
Thats is why, the govt. came out with FRBM Act in 2004. You will come to know about it!
PS:- It would be better if, after understanding this, you also read about Balance of Trade and Balance of Payments as that would again require an understanding of this topic. Hope it helped.
This is natural, economics is alien territory for students from science background. I would recommend you to go through a NCERT on macroeconomics(11th or 12th..just check which one is it).
Back to Business:
Current Account: Actually for international trade we have to pay in international(hard) currency. Mostly, Dollar 1. Deficit: Means you are buying more than selling and hence you should have required Dollars to pay for the bought items. This causes problem if deficit is huge. In 1991, we were left with little amount of dollars even to buy Oil. 2. Surplus: It seems to be good as it will increase the flow of dollars in the economy. But this also has problems if it is huge.
Capital Account:
Now India is not oil producing country, therefore she is always in current account deficit. Only options left to cover it up are either borrowing dollars or attracting investors. And due to vibrantly economy, she is able to attract investors and hence in capital account surplus. Capital account surplus is need of her. That's why govt. is trying to make environment investment friendly.
[EDITED]thanks to you both for having the patience to explain..
@Aks: what kinds of receipts are included in current and capital accounts?
@jmmeena and @Aks: there is this article on euro as a reserve currency in The Hindu today..
i will quote a portion of it "suitable historical conditions for a reserve currency to emerge seem to occur only when the country issuing the currency generates a persistent and sizeable current account surplus, implying an ongoing demand for the country's currency in order to purchase goods and services from the country or to make factor payments to it"
now when there is a "surplus," how does it imply that there is a "demand" for its currency. if a country's currency is in demand and it is purchasing goods, it means the money is going out and hence there should be a deficit.
what am i missing here?
it goes on to say, with regard to the Triffin dilemma, "in the surplus phase, the appetite of foreigners for a currency is in excess of the payments made to them in that currency. during this period, foreign accumulation of the currency is driven by expansion of itsshare of reserves rather than by increases in the overall demand for money"
what is "appetite of foreigners for a currency" here..isn't it same as the "payments"?
[Moderator Note: Please write in paragraphs to make your post readable. This post has been edited to do so]
@Aruna_Tripathi ASingh is an old member. He is just pulling your leg :-) This site does not moderate user's comments except (as far as I have noticed), to correct and grammatical errors or include a few blank lines/line breaks in posts where users write without any paragraph form and w/o any line breaks, so you have no reasons to worry.
Your question is actually valid. The link to the article is
@AyushSinha that apology was for the moderator for including the blank spaces only..my initial post was one big bulky paragraph and the moderator had to edit it.
i will quote a portion of it "suitable historical conditions for a reserve currency to emerge seem to occur only when the country issuing the currency generates a persistent and sizeable current account surplus, implying an ongoing demand for the country's currency in order to purchase goods and services from the country or to make factor payments to it"
now when there is a "surplus," how does it imply that there is a "demand" for its currency. if a country's currency is in demand and it is purchasing goods, it means the money is going out and hence there should be a deficit.
what am i missing here?
it goes on to say, with regard to the Triffin dilemma, "in the surplus phase, the appetite of foreigners for a currency is in excess of the payments made to them in that currency. during this period, foreign accumulation of the currency is driven by expansion of itsshare of reserves rather than by increases in the overall demand for money"
what is "appetite of foreigners for a currency" here..isn't it same as the "payments"?
If there is demand for a certain currency, it doesnt mean that there will be less of it. Because the Central Bank keeps printing the currency, for one. Say if the US Dollar is a strong currency and is a stable reserve currency (not volatile, doesnt lose value from time to time, and the exchance rate that determines its value is transparent, unlike China where the valuation of currency is controlled by state), there will be demand for it.
Since the country exports, people all over the world will need dollars to pay for their US made iPhones. That will not lead to deficit of the currency as the Central bank will replenish the stock.
