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Informist, Thursday, Apr. 30, 2026

 

NEW DELHI – India's current account deficit is expected to average around 1.5% of GDP over the next five years, with some improvement in the quality of trade deficit and reduced risks from external shocks, Morgan Stanley said in a report. In the medium term, energy diversification and de-risking of the supply chain should support a more stable, potentially narrower current account deficit, the report said. 

 

India's current account deficit was $13.2 billion or 1.3% of GDP in the December quarter. India recorded a higher current account deficit in Oct-Dec, mainly due to a larger year-on-year merchandise trade deficit, according to data from the Reserve Bank of India. RBI Governor Sanjay Malhotra had said robust services exports and remittances in the March quarter will keep India's current account deficit moderate and within sustainable levels in 2025-26. In FY25, India's current account deficit was 0.6% of GDP.

 

Overall, Morgan Stanley sees India's medium-term growth trajectory remaining well supported, with real GDP growth of around 6.5-7.0%. Earlier this month, the bank projected India's GDP growth in FY27 at 6.2%. India's GDP grew 7.8% in the December quarter. The government's second advance estimate has projected FY26 GDP growth at 7.6%.

 

On the import front, energy is a critical import item for India as the country imported about 85% of its crude oil and around 50% of its natural gas requirements as of early 2026. Amid the external shocks from the war in West Asia, this reliance on energy imports makes India's economy vulnerable to commodity price hikes and supply chain disruption, the report said.

 

However, the bank expects the intensity of oil imports to continue to moderate. In contrast, analysts at the bank said the near-term import bill may rise as India diversifies its energy sources and builds domestic energy buffers.

 

Morgan Stanley expects higher import bills and defence spending to weigh on India's fiscal deficit, which may temporarily widen. It sees the fiscal deficit at 4.6-4.8% of GDP in FY27 compared with 4.3% of GDP estimated in the Budget, even though the deficit had remained on a consolidation path, the report said.

 

The fiscal policy will provide "cushioning through a looser stance in the short term," according to Morgan Stanley. "Higher conflict-related outlays, fuel and fertiliser subsidies, and fuel tax adjustments, alongside potential revenue shortfalls, are likely to strain public finances," Morgan Stanley said. "Spending priorities are also likely to shift, with defence-related expenditure assuming greater importance from a security and strategic standpoint."

 

For India's external balances, remittance flows remain a key stabiliser cushioning the current account against periods of elevated commodity prices. India has been diversifying its remittance inflow source mix towards advanced economies. This is improving India's "resilience relative to a profile dominated by the Gulf," analysts said. "Near-term downside risks are concentrated in a sustained slowdown in Gulf labour markets and services activity." This will result in slower inflows of remittances in the remittance-dependent states. It will be offset by the growing share of higher-skilled migration corridors and the potential for reconstruction-led labour demand once the situation in war-hit West Asia normalises, the report said.

 

Remittance flows to India should "grow steadily", on the back of a diversified source base and stable labour market conditions across key corridors. This will provide a buffer to the current account and help offset pressures from volatile capital flows and elevated import costs, it said.

 

The report suggested the government revert to its stated glide path and pursue "calibrated debt reduction while balancing macro stability with growth-supportive spending." "Given the government's demonstrated fiscal prudence, we expect adherence to the medium-term consolidation target of a debt-to-GDP ratio of 50% plus or minus 1% by F2031, while retaining flexibility to deploy fiscal policy countercyclically if conditions warrant," it said.  End

 

US$1 = INR 94.91

 

Reported by Shweta

Edited by Saji George Titus

 

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