India’s external sector and its growth goals

The challenge is not merely to attract capital, but to sustain and anchor FDI in productive, export-oriented ecosystems

- V Anantha Nageswaran Gargi Rao Pavit

In a global economy marked by heightened volatility and fragmentation, it is tempting to judge a country’s external strength through the narrow lens of daily currency movements or fluctuations in capital flows.

Periods of stable capital inflows and manageable current account deficits (CAD) are often seen as validation of macroeconomic strength, while episodes of currency weakness or volatile portfolio flows quickly revive anxieties. This narrow view, however, obscures deeper structural realities. Chapter 4 of the Economic Survey 2025-26 encourages a longer-term perspective, asserting that external stability is not determined by episodic inflows or short-run currency management, but by the structure of the economy — how growth is financed, how foreign exchange is earned, and how capital is deployed.

India’s persistent merchandise trade and CAD create a chain of vulnerabilities in growing economies. High trade deficits are often a byproduct of growth itself, reflecting strong import demand for capital goods, energy, and intermediate inputs needed to expand productive capacity. Even strong export growth pulls in imports through global value chains (GVCs). Import growth, therefore, is an inevitable and often desirable feature of development.

The country's CAD has been on a downward trajectory, but has persisted. There remains an overall trade deficit as services’ trade surplus and remittances do not offset the deficit in merchandise trade. A moderate CAD is neither unusual nor undesirable for a capital-scarce economy, but it creates continued reliance on foreign savings. When domestic savings fall short of investment needs, economies must borrow from abroad. Global investors, in turn, demand a risk premium to compensate for external vulnerability. This shows up as a higher economy-wide cost of capital.