The need for such measures stems from the rupee’s sharp decline over the past year due to a large CAD, persistent foreign-portfolio outflows from the stock market, poor net foreign direct investment (FDI) inflows, negative net exports, and capital outflows through both the LRS and outward FDI. The result is alarming: For the first time, India is running deficits on both its current and capital accounts. That is perhaps the least commented marker of the seriousness of the problem. So concerning has the situation become that Prime Minister Narendra Modi recently appealed to citizens to curb non-essential imports, such as gold purchases and overseas travel, in order to conserve foreign exchange.
India has long run a CAD because it imports more than it exports. But this was usually an irritant rather than a crisis because the gap could be financed through capital inflows, generating a surplus on the capital account. Today, thanks to a series of policy missteps, half-finished reforms, and poor execution, India faces deficits on both fronts. The combined pressure on the rupee and foreign-exchange reserves is the principal reason the currency has fallen from ₹84 to ₹94 against the dollar in just one year — a depreciation of nearly 12 per cent.
This crisis is neither sudden nor unforeseeable. The task of a serious state is to identify structural vulnerabilities and address them long before they become emergencies. India has always known that spikes in oil and gold prices expose the economy’s weaknesses. Reducing import dependence should, therefore, have been a strategic priority. Equally, India has long needed to strengthen export competitiveness and narrow its CAD, if not eliminate it altogether. Yet progress on both fronts has been limited. In the meantime, while the current account was being repaired over the long term, policymakers should have welcomed foreign capital to ensure a surplus on the capital account and support currency stability. Instead, they often took steps that discouraged it.
There is, moreover, a positive reason to attract foreign capital beyond stabilising the rupee. India simply does not generate enough domestic savings to sustain the growth rate that policymakers aspire to, let alone achieve the ambition of joining the ranks of developed economies. Economic growth comes from four sources: Private consumption, government expenditure, net exports, and fixed investment. Private consumption already accounts for around 61 per cent of gross domestic product (GDP), leaving limited scope for further expansion. Net exports remain negative. So, growth ambitions depend overwhelmingly on sustained increases in productive fixed investment. Given the current composition of GDP, investment must contribute roughly 3.73 percentage points to annual growth. To achieve 8 per cent growth, investment itself would need to expand by about 8.9 per cent a year. Historically, whenever India has experienced periods of rapid growth, investment has been the decisive factor.
Investment, however, requires capital. India’s domestic savings rate is insufficient to fund the level of investment required. If savings remain at roughly 32.5 per cent of GDP, the country would need foreign capital equivalent to around 2.1 per cent of GDP annually to bridge the gap — approximately $88 billion a year. Yet India is currently running a negative capital account balance. Foreign capital encompasses FDI, portfolio investment, external commercial borrowing, and other inflows. Of these, borrowing creates liabilities, while portfolio investment is only semipermanent and can reverse quickly if conditions deteriorate. It is FDI that policymakers should actively court. Yet net FDI in 2025-26 (FY26) amounted to just $7.7 billion. Although that represented a modest recovery from the dismal $1 billion recorded in FY25, it was still dramatically below the $27-28 billion seen in FY23 and FY24 — and nowhere near the roughly $90 billion required each year.
Attracting foreign capital was, after all, one of the principal reasons India liberalised its economy in the first place. Yet the strategic importance of attracting long-term FDI to achieve 8 per cent growth appears to have faded from view. At the same time, buoyed by claims of India’s emergence as an economic superpower, policymakers moved to discourage portfolio flows, first by reintroducing capital gains tax on listed equities in 2018 and then by raising the rate further in 2024.
FDI itself presents a mixed picture. Gross inflows remain substantial, but so do outflows, leaving India with insufficient net capital to finance growth much above 7 per cent. A large part of these outflows reflects repatriation and disinvestment by foreign companies, amounting to $54 billion in FY26. Another component comes from Indian firms investing abroad through equity injections, loans and guarantees, which reached roughly $30 billion that year. This raises an obvious question. Why would a country that requires close to $90 billion in net foreign capital annually to create jobs, build productive capacity, and sustain rapid growth permit $30 billion of capital to flow abroad, thereby contributing to pressure on the rupee? That, however, is another story.
The writer is cofounder of
www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
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