India’s current account, the difference between what the country earns from other nations and what it pays out, has seen significant shifts in 2024. A combination of global economic conditions and domestic policy changes are impacting exports, imports, remittances, and more – influencing India’s relationship with the rest of the world.
The interplay between policy reforms, global factors, and current account interest rates defines India’s ability to finance its international trade and payment obligations.
Booming Services Exports
India has become a global dominant force in services exports like IT and outsourcing business processes. These exports reached record levels in 2024. Several key factors enabled this boom:
- Continued demand for technology services and outsourcing as companies abroad sought to cut costs. Investments in digital transformation post-pandemic also drove tech spending.
- The weakening of major currencies like the Euro and Pound against the US dollar made Indian services more competitive. Most billing is done in dollars, while costs are in Rupees.
- Investments by major Indian firms like TCS, Infosys, and Wipro over the past decade in next-gen capabilities around AI/ML, analytics, and cloud-based offerings also supported export growth.
Manufacturing Exports Momentum
Merchandise exports, especially from labour-intensive manufacturing sectors like textiles, leather, and plastics, also increased in 2024, building on strong post-pandemic recovery. What led to the manufacturing export boom?
- Large industrial infrastructure and logistics investments over 2022-2023 improved competitiveness. Port & inland transport modernization reduced export costs.
- FTAs with the UAE, Australia, and the EU provided zero-duty access, boosting exports in the apparel, footwear, and machinery sectors. Talks are underway for FTAs with the UK, Canada and others.
While risks around global economic slowdown persist, manufacturing exports are key to moderating trade deficits.
Moderating Import Growth
With economic growth moderating post-pandemic, imports slowed after the stimulus-driven rise of 2022. What enabled this import moderation?
- The government ensured adequate coal supplies, reducing import reliance as domestic output rose after years. Renewables expansion is also now cutting oil import dependence. Overall, commodity imports fell.
- Some reshoring of global supply chains in electronics/telecom back to India lowered reliance on imported inputs, boosting local output & jobs. Exports also rose.
The shift towards more domestic value addition supported by policy action drove import moderation – providing relief to the current account.
Current Account Deficit Widens but Manages to Remain Stable
Despite strong services exports, moderating imports, and rebounding remittances, India’s current account deficit, or CAD, widened beyond projections due to surging oil prices and gold imports.
So, while India’s current account balance deteriorated compared to 2021-22, supportive factors like services export momentum, policy efforts at import moderation, and adequate financing limited the damage. The trends showcase India’s structural shift underway through economic self-reliance efforts.
Future Outlook
India’s current account will continue facing challenges in 2025, with exports potentially slowing given recession fears and imports staying elevated due to the ongoing dependence on oil and gold.
Import curbs can harshly impact export competitiveness so that they may ease. But reshoring global supply chains in India will progress, boosting domestic output, jobs, and exports. Local electronics and telecom production is set to rise sharply, cutting import reliance.
