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Informist, Wednesday, Jul. 23, 2025

 

NEW DELHI – India needs to lower import restrictions, especially on intermediate goods, ease foreign direct investment norms, and improve the business environment to boost private investment to rebalance its external sector, the International Monetary Fund said in a report released Tuesday. India should also develop trade infrastructure and expand trade networks for improved current account balance, which is expected to come down in the near term, thanks to strengthening of private consumption, the report said.

 

"These efforts should be complemented by the development of trade infrastructure and expansion of trade networks," the IMF said in its 'External Sector Report'. "Industrial policies should be pursued cautiously, remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions, and aim to minimise trade and investment distortions."

 

IMF's suggestions come at a time when India has been working on a trade agreement with the US, which wants New Delhi to lower is import duties and non-tariff barriers. In the FY25 Budget, Finance Minister Nirmala Sitharaman said the government would simplify FDI investment rules to promote opportunities for using the Indian rupee as a currency for overseas investments.

 

India's current account deficit moderated to 0.6% of GDP during 2024-25 (Apr-Mar) from 0.7% of GDP in FY24, according to data from the Reserve Bank of India. The IMF said India's current account deficit is projected to increase to about 0.9% of GDP in FY26, "largely reflecting resilient domestic demand and a slowdown in external demand." Over the medium term, the deficit is projected to widen to around 2% of GDP, the report said. 

External vulnerabilities during FY25 were mainly from weakening external demand, geo-economic fragmentation, and potentially volatile global financial conditions and commodity prices, the report said. "Reflecting buoyant services exports and declining oil prices, the CA (current account) deficit is projected to remain smaller than its estimated norm but to converge to it over the medium term given India's development needs."

 

Despite recent steps towards opening, India's trade and capital account regimes remain relatively restricted, weighing on both exports and imports, the report said. According the IMF, exchange rate flexibility should act as the main shock absorber, with intervention limited to periods marked by destabilising risk premiums.  End

 

Reported by Shubham Rana

Edited by Avishek Dutta

 

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