At the heart of India’s growing exposure to potential external economic shock is the fact that the country is suffering a widening deficit in trade-related flows at the same time as foreign investors’ affection for emerging markets is dwindling. India has a better chance of tackling the former than the latter.
This external vulnerability is evident from the growing current account deficit (CAD) — when trade-related outflows exceed inflows — which we believe has both a cyclical and a structural component to it. The cyclical component can best be explained by the fact that India is growing faster than most of
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