Watch out for trouble on the external front
Here is a number that Indian planners, economic administrators and central bankers would do well to remember: $124 billion. It should perhaps be imprinted on all policy documents henceforth.
As the global economy enters a new era of volatility and unpredictability that includes a comprehensive reset of commercial relations and networks, an unprecedented bout of flux has begun to convulse all individual economies.
Multiple wars—both conventional and unconventional—have added another layer of complexity that shows no sign of an early resolution. India, as a key member of the global polity, has also been struck by this tsunami. It threatens to worsen our existing problems of endemic unemployment, slow household income growth and stagnation across significant parts of the economy.
The latest US salvo on H-1B visas, on top of the irrational tariffs imposed earlier, is likely to squeeze the flow of Indian talent to the US, though the severity of its impact is yet to be ascertained. But it is here that the sum of $124 billion assumes primacy.
As our net inward personal transfers during 2024-25, including worker remittances, this amount played a big role in keeping our current account deficit down to a comfortable 0.6% of GDP last fiscal year.
India tops the global league tables of remittance earnings. As our domestic economy grows, so will its interface with foreign economies. This has a direct impact on our external account; closer engagement with the global economy amplifies the risk of an off-kilter balance of payments (BoP)—comprising both current and capital accounts—as trade, investment and other flows can vary widely.
There is a degree of inevitability around India’s BoP vulnerability. For example, we have little flexibility on certain imports—oil, capital goods, active pharma ingredients and bullion; this tends to widen our trade deficit whenever export growth slumps.
In parallel, though, our diaspora has powered a boom in remittance inflows: from $107 billion in 2023-24 to $124 billion in 2024-25. These come from various countries, but the US is our largest source and its new visa barrier will get in the way of that growth.
India’s external account, thus, is exposed to more risk even if all other variables that impact the BoP stay the same—which is unlikely. Apart from imports, we have some other inelastic items that make BoP management tricky. Indian companies on a growth path will want loans from overseas to keep their interest bills low, for instance, or use supplier credit lines for capital expenditure to expand their capacity.
Foreign portfolio investors, meanwhile, have been losing their appetite for Indian assets. Even foreign direct investment has been drying up, with our net inflows last year dipping below the $1-billion mark.
All this presents the central bank with a sort of a fait accompli: the need to tighten capital controls. If action is taken, it must not inhibit routine fund transfers, like dividends sent to overseas shareholders or foreign investors repatriating the sale proceeds of local assets. Its ambit should be confined to Indian citizens and companies that send money abroad under liberalized outward remittance schemes.
India Inc, which has shown a rising propensity to invest overseas despite being lavished with multiple fiscal incentives, low taxes and interest rates, may rediscover opportunities back home. But it should be made amply clear that these curbs are only temporary.
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