India’s widening current account deficit amid global uncertainty: At what point do alarm bells ring?

One number buried in the latest World Economic Outlook database is worth pulling out: India’s current account deficit.

This external gap is not only the widest available measure of trade imbalances with other countries, but is also an indicator of how much a country needs to borrow from the rest of the world to keep its balance of payments on an even keel.

Now to the data. The IMF expects India to run a current account deficit of $84.46 billion this year, the second highest in the past two decades (see chart).

It is very close to the $87.84 billion gap in 2012, which was a very tough year for the Indian economy. Any current account deficit needs to be funded by financial inflows from other countries through sources of capital such as net foreign direct investment (FDI), foreign investments in the Indian stock market and commercial loans.

The main reason for the sharp increase in the expected current account deficit is not hard to guess. IMF economists have assumed that international oil prices will be at $82.22 a barrel in 2026, as against $67.74 in 2025. Meanwhile, the Reserve Bank of India has also made a similar change in the assumptions underlying its analysis in its newMonetary Policy Report that was released in early April. The Indian central bank now assumes that the price of a barrel of crude oil will be at $85, up from the $70 it had cemented into its forecasts in October 2025.

Funding an external gap of close to $85 billion will be a challenge. Remember that India was unable to adequately fund relatively modest current account deficits of $22.95 billion in fiscal years 2023-24 and $36.16 billion in 2024-25. This year is likely to be no different.

In other words, India seems headed for a third consecutive year of a balance-of-payments deficit with the rest of the world. These stark facts need to be seen against the backdrop of the recent slide of the rupee against major international currencies such as the US dollar.

When analysing the sustainability of a current account deficit, economists usually stick to the ratio of the current account deficit to the size of the economy. This is the correct metric to assess the structural stability of an economy—in normal times.

A committee headed by C. Rangarajan had estimated way back in 1993 that India needed to keep its current account deficit below 1.6% of gross domestic product (GDP), but these red lines were drawn when we were just recovering from the severe macroeconomic crisis of 1991 and capital flows coming into the country were still a trickle.

Much has changed since then.

Subsequent research comes to the broad conclusion that a current account deficit of anywhere between 2% and 2.5% of GDP is sustainable. India is likely to run a current account deficit of 2% of GDP in the current fiscal year.

The easiest way to understand the idea of a sustainable current account deficit is that it does not force the country into any disruptive adjustment such as a sharp currency depreciation or a sharp increase in interest rates.

However, there are more technical tools as well.

A deficit is sustainable if it reflects optimal inter-temporal borrowing. This refers to a situation in which a country that borrows from abroad today can repay its obligations in the future because of rapid economic growth. In fact, current account deficits allow dynamic economies to invest more than what can be supported by domestic savings.

We can also ask whether the current account deficit is stabilizing the ratio of net foreign liabilities to GDP at a reasonable level. The mathematics of this is similar to fiscal sustainability analysis.

For India, the fact that the recent balance-of-payments challenge comes from a sudden rise in international energy prices rather than domestic economic instability means that the lights are flashing amber rather than red. It is cause for concern rather than panic. Yet, India may still need to pull in around $85 billion of international capital at a time of risk aversion among investors who have multiple options to park their money.

The English economist A.P. Thirwall provided an intuitive way to think about the impact of a balance-of-payments imbalance on the growth of the domestic economy. If a country grows faster than its exports can support, it will suck in imports, run a current account deficit, accumulate foreign debt and eventually be forced to slow down to restore external balance.

The sustainable growth rate is thus the one that keeps the current account roughly in equilibrium, which Thirlwall showed is approximated by a simple formula: the growth rate of export volumes divided by the income elasticity of demand for imports.

Countries with high income elasticities of import demand—meaning their demand for foreign goods rises sharply as incomes grow—are structurally constrained to grow slowly, unless they can continuously boost export performance.

It is a lesson worth remembering in a time of heightened uncertainty.

The author is executive director at Artha India Research Advisors.