India’s current account deficit (CAD) marginally narrowed to $11.2 billion, or 1.2 percent of gross domestic product (GDP), during the July-September 2024 quarter, as per data released by the Reserve Bank of India (RBI) on Friday. This figure represents a slight improvement over the $11.3 billion deficit recorded in the same period the previous fiscal year. The current account deficit is an important indicator of a country’s external sector, reflecting the difference between exports and imports of goods and services.
The CAD in the April-September period of FY2024-25 stood at $21.4 billion, or 1.2 percent of GDP, compared to $20.2 billion, or 1.2 percent of GDP, during the first half of FY2023-24. Despite a moderate reduction in the second quarter, the country’s overall external account remains under pressure, mainly due to a rising merchandise trade deficit.
The increase in the merchandise trade deficit in the second quarter of FY2024-25 is a key factor influencing the overall CAD. During this period, the merchandise trade deficit reached $75.3 billion, a significant rise from the $64.5 billion recorded in the same quarter of the previous fiscal year. The widening trade deficit is driven by an increase in the import of goods, which has outpaced the growth in exports.
Imports of goods increased significantly, reflecting stronger domestic demand, while export growth remained relatively slower. Key import categories such as crude oil, gold, and electronics have seen higher demand, which has placed additional pressure on India’s external sector. While India’s services exports continue to perform well, they were not enough to fully offset the widening merchandise trade deficit.
The narrowing of the current account deficit in the second quarter was aided by a slight increase in remittances from Indians working abroad and a marginal improvement in the services trade surplus. The services sector, particularly information technology, continues to contribute positively to the economy, although the overall balance remains under strain due to the high import bill for goods.
Experts suggest that India’s reliance on oil imports, which is a significant component of the merchandise trade deficit, continues to be a major concern. As global oil prices remain volatile, the pressure on the current account could increase further, depending on future price movements. The government and RBI have been actively monitoring the external sector and taking measures to stabilize the situation. However, the persistent trade deficit, primarily driven by rising imports, remains a challenge for the country’s balance of payments.
Despite the narrowing CAD in Q2, India’s overall external situation remains vulnerable to global uncertainties. The country’s import-dependent growth model has made it susceptible to external shocks, such as fluctuations in commodity prices and global economic slowdowns. Analysts suggest that India needs to focus on boosting its export performance and reducing its dependence on imported goods to ensure long-term sustainability in its external account.
The RBI and the government have implemented various measures to manage the external sector. These include efforts to attract foreign direct investment (FDI), enhance export competitiveness, and encourage domestic manufacturing. However, these strategies will take time to yield significant results. In the short term, India must navigate the challenges posed by the rising trade deficit and its impact on the current account balance.
The CAD is a key area of concern for policymakers as a large and sustained deficit could put pressure on the rupee and lead to higher inflation. A higher CAD could also impact foreign exchange reserves and the overall stability of the economy. As India continues to grow and integrate into the global economy, managing the current account deficit will remain a critical challenge for both the government and the central bank.
The narrowing of the current account deficit (CAD) in the second quarter of FY2024-25 is a welcome sign, but experts caution that the overall external sector vulnerabilities remain significant. As the global economy continues to experience fluctuating demand and supply conditions, India must strategically manage its external sector imbalances. While services exports remain resilient, the growing import bill, particularly for oil and gold, continues to place strain on the economy’s balance of payments.
India’s growing reliance on imported goods, especially energy and raw materials, underscores the need for structural reforms aimed at reducing dependence on external sources. With the global energy market remaining unpredictable, the country’s energy security is increasingly becoming a focus area. Measures to diversify energy sources, invest in renewable energy, and reduce oil imports could help alleviate some of the pressures on the current account deficit in the medium to long term.
In addition to boosting exports, India must also focus on improving its domestic production capabilities. A strong and self-sufficient manufacturing sector could play a pivotal role in reducing the import bill and strengthening the country’s external balance. The government’s “Atmanirbhar Bharat” initiative, which aims to promote self-reliance in key sectors like electronics, pharmaceuticals, and renewable energy, could be an essential part of this strategy.
To support its export sector, India could also consider pursuing trade agreements and partnerships that open up new markets and ensure better access to high-demand goods and services. Strengthening the manufacturing ecosystem and improving the ease of doing business will be critical for improving India’s competitiveness on the global stage. The government has already taken steps to streamline labor laws and reduce regulatory burdens to foster a more conducive environment for domestic manufacturing and export growth.
Furthermore, attracting more foreign direct investment (FDI) will be key in addressing the country’s external sector challenges. FDI can help strengthen the capital account and ease some of the pressure on the current account by supplementing domestic savings. By creating a favorable investment climate, India can attract greater FDI in sectors that contribute to exports, such as electronics, engineering, and renewable energy.
Another factor that could help mitigate the pressures on India’s external sector is enhancing the skill set of the labor force. A more skilled and productive workforce can enhance India’s export capacity, particularly in high-value-added sectors such as technology and services. Investing in education, training, and upskilling programs for the workforce can lead to increased productivity, improved competitiveness, and better integration into global value chains.
In the short term, the RBI’s monetary policies and the government’s fiscal measures will play a crucial role in managing external sector challenges. Ensuring exchange rate stability, managing inflation, and maintaining robust foreign exchange reserves will help cushion the economy from external shocks. Moreover, timely interventions to support export sectors affected by global slowdown or supply chain disruptions will be vital in maintaining the country’s external balance.
As the year progresses, managing the current account deficit will remain an important area of focus for Indian policymakers. While the narrowing of the CAD in Q2 is a positive sign, addressing the root causes of the trade deficit and enhancing India’s external competitiveness will be necessary for sustained economic stability. India’s growth story depends not just on its domestic reforms but also on how effectively it manages its external sector in an increasingly interconnected global economy.