The outlook for India's external sector is one of cautious optimism, albeit with some downside risks accentuated at this juncture, noted
Shaktikanta Das, Governor, Reserve Bank of India in a speech yesterday. He noted that deepening of the global slowdown and escalation of trade and geopolitical tensions appear to be the most significant factors for external stability. Volatile international crude prices also continue to pose potential risks to the viability of the current account balance through trade and remittances channels.
However, there are underlying strengths that can be built upon to buffer the external sector from these risks. The search for new export markets and new niches must go on so as to reap the benefits of changing dynamics of global value chains. Indian IT companies need to accelerate market diversification and invest in new skills and technologies to hone their comparative advantage. Remittances and non-resident deposits are likely to remain shock-absorbers over the medium term and need to be assiduously cultivated, including by ease of remitting/depositing and reducing transaction costs.
Ultimately, the strength of the external sector derives from domestic macro-fundamentals. Investors and markets need to be credibly assured of our ability to maintain macroeconomic and financial stability through continued focus on these areas. At the same time, we need to persevere with structural reforms in various sectors of the economy to unlock productivity and competitiveness gains. The overarching objective should be to keep the current account deficit within sustainable limits and financed by a prudent mix of debt and equity flows. As I stated earlier, the global environment is challenging, but it offers opportunities as well. By the IMF's assessment, India will account for a sixth of global growth in 2020.
Trade wars are presenting new business relocation avenues that seem to be favourable to India from the point of view of the economies of scale and scope. Indian entrepreneurship, the rupee and our people are progressively but inexorably internationalising. Since 2018, India's working age population has grown larger than the dependent population, and this demographic advantage is expected to last till 2055. In this milieu, prudent external sector management with a close and continuous vigil on areas of external vulnerability assumes critical importance and will continue to receive RBI's close attention.
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