By Dhananjay Sinha
India鈥檚 balance of payments (BoP) recorded a $13.5 billion current account surplus in the fourth quarter of fiscal year 2025 (Q4FY25), equivalent to 1.3 per cent of GDP. This surplus, driven by robust services exports and remittances, paints a picture of external sector strength.
However, it conceals significant vulnerabilities in merchandise trade, capital inflows, and domestic demand. In fiscal year 2025 (FY25), the current account deficit (CAD) moderated to -0.6 per cent of GDP, an unusual outcome for a growing economy with strong GDP figures.
This piece delves into the structural weaknesses beneath this surplus, highlighting India鈥檚 over-reliance on services and remittances, declining foreign direct investment (FDI), and inconsistent policy responses that threaten long-term stability.
Rising dependence
The current account surplus is primarily fuelled by services exports and remittances. In FY25, net services exports surged by 25 per cent, reaching $188.8 billion, with $53.3 billion in Q4 alone. Business services grew by an impressive 112 per cent in Q4, while software services maintained steady growth at 12 per cent.
Net transfers, predominantly remittances, rose by 16.6 per cent in FY25, with a 9.7 per cent year-on-year increase in Q4, providing stable inflows less tied to domestic GDP fluctuations. Services now account for 47 per cent of India鈥檚 total exports of goods and services, underscoring a growing dependence on the global economic environment.
In contrast, merchandise exports have stagnated, despite initiatives like Make in India, production-linked incentives (PLIs), vigorously pursued various free trade agreements (FTAs), and corporate tax cuts aimed at boosting manufacturing. Goods exports contribute only 53 per cent to total exports, a 35-year low, down from 67 per cent in FY13 and 81 per cent in FY96. This decline mirrors the fall in manufacturing鈥檚 share of India鈥檚 gross value added (GVA) to 13.9 per cent, a 66-year low, compared to a peak of 20 per cent in FY96.
World Bank data reveals that 103 out of 200 countries saw an increase in manufacturing鈥檚 GVA share over the past decade, while India and China experienced declines, possibly linked to China鈥檚 deindustrialisation and dumping of goods in Indian markets. Intensifying global trade protectionism further threatens India鈥檚 manufacturing competitiveness.
India鈥檚 merchandise trade deficit widened to $287 billion in FY25 (7.3 per cent of GDP), though it narrowed to $58.7 billion in Q4 from $78.7 billion in Q3. Merchandise exports contracted by 4.3 per cent in Q4, while imports grew by 1.2 per cent, leading to a 1.1 per cent contraction in overall trade.
Since the post-Covid peak in FY23, exports and imports have remained flat, with compound annual growth rates (CAGR) of -0.13 per cent and -0.19 per cent, respectively.
The merchandise trade-to-GDP ratio has plummeted to 28 per cent from 37 per cent in Q2FY23, and including services, the total trade-to-GDP ratio fell to 43.2 per cent in Q4 from 52.6 per cent in Q2FY23, reverting to pre-Covid levels. This decline in trade openness signals fading post-pandemic gains and raises concerns about India鈥檚 integration into global markets. A potential global GDP slowdown could further erode services exports, risking a wider CAD in the future.
Remittances, a key pillar of India鈥檚 external balance, grew by 17 per cent in FY25.
While stable and less sensitive to domestic growth, their dependence on global economic conditions exposes India to external shocks. Any disruption in global labour markets or economic slowdowns in key remittance-sending countries could destabilise these inflows, undermining the current account surplus.
Rising repatriation
Net capital account inflows plummeted by 81 per cent in FY25 to $16.7 billion, driven by a 90 per cent contraction in both FDI ($0.95 billion) and foreign portfolio investment (FPI) inflows ($3.56 billion).
Net FDI inflows reached their lowest level since FY01, averaging $20 billion, a 97 per cent drop from the FY21 peak of $44 billion.
The FDI inflow-to-GDP ratio fell to a historic low of 0.04 per cent in FY25, compared to 3.5 per cent in FY09.
Gross FDI into India rose by 13.7 per cent to $81 billion, but repatriation surged by 16 per cent to $51.5 billion, with the repatriation-to-gross FDI ratio climbing to 63.5 per cent from 22 per cent in FY15.
Including repatriation of income, total repatriation reached $104 billion, exceeding gross FDI inflows. This trend reflects diminishing long-term investment opportunities for foreign firms, compounded by weak domestic demand and global trade protectionism, which have also suppressed private capital expenditure by Indian companies for over a decade.
External commercial borrowing (ECB) surged fivefold year-on-year to $7.8 billion in Q4FY25, the highest since Covid peaks. Non-banking financial companies (NBFCs) accounted for 43 per cent of ECBs in FY25, despite the Reserve Bank of India鈥檚 efforts to boost domestic liquidity and a weakening INR/USD. This reliance on ECBs highlights tight domestic financial conditions and underscores the economy鈥檚 dependence on external financing to bridge gaps in domestic credit.
Policy inconsistencies
India鈥檚 policy response has been inconsistent, combining aggressive fiscal consolidation that suppresses demand with excessive monetary easing to encourage leveraged consumption. These measures fail to address structural weaknesses. Stagnant income growth, sluggish bank lending, and subdued private investment reflect a fragile domestic economy. With global protectionism intensifying and economic slowdowns looming, India鈥檚 reliance on simplistic monetary interventions is inadequate. A more robust policy framework is needed to enhance manufacturing competitiveness, boost domestic demand, and attract sustainable foreign investment.
India鈥檚 $13.5 billion current account surplus in Q4FY25 masks underlying vulnerabilities in merchandise trade, capital inflows, and domestic demand. Over-reliance on services exports and remittances exposes the economy to global slowdowns, while declining FDI and rising repatriation signal waning investment appeal. Stagnant trade, weak consumption, and inconsistent policies further highlight fragility. To ensure long-term stability, India must address structural challenges, reduce dependence on external factors, and adopt a cohesive policy framework that goes beyond monetary easing.
The writer is CEO & Co-Head of Equities & Head of Research, Systematix Group. Views are personal
Published on July 3, 2025