India faces a persistent challenge with its current account deficit (CAD), which is a crucial component of the balance of payments. This metric tracks the country’s earnings from global trade against its expenditures. Over the past 25 years, India has only achieved a current account surplus four times: in the years 2001-02, 2002-03, 2003-04, and 2020-21. In every other year, the country imported more than it exported, resulting in a recurring deficit.
The CAD reached alarming heights of $78.2 billion in 2011-12 and $88.2 billion in 2012-13. Since that period, it has generally remained below $50 billion, with notable exceptions in 2018-19 ($57.3 billion) and 2022-23 ($67.1 billion).
The current account consists of two main components: merchandise trade and invisibles. Merchandise trade involves the exports and imports of tangible goods. In contrast, the invisibles subcomponent includes the flow of services, remittances, and intellectual properties.
India has historically imported more physical goods than it exports, leading to a widening merchandise trade deficit. Some key statistics include:
At this rate, the deficit in 2025-26 may exceed $300 billion.
Despite the significant merchandise trade deficit, India benefits from a strong invisibles surplus, which helps mitigate the impact on the current account. Key factors contributing to this surplus include:
India's invisibles surplus has shown remarkable growth, reaching:
While India's CAD has decreased from $25.3 billion in the first half of 2024-25 to $15.1 billion in the same period of 2025-26, the rupee has experienced a sharp depreciation against major currencies. This decline is attributed to diminishing capital inflows rather than an excessive import bill. Inflows peaked at $107.9 billion in 2007-08 but fell dramatically to only $8.6 billion in 2025-26.
The reduction in foreign investment has been significant:
Despite India's robust growth rate of 8.2% annually from 2021-22 to 2024-25, foreign investors have hesitated, exacerbating the capital account deficit.
The weakening of the rupee is primarily influenced by declining foreign capital inflows, highlighting the current vulnerability of India’s economy. Addressing this issue is crucial for stabilizing the currency and enhancing economic resilience.
Q1. What is the current account deficit (CAD)?
Answer: The current account deficit (CAD) measures the difference between a country's total exports of goods, services, and transfers and its total imports. A CAD indicates that a country is spending more on foreign trade than it is earning.
Q2. How does the invisibles surplus impact India's economy?
Answer: The invisibles surplus helps to offset the merchandise trade deficit, providing essential foreign exchange and stabilizing the current account. It includes revenue from services, remittances, and investments.
Q3. Why is the rupee depreciating despite economic growth?
Answer: The rupee's depreciation is primarily due to reduced foreign capital inflows, which impact the currency's availability and weaken its value, despite India's robust economic growth.
Q4. What factors contribute to India's merchandise trade deficit?
Answer: Key factors include high import levels of goods, rising demand for foreign products, and lower export levels, leading to a persistent trade deficit.
Q5. How can India improve its current account balance?
Answer: India can enhance its current account balance by boosting exports, attracting foreign investments, and strengthening its service sector to increase invisibles income.
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