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Not sustainable: India's trade and current account deficits

India’s trade balance and current account have shown persistent deficits for a major part of its post-independence period. Since the mid-2000s, trade deficits have increased perilously, with a sharp rise in both oil and non-oil imports. This has increased the magnitude of the current account deficit, as net earnings from services and remittances have been insufficient to offset the trade deficits. India has relied on remittances, services exports and capital inflows to finance these deficits. This paper argues that all three sources entail elements of fragility. The recent global economic slowdown, economic recession in Europe, slow economic recovery and low growth forecasts for the US and Europe, and the potential Dutch disease effects of remittances raise questions on whether services exports and remittances can continue to generate sufficient earnings to sustain these deficits, especially if they continue to increase. Relying on remittances and capital inflows for financing ever-rising trade deficits also carry risks of financial fragility, especially with short-term capital inflows becoming more prominent in the Indian economy. Policy efforts aimed at improving the competitiveness of merchandise exports to reduce the magnitude and persistence of these deficits seem to be the need of the hour.

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