India's Economic Challenges: Navigating Trade Deficits and Capital Flows

India's Current Account Deficit is projected to be 1.1% of GDP in FY25, according to ICICI Bank. Despite efforts to manage the trade deficit amidst global weaknesses, significant foreign investment outflows and fluctuating exports and imports highlight potential economic instability. However, strong service exports and remittances offer some relief.

According to a recent report by ICICI Bank, India's Current Account Deficit (CAD) is anticipated to stay at 1.1% of its Gross Domestic Product (GDP) for the fiscal year 2024-25 (FY25). This period has seen considerable shifts in the nation's external financial posture, exacerbated by a broadening trade deficit and substantial FPI outflows.

The trade deficit reached a historic peak of USD 37.8 billion in November 2024, mainly driven by gold imports accounting for USD 14.9 billion. Meanwhile, non-oil and non-gold imports surged by 3.5% year-on-year between October and November 2024. On the export front, reductions in oil exports were counterbalanced by robust growth in electronics and engineering goods exports, which rose by 50% and 27% year-on-year, respectively.

Despite government endeavours to temper gold imports, the report underscores a sustained trade deficit, compounded by a global economic slowdown and an anticipated increase in interest rates signalled by the U.S. Federal Reserve. Additionally, while Foreign Direct Investment (FDI) has remained strong, massive outflows—mainly from departures in India's vibrant primary equity market—have pressured the Balance of Payments (BoP), which may turn negative if FPI outflows surpass expectations.

Nevertheless, substantial growth in India's service exports and remittances offers a counterbalance to these challenges, keeping the Current Account Deficit manageable against the backdrop of evolving trade and capital dynamics.

(With inputs from agencies.)