It would lead to a deficit ONLY if the demand for the currency was not driven by market forces, but created artificially or manipulated. (i.e, if someone riggs the Nigerian currency and buys lots of it, it doesn't mean that Nigeria is exporting too much! Its not a stable economy and the currency may lose its value as soon as the agenda of the buyer/manipulator is over )
We are a secret self-moderated community for Civil Services preparation. Feel free to join, start a discussion, answer a question or just to say Thank you.Just dont spread the word ;)Sign in or join with Facebook or Google
ForumIAS is India’s leading Online website for UPSC IAS Exam Online Preparation and guidance. At ForumIAS, we have a dream. Our dream is to make its members achieve their IAS dream. Today thousands of aspirants have joined the elite services such as IAS, IPS, IFS, IRS and other central and state services with the right inputs provided by ForumIAS. Take a look at our IAS Toppers
Free IAS Online Preparation Initiatives by ForumIAS
Current affairs is the most important part of UPSC IAS exam. ForumIAS provides a detailed analysis of important news articles through its 9PM brief. In current affairs reading Editorials Online needs an in-depth focus and hence we provide a separate analysis of daily editorials which is not found in any other website. Click the following link to access these free preparation initiatives in Portal . ForumIAS also provides compilations and Free downloads for UPSC IAS preparation
Knowing is never enough for IAS exam. An IAS aspirant must be engaged in answer writing practice to do well in UPSC IAS Mains Exam. ForumIAS has launched a Mains Marathon initiative for IAS mains Online answer writing. Click here to access UPSC Mains Marathon initiative . For Daily Must Read Newspaper articles, Visit Must Read Newspaper page here. Must Read Newspaper is an Initiative by Team ForumIAS to provide Current Affairs links to the Must Read Articles of The Day from Newspaper.
UPSC Syllabus
The most important part of UPSC IAS exam is its syllabus and there is a need to take an in-depth look at it. Click here to view the UPSC IAS Prelims syllabus. Visit UPSC IAS syllabus page here
UPSC IAS Study Material
ForumIAS is the repository of many toppers’ Online study materials for GS Mains and Optional subjects. The most unique thing about it is that they are handwritten by toppers themselves. Click here for UPSC sample notes
Interview Preparation for IAS
Interview is the last and crucial stage for becoming an IAS officer. How to prepare for it? We provide a solution. ForumIAS is the only online website where quality IAS interview preparations happen. Online Current affairs from an interview perspective are extensively discussed and specific preparation based on candidate’s profile and hobbies can be done. Please visit this link for UPSC Interview Preparation
At ForumIAS we have an exclusive Online page to read the UPSC Interview Transcripts
Indian Forest Service (IFoS)
IFoS is one of the most sought after All India Service. ForumIAS provides the right approach to excel in this exam through their toppers who have shared their success mantras and their study materials in an elaborate manner.
About Indian Administrative Service (IAS)
IAS is considered as one of the best jobs on earth. IAS officers hold the most important positions in Central and State Governments and in Public Sector Undertakings (PSUs). They also represent India in international organizations. They take the most important decisions in the administration of Government policies and development programs.
About Indian Police Service (IPS)
IPS officers occupy higher positions in the State Police Departments, Central Armed Police Forces and Intelligence Agencies. Their most important responsibilities are maintenance of Law and Order and internal security.
About Indian Foreign Service (IFS)
IFS officers serve as diplomats in international missions and embassies of India around the world and in prominent international organizations like United Nations (UN), World Bank, and IMF. They work to promote India’s interests from a bilateral and a global perspective.
The Study portal is a single point of online IAS preparation through its several initiatives like the Must Read News Articles, the 9 PM Brief, the Mains Marathon. If you are preparing for IAS exam online, ForumIAS is the place to go. ForumIAS is proud of ForumIAS Alumni in UPSC Service who have secured top Ranks in past 5 years.
Visit Us At
ForumIAS - Offline Guidance Centre
ForumIAS Academy, 1st Floor, IAPL House, 19, Pusa Road, Opposite Metro Pillar 95-96, Karol Bagh, New Delhi-110005,
View Google Map Location
) 
Comments
1.) Budget consists of Revenue Account and Capital Account.
Explanation:- Union Budget of India is presented under 2 heads. Revenue (Current) Account gives us details of govt's day-to-day expenditure and receipts. Eg- maintenace costs of govt. infrastructure, salaries of employees etc. While Capital Account is a long-term account which tells us govt's capital expenditure. Eg- Cost of building infrastructure like fly-overs etc.
Now, when I use the word "Account", it simply means 2 things:- Expenditure incurred and Revenue earned by the govt. Revenue earned is called "Receipt". OK? that means:-
Capital Account would talk about Capital Receipt and Capital Expenditure
Revenue Account would talk about Revenue Receipt and Revenue Expenditure
2.) Now coming back to the Union Budget. As you must be aware that the purpose of Budget is primarily to show the state of Economy and what steps govt plans to take to revive it, or regulate it. The best way to show the current state would be to show whether the govt. is in overall profit or overall loss.
