India must fix weak trade and investment fundamentals

Source: The post India must fix weak trade and investment fundamentals has been created, based on the article “Fragility in current account surplus” published in “Businessline” on 3rd July 2025

UPSC Syllabus Topic: GS Paper3-Economy-mobilisation of resources, growth, and development.

Context: India recorded a $13.5 billion current account surplus in Q4FY25, equal to 1.3% of GDP. While this appears positive, it conceals deeper structural vulnerabilities in trade performance, investment flows, and domestic economic health, raising concerns about sustainability.

Services-led Growth and its Structural Weakness

1. Overdependence on Services and Remittances: The surplus is largely driven by a 25% surge in net services exports, touching $188.8 billion in FY25, and a 16.6% rise in remittances. In Q4 alone, business services rose 112% and remittances grew 9.7%. This indicates that India’s external strength rests on sectors highly sensitive to global trends.
2. Skewed Export Structure: Services now make up 47% of total exports, while goods exports have declined to 53%—a 35-year low. This shift reflects India’s rising reliance on global service demand rather than a balanced export portfolio.
3. Stagnation in Manufacturing: Despite policy efforts—Make in India, PLIs, FTAs, and tax cuts—manufacturing’s share in GVA fell to 13.9%, a 66-year low, down from 20% in FY96. India’s failure to boost manufacturing hampers job creation and limits resilient export capacity.
4. High Merchandise Trade Deficit: The merchandise trade deficit widened to $287 billion in FY25, or 7.3% of GDP. In Q4, it narrowed slightly to $58.7 billion, yet exports contracted 4.3% while imports grew 1.2%, exposing structural inefficiencies in trade competitiveness.

Signs of Declining Trade Integration

1. Post-Covid Gains Reversing: Since FY23, both exports and imports have been nearly flat, with CAGR at -0.13% and -0.19%, respectively. The merchandise trade-to-GDP ratio dropped from 37% in Q2FY23 to 28%, while overall trade-to-GDP fell from 52.6% to 43.2%, marking a retreat from global market integration.
2. Remittance Vulnerability: Although remittances rose 17% in FY25, they remain vulnerable to global labour market disruptions. Overreliance on them adds risk, as external shocks in key remittance-sending nations can quickly destabilize India’s current account.
3. CAD Risk Amid Global Uncertainty: With merchandise exports weakening and services susceptible to global slowdowns, India risks slipping back into a current account deficit if international conditions worsen.

Deteriorating Capital Inflows

1. Sharp Decline in FDI and FPI: Net capital inflows fell 81% in FY25 to $16.7 billion. Net FDI dropped 90% to $0.95 billion, its lowest since FY01, while FPI declined to $3.56 billion. This shows diminishing investor confidence in India’s long-term growth story.
2. Rising Repatriation: Gross FDI rose to $81 billion, but repatriation climbed 16% to $51.5 billion. The repatriation-to-gross FDI ratio surged to 63.5%—up from 22% in FY15—signalling growing exit by foreign investors. Total repatriation, including income, reached $104 billion, surpassing inflows.
3. Dependence on External Commercial Borrowing: ECBs rose fivefold to $7.8 billion in Q4FY25, with NBFCs accounting for 43% in FY25. This reflects tight domestic liquidity and increasing reliance on external debt to meet funding needs.

Policy Imbalance and Domestic Weakness

1. Conflicting Economic Policies: India’s policy mix—fiscal tightening alongside monetary easing—aims to contain deficits while boosting consumption. But it ignores structural gaps like low private investment and stagnant income growth, weakening domestic demand.
2. Chronic Economic Fragility: Slow credit growth and low capital expenditure reflect a fragile domestic base. Despite stimulus, private sector response remains muted, affecting job creation and GDP momentum.
3. Urgent Need for Structural Reforms: Monetary levers alone cannot fix deep-rooted issues. India must rebalance growth toward manufacturing, enhance competitiveness, and build investor trust through coordinated policy action.

Conclusion

India’s Q4FY25 surplus masks deep concerns—a weakening manufacturing base, volatile capital flows, excessive dependence on services and remittances, and an incoherent policy environment. Sustainable growth demands bold structural reforms to strengthen domestic fundamentals and reduce external vulnerabilities.

Question for practice:

Examine the structural weaknesses in India’s external sector that are hidden behind the current account surplus in Q4FY25.