India needs to reduce import restrictions, especially on intermediate goods, enhance the business environment to boost private investment, liberalise the foreign direct investment (FDI) regime and expand trade networks to sustain a healthy external balance, the International Monetary Fund (IMF) said in a report released Tuesday.
It suggested cautious implementation of industrial policies, minimisation of trade and investment distortions and maintenance of exchange rate flexibility to absorb shocks, with intervention used only during market instability.
India’s external sector in FY25 was stronger than expected, driven by strong services exports and lower oil prices. However, risks remain with continued trade and capital account restrictions limiting export and import growth, according to the IMF’s External Sector Report.
The current account deficit (CAD) rose to 0.8 per cent of gross domestic product (GDP) in FY25 from 0.7 per cent of GDP in FY24, due to rising import demand amid strong services exports. It is projected to reach 0.9 per cent in FY26, “reflecting resilient domestic demand and a slowdown in external demand”, the report said.
Over the medium term, it is estimated to widen to around 2 per cent of GDP, aligning with India’s development needs, it added.
The report analysed 30 economies based on external sector data as of May 27, 2025 and IMF staff projections in the April 2025 World Economic Outlook.
In the first half of 2024, a contained CAD and portfolio inflows strengthened the rupee, but this reversed in the second half due to equity outflows and global uncertainty.