Profit= Revenue earned - Expenditure incurred; Similarly, Loss= E-R right?
Hence, in the Budget, Govt's total Revenue earned would be:-
Total Revenue earned = Revenue Receipt+Capital Receipt
and total Expenditure incurred would be:-
Total Expenditure incurred = Revenue Expenditure+Capital Expenditure
3.) Now, depending on the state of economy at the moment, the govt. enters into either:- Deficit or Surplus ( which in simple terms can be equated to profit or loss)
Hence, the govt. runs into deficit when its expenditure far surpasses the revenue it earns.
Therefore, Deficit = Total Expenditure - Total Revenue, (This is called Budgetary Deficit)
Similarly, Current Account Deficit (CAD) would be:-
Current Account Deficit = Current Expenditure - Current Receipt and
Capital Account Deficit would be:-
Capital Account Deficit = Capital Expenditure - Capital Receipt
4.) You must have read at places that Capital Account Deficit is not too bad for the economy but Current Account Deficit is lethal. Why is it so? This is because when the govt. runs into Capital Account Deficit it simply means that the govt. has spent on infrastructure like building roads, airports, ports and stuff which is going to boost up the economy as it would contribute in large volumes of trade. (Better roads-> faster travel+ better connectivity-> more trade). So, capital account deficit, in long run, is not bad for the economy as the infrastructre created is "Productive" i.e it is going to reap benefits in times to come.
Current Account Deficit, on the other hand, is crippling for the economy. It simply means that the govt. is spending on non-productive assets like day-to-day expenditures which aren't going to yield anything productive in the times to come.
Thats is why, the govt. came out with FRBM Act in 2004. You will come to know about it!
PS:- It would be better if, after understanding this, you also read about Balance of Trade and Balance of Payments as that would again require an understanding of this topic.
Hope it helped.
Back to Business:
Current Account:
Actually for international trade we have to pay in international(hard) currency. Mostly, Dollar
1. Deficit: Means you are buying more than selling and hence you should have required Dollars to pay for the bought items. This causes problem if deficit is huge. In 1991, we were left with little amount of dollars even to buy Oil.
2. Surplus: It seems to be good as it will increase the flow of dollars in the economy. But this also has problems if it is huge.
Capital Account:
Now India is not oil producing country, therefore she is always in current account deficit.
Only options left to cover it up are either borrowing dollars or attracting investors. And due to vibrantly economy, she is able to attract investors and hence in capital account surplus. Capital account surplus is need of her. That's why govt. is trying to make environment investment friendly.
@Aks: what kinds of receipts are included in current and capital accounts?
@jmmeena and @Aks: there is this article on euro as a reserve currency in The Hindu today..
i will quote a portion of it "suitable historical conditions for a reserve currency to emerge seem to occur only when the country issuing the currency generates a persistent and sizeable current account surplus, implying an ongoing demand for the country's currency in order to purchase goods and services from the country or to make factor payments to it"
now when there is a "surplus," how does it imply that there is a "demand" for its currency. if a country's currency is in demand and it is purchasing goods, it means the money is going out and hence there should be a deficit.
what am i missing here?
it goes on to say, with regard to the Triffin dilemma, "in the surplus phase, the appetite of foreigners for a currency is in excess of the payments made to them in that currency. during this period, foreign accumulation of the currency is driven by expansion of itsshare of reserves rather than by increases in the overall demand for money"
what is "appetite of foreigners for a currency" here..isn't it same as the "payments"?
[Moderator Note: Please write in paragraphs to make your post readable. This post has been edited to do so]
Ab to hamein bhi doubt ho gaya.
Your question is actually valid. The link to the article is
http://www.thehindu.com/todays-paper/tp-opinion/article3643962.ece
I havent read the article yet, but will reply as soon as I read (and understand it)
Since the country exports, people all over the world will need dollars to pay for their US made iPhones. That will not lead to deficit of the currency as the Central bank will replenish the stock.
It would lead to a deficit ONLY if the demand for the currency was not driven by market forces, but created artificially or manipulated. (i.e, if someone riggs the Nigerian currency and buys lots of it, it doesn't mean that Nigeria is exporting too much! Its not a stable economy and the currency may lose its value as soon as the agenda of the buyer/manipulator is over )
"Do you want to finish the beer from last night? There are 5 cans left in the fridge. "
"Oh no, I don't have an appetite for beer today. I am full. do you have some rum, by the way?"