India's balance of payments current deficit is forecast to increase to a $120 billion deficit this year. The country’s current account deficit is now 3% of GDP which puts it close to the US which has the world’s largest deficit to GDP ratio at 3.6%.

One of the main causes of India’s current account deficit is the country’s negative balance of trade in visible goods.

A big increase in the import of oil and gas has driven an increase in India’s import expenditure which is a major component of the country’s trade balance.

India’s visible trade deficit has not been compensated for by a surplus on its invisible trade balance. In recent years the country’s export of computer software has really helped support its current account and helped to reduce its deficit.

Remittances are also an important inflow of funds into India’s economy on its current account. In 2022 $100 billion of remittances entered the Indian economy on its current account which is up from $89 billion in 2021. India’s high level of remittances can be attributed to Indian migrants earning relatively high salaries in the US, UK and East Asia and sending them back to the country.

India’s current account deficit has pushed the value of the rupee downwards rupee with the current reaching a historic low of R83.29 against the dollar in late October 2022. The Indian government hopes the lower value of the rupee might help to correct some of the deficit as the country’s exports become more competitive, but a depreciating rupee will increase the price of imported oil and gas which could make the country's deficit worse.

The increase in India’s current account deficit has raised fears about the country’s ability to fund the deficit if not enough investment flows are drawn in on India’s financial account. One problem for India of trying to attract portfolio investment flows is the need to offer foreign investors higher interest rates whihc puts upward pressure on interest rates in the country. However, the Indian government feels it is in a good position to cover the overall deficit on its balance of payment with healthy foreign exchange reserves of $531 billion. 

Possible questions for a class

1. What makes up India's balance of payment current account?

2. Why has the size of India's current account deficit increased?

3. What are the consequences for the Indian economy of an increase in its current account deficit?

4. What could the Indian government do to reduce its current account deficit?