India's External Sector

The deterioration in India's current account has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in infl uencing the trade balance, and the role of high and rising inflation. Against this background, this article takes a step back and analyses the performance of the external sector in India since 1990. It estimates the sustainable current defi cit to GDP ratio to be 2.3%. Importantly, even to sustain a 2.3% CAD, India would need net capital infl ows of the order of at least $50-70 billion annually over the next fi ve years. Given the uncertainty around both the push factors (e g, rising global risk aversion) as well as the pull factors (slower growth in India) that determine capital fl ows, attracting such magnitudes of fl ows could very well be an uphill task.