The spectre of higher tariffs imposed by the US means export prospects, including for India, will be subdued in 2025
We expect crude prices to settle lower, around $65-70 per barrel, compared with $79 per barrel last financial year. So, crude imports are unlikely to exert much pressure | Illustration: Binay Sinha
Last financial year, India’s current account deficit (CAD) printed at a non-worrisome 0.6 per cent of gross domestic product (GDP), driven by healthy net invisible receipts. It was a whit lower than 0.7 per cent in 2023-24, despite the goods trade deficit rising to 7.3 per cent of GDP from 6.7 per cent.
This happened because both the services trade and secondary income accounts saw a higher surplus, which more than offset the deterioration in the goods trade deficit. Such low reliance on external financing of CAD is a buffer against volatility in capital flows and the attendant currency swings — facets that have become the norm rather than the exception today because of macroeconomic and geopolitical flux.
Elevated uncertainties around trade have cast a long shadow over economic activity. S&P Global expects world GDP growth to slow to 2.9 per cent in 2025, from 3.3 per cent in 2024, as the two largest economies, the United States and China, plod on. This will adversely impact India’s exports, while healthy domestic growth, which we expect at 6.5 per cent, should support imports.
Will that be worrisome for India’s current account? Not so much — yet.
This financial year, we expect CAD to remain in the safe zone at about 1.3 per cent of GDP. The current account comprises not only the goods trade but also the services trade, and incomes under the primary and secondary accounts (largely personal transfers, including remittances).
Before discussing their prospects, it is pertinent to recall what caused the last sharp rise in CAD — to 4.3 per cent and 4.8 per cent of GDP in FY12 and FY13, respectively. India’s merchandise trade deficit as a share of GDP had risen sharply above the 10 per cent mark in both years, owing to a broad-based deterioration in goods trade deficit, as the prices of crude oil and gold took off. The surplus in services and secondary income, however, remained static at 3.5 per cent of GDP. The situation is materially different now. The spectre of higher tariffs imposed by the US means export prospects, including for India, will be subdued in 2025.
The surge in global goods trade earlier this year, driven by importers frontrunning purchases in anticipation of higher tariffs, will wear off, as suggested by the World Trade Organization’s (WTO) latest forward-looking New Export Orders Index, which fell to 97.9.
In FY25, India’s goods exports flatlined at $441.8 billion, compared with $441.2 billion in FY24. This year, headwinds are expected to rise. At the same time, the elevated tariffs on Chinese goods will accentuate overcapacity and deflationary pressures there, goading businesses to divert excess supply to other markets, including India.
While that means some upward pressure on core imports, what about crude oil and gold, the top two commodities in India’s import basket? Crude oil prices, which had flared up owing to uncertainties in West Asia, are now abating as fundamentals reassert.
The surge was in any case transitory, given sluggish global economic growth and the long-term slowdown in oil demand. This is because of the increasing adoption of green energy and electric vehicles, especially in China, the world’s largest automobile market.
We expect crude prices to settle lower, around $65-70 per barrel, compared with $79 per barrel last financial year. So, crude imports are unlikely to exert much pressure. Likewise, prices of coal, India’s other key energy import, are expected to fall sharply.
But gold prices, which rose sharply last financial year (30 per cent in dollar terms), are expected to rise further this year, according to the World Bank. That’s because gold is a special asset class and considered safe haven by investors, which means its price rises during uncertainty. Ergo, some pressure on gold imports is likely. Interestingly, however, gold demand in India has been trending downward in recent years. It typically declines in years when prices rise. Last financial year, for instance, imports fell by 38 metric tonnes year-on-year to 757 metric tonnes — despite the government sharply reducing import duty to 6 per cent from 15 per cent in July. Lower demand will also curb the dollar value of India’s gold imports.
Higher imports in some categories, along with a tepid outlook for goods exports, can accentuate pressure on India’s goods trade deficit this financial year. To be sure, services exports, which account for 48 per cent of total exports, will provide a buffer.
Software exports, for which the US remains the biggest destination, could see some pressure as the world’s largest economy is expected to decelerate this year. Notably, however, in the past few years, India has been doing phenomenally well on the front of professional and management consulting (PMC) services, thanks to the stellar rise of its global capability centres (GCC). For instance, between FY21 and FY25, while net information technology (IT) exports rose at an average 14 per cent, net PMC exports surged 33 per cent. The latter’s pace can offset any slack in the former and keep the overall services trade surplus buoyant this financial year.
As for remittances, the US has reduced the tax on them to 1 per cent from the earlier announced 3.5 per cent, offering relief. Moreover, since this is applicable only from January 2026, the impact this financial year would be limited. While the US is now the largest source of Indian remittances, the Gulf still accounts for a substantial part. Although those economies are reducing dependence on oil income by diversifying and encouraging private sector growth, low oil prices are unlikely to make a material difference to remittances from there.
To wit, the United Arab Emirates is the second-largest source of remittance for India and its non-oil sector accounted for about 75 per cent of GDP in 2024.
Hence, while India’s CAD may face marginal pressure this financial year, there are no big worries. But its financing needs monitoring. Last financial year, despite a decline in CAD, financial flows were not adequate to fund it as both net foreign portfolio investments (FPI) and net foreign direct investment (FDI) inflows fell sharply. However, the rise in net external commercial borrowings (ECB) provided some support.
This financial year, too, foreign capital flows are expected to remain volatile given the heightened global uncertainties.For instance, FPI debt has already seen net outflows in the first three months of this financial year, and external commercial borrowings may not be as buoyant as last year, given the softening in domestic interest rates.
However, with comfortable foreign exchange reserves and the expectation of only a marginal rise in CAD, India is in a good position to weather global volatility.
The authors are, respectively, chief economist and senior economist at Crisil
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