At the invitation of President Emmanuel Macron, Prime Minister Narendra Modi is due to attend France’s G7 summit next month. Imbalances in current account deficits and surpluses are at the centre of the summit’s economic agenda. These imbalances primarily involve three global players: The United States, the European Union and China — the G3. Recent research (to which we have contributed1) suggests that while balanced growth and non-discriminatory trade are fundamental to a well-functioning global economy, these principles are currently jeopardised by the policy choices and geopolitical compulsions of the G32.
India’s engagement at the summit should build on its impressive recent record of concluding free-trade agreements, most importantly with the EU. Yet, India’s most pressing requirement remains investment finance, ideally linked with the transfer of technology and integration into global value chains. The counterpart of current account deficits is net cross-border financial flows.
The dynamism of the US economy, coupled with the depth and creativity of its financial markets and confidence in its legal system, has made it the preferred destination for gross and net flows from both China and Europe. A more durable resolution, therefore, requires not only policy adjustments in surplus and deficit economies, but also credible destinations where capital can be deployed productively at scale.
India’s development trajectory positions it directly within this global adjustment process. Unlike surplus economies that export capital, India has historically run moderate current account deficits, reflecting its status as a capital importer. These deficits have generally remained contained, averaging around 1 to 2 per cent of gross domestic product (GDP) in recent years, and have been financed without major external stress.
This reflects a structural feature of the Indian growth model: Domestic investment has rightly exceeded domestic savings, generating what we might call “good” current account deficits paired with “healthy” net external capital inflows, part of which is appropriately diverted to building up our foreign exchange reserves.
There are moments (like the present) when current account deficits are widening in response to shocks, but our system has a well-developed playbook for dealing with these. It is important to be able to differentiate between “good” and “bad” current account deficits. The former is characterised by a rise in capital formation in productivity enhancing investment, ideally meeting market tests imposed by private sector investors.
During the previous investment cycle, gross capital formation rose to nearly 40 per cent of GDP in 2008, a level associated with rapid growth and structural transformation. Sustaining a growth rate of 7 to 8 per cent, consistent with reaching a developed economy status by 2047, will require a sustained investment push towards these earlier levels. This is the macro strategy, but at the sector level, two transitions — energy and urbanisation — are both investment hungry. Domestic savings alone are unlikely to suffice, implying a continued role for foreign capital.
The question then is not whether global savings should be redirected, but how much and under what conditions they can be absorbed productively by India. Given India’s scale and sustained investment needs, even a modest reallocation of global capital flows could have meaningful domestic and global effects.
Two points follow: First, the best guarantee of using capital productively is competition, for which trade and investment openness are key. Second, we need to be vigilant about the investment freedom granted to our mini and maharatnas in their investment choices. In principle, they should be subject to the same rigour as is applied to public investment via the Expenditure Finance Committee in the Ministry of Finance. High quality finance to support high quality investment needs to be India’s mantra.
By remaining a moderate capital importer, India can act as a natural absorber of global savings, aligning its domestic investment needs with the surplus savings of ageing economies. In doing so, it contributes to the reduction of global imbalances while preserving macroeconomic stability.
The G7’s discussion of global imbalances is an ideal opportunity for the Prime Minister to link India’s future reform agenda with its past successes and to indicate that India welcomes deeper global engagement for its own needs and those of the global order. Unlike export-led models of East Asia, India’s growth has been driven more by domestic demand and services. This has reduced exposure to external tensions and created space for more balanced integration into global value chains.
The broader point is that India’s development strategy aligns with a wider global need. The task now is to ensure that global savings are directed towards productive uses, and India is well placed to play a central role in that reallocation.
The authors are, respectively, outgoing Vice Chairman, NITI Aayog, Indian Economic Service Officer and Consultant at NITI Aayog.
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