India's Current Account Deficit Narrows to 1.2% of GDP, But Challenges Remain

New Delhi: Data released for the July-September quarter shows that India's current account deficit (CAD) has narrowed to 1.2 per cent of Gross Domestic Product (GDP), down from 1.3 per cent in the previous year. This modest improvement is a positive development, but experts warn that underlying challenges persist.
The widening merchandise trade deficit and weaker global demand have been major concerns for India's economy. However, the strength of its services exports has helped cushion against these pressures. Net services receipts rose to $44.5 billion, contributing significantly to the country's foreign exchange reserves.
According to experts, the growth in IT services, business services, and transportation underscores India's competitiveness in these sectors. The services sector remains a critical pillar supporting India's economic structure and foreign exchange reserves.
However, the growing goods trade deficit is a cause for concern. Merchandise imports, particularly gold, surged to $75.3 billion in the quarter, exacerbating the trade imbalance. The demand for gold, driven by both cultural and global price fluctuations, continues to put pressure on India's external sector.
The widening trade deficit also puts pressure on the rupee, contributing to inflationary pressures and increasing import costs. Private remittances from Indian diaspora remain a bright spot, reaching $31.9 billion in the July-September quarter. This steady inflow of funds helps offset some of the CAD and supports domestic consumption and poverty alleviation efforts.
Despite this resilience, experts warn that the outlook for India's CAD remains cautious. The widening trade deficit and slowdown in global demand could push the CAD to 2.5 per cent-2.7 per cent of GDP in the current quarter.
In response to these challenges, experts call for a focus on reducing reliance on gold imports and strengthening the manufacturing sector. A more diversified economy with a greater emphasis on domestic production and exports is essential to mitigate pressures on the CAD. India's long-term economic health depends on fostering innovation, diversifying the industrial base, and reducing dependence on imports.
As India navigates these external challenges, a resilient and self-sufficient economy will be crucial for ensuring sustainable growth and maintaining economic stability. By balancing trade through increased manufacturing exports, India can continue its path toward steady growth and cement its position as a major economy.