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The Economic Survey raised concerns about the sustainable level of current account deficit (CAD) for India.
“India runs a CAD, and its investment needs are much larger considering the size of its economy. Supplementing domestic savings with reasonably large foreign savings expands the scope for capital formation,” said the survey tabled by finance minister Nirmala Sitharaman in parliament on Friday.
“If, for various reasons, capital flows are going to be problematic, it raises questions as to the level of sustainable CAD for India,” the survey said. “It may not be 2.5 per cent to 3 per cent as before, but it is much lower.”
India’s CAD stood at $11.2 billion or 1.2% of the GDP in the third quarter ended December compared with a deficit of $11.3 billion or 1.3% of the GDP a year earlier.
The survey, however, also raised questions around the possibility of CAD widening because of restrictive trade policies of the European Union and foreign outflows.
“Challenges that India will face in the near future, such as the threat of restrictive trade policies that the European Union has initiated in the name of avoiding carbon leakage and saving the forests of the world,” said the survey. “These have the potential to restrict India’s exports and widen the current account deficit at a time when the net foreign direct investment into India is declining because of successful exits by foreign investors.”
The European Union’s Carbon Border Adjustment Mechanism (CBAM), which is set to be implemented by 2026, mandates EU importers to pay for carbon emissions embedded in imported goods to prevent carbon leakage. The mechanism is expected to impose an additional 25% tax on carbon-intensive goods exported from India to the EU. This imposition of carbon price on imports is expected to hit India’s trade and employment in carbon-intensive sectors.
On the other hand, capital flows have been volatile over the last few months. While gross foreign direct investment (FDI) into India has increased in the first eight months of FY25, net FDI flows have been hit due to rise in repatriations as international companies realized returns from investments in initial public offerings (IPO) and secondary sales. Foreign portfolio investment (FPI) outflows have also been volatile on account of uncertainty in the global markets and profit-taking by investors.
Economists, however, do not expect CAD to go beyond 1.5% of the GDP as they expect capital outflows to reverse once there is more clarity on the potential tariffs imposed by the US and other countries.
“As of now, we are looking at baseline CAD of 1.1% of GDP in FY26. The worst-case scenario is 1.5% of GDP. That is half the level that was previously considered financiable,” said Aditi Nayar, chief economist at Icra Ltd. “Until we know relative tariff on different countries, its is difficult to gauge what impact it will have on India exports.”
The survey, however, said “there is room to improve tax certainty and tax stability in matters such as APA (Advance Pricing Agreement)”. While India has simplified many of its laws, rules and regulations over the years, it said all statutory and regulatory authorities must bear in mind that “international investors benchmark countries cross-sectionally and not longitudinally”. “That will determine the success of the government’s goal to make global companies produce in India for the world, making India a part of the global supply chain.”
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