<div id="readability-page-1"><div>India has faced balance of payments pressures before. Earlier episodes, including the 2013 crisis, were also driven by current account pressures arising from widening trade deficits.Oil and gold imports are once again putting pressure on the current account. Higher energy prices and geopolitical tensions in West Asia have only made things worse.But what makes the present challenge different is not the current account deficit itself. The difference this time is that India is not generating enough surplus on the capital account to offset it.Large FPI outflows and weaker net FDI inflows — as outward investments and repatriation offset a growing share of gross inflows — are creating pressure at the same time when the current account deficit is widening.This leaves India with two broad choices.The first is achieving balance on the current account, which in reality means fixing the goods trade deficit, as India is already running surplus on services trade and remittances.The second is generating enough surplus on the capital account.Futility of import controlsFixing the goods trade deficit means either cutting imports or pushing exports harder.India has no real substitute for large imports such as crude oil, chemical fertilisers and precious metals.Trying to restrict gold imports by raising import duty to as high as 15% may not reduce gold demand. Instead, by driving gold prices up, it may increase speculation in gold and, worse, encourage smuggling into India to avoid payment of customs duty. Similarly, advising Indians to avoid foreign travel is unlikely to help much.The use of import duties and quality control orders (QCOs) may help check imports, but they also hurt value-added production in downstream industries and, in turn, exports.India’s leading exports have high import intensityThe other problem with import duties is that they block imports but do nothing to encourage exports of goods or services, which is what is needed to reduce the trade deficit and, in turn, the current account deficit.Again, many of India’s better-performing exports, such as electronics and pharmaceuticals, are import intensive. In other words, more exports lead to more imports.A weaker rupee supports exports. Critics argue that despite the weakening INR, India’s exports continue to struggle. That is only partly true because it is mainly goods exports that are underperforming.A favourable exchange rate cannot offset other disadvantagesA favourable exchange rate helps, but it cannot substitute for addressing other disadvantages such as lack of FTAs, high power costs and other structural bottlenecks unless the rupee is allowed to decline substantially.As of now, India is too focused on managing imports through a combination of higher import duties and a stronger rupee that it often forgets a weaker rupee can rein in imports while simultaneously incentivising exports needed to achieve current account balance.It also helps address the challenges associated with import-intensive exports, and encourages inward remittances through formal channels instead of hawala. Therefore, it is a better policy tool for managing current account balances than opaque import duties.India does not need a stronger rupee but an exchange rate that balances its dollar outflows with inflows.But the RBI has often prevented this through frequent interventions in the forex market despite repeated advice from economists and trade experts in favour of greater exchange-rate flexibility.Nevertheless, fixing the trade regime does not do away with the need to strengthen the capital account.India needs to welcome Chinese FDIOne major factor behind the current account deficit is the rising trade deficit with China, something the Indian government has been struggling to deal with for a long time.The only practical way to deal with the rising trade deficit with China is to encourage Chinese FDI in all sectors, except a small negative list of strategic sectors. The recent decision to allow investments with up to 10% beneficial ownership from land-border countries through the automatic route is a step in the right direction, but it is not enough.India worries too much about tax avoidance and, as a result, gives tax and customs officials too free a hand through increased discretionary powers to ensure compliance. The result is increased tax uncertainties.But we often forget that there are other equally important objectives especially — bringing in more FDI and FPI needed to make up for a steadily rising trade deficit in an economy burdened with high transaction costs, while also improving the country’s overall investment rates at a time when private capex remains weak.When Indian businesses are not investing enough despite slashed corporate income tax and generous PLI subsidies, there is little option but to welcome foreign investment.That requires, among other things, a predictable and transparent tax regime in an intensely competitive global market for foreign investment.That calls for restoration of a residence-based capital gains taxation regime and making a valid tax residency certificate sufficient proof of residence.Along with expediting bilateral investment protection treaties with major foreign investment source countries, this can give a significant boost to capital account inflows in both the short and long run.To tame FPI outflows, the government cannot do much except reduce or remove long-term capital gains tax while retaining higher securities transaction taxes (STT) to discourage speculative futures and options trading by retail participants.As the lingering Iran conflict suits both Russia, which benefits from higher crude oil prices, and China, which remains the dominant buyer of discounted Iranian oil, the conflict is unlikely to end anytime soon.It is therefore time for India to assert its energy independence to keep its energy import bill manageable. New Delhi partially demonstrated this in the case of Russia.India should make it clear that it will buy oil not only from Russia but also from Iran or any other cost-effective supplier.Indian policymakers should focus on curing the disease — sluggish goods exports — and not its symptom, the declining INR.(Ritesh Kumar Singh is a business economist and CEO, Indonomics Consulting Private Limited. His X account @RiteshEconomist.)Views are personal, and do not represent the stand of this publication.</div></div>

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India faces balance of payments challenges due to widening trade deficits, particularly from oil and gold imports. Unlike previous crises, the current account deficit is not being offset by sufficient capital account surpluses, exacerbated by FPI outflows and weak FDI inflows. Import controls may not effectively reduce trade deficits and could harm exports. A weaker rupee could incentivize exports and manage imports better. To address the trade deficit with China, India should encourage Chinese FDI while ensuring a predictable tax regime to attract foreign investments.

India’s BoP challenge needs more capital, not more import controls