Structural reforms needed to fix CAD challenges

India is currently facing challenges in the management of its external account, reflected in worries about rupee depreciation, and concerns about the current account deficit (CAD).

India’s CAD is structural. Growth is not driven by exports. Domestic growth drivers — investment, and in recent times, consumption — are import intensive. The immediate strategy to address this has been to a) finance the current account deficit by encouraging foreign direct and portfolio inflows and b) accept that a structural CAD would require a continuing, orderly depreciation of the rupee, which would eventually reduce the pace of import growth and encourage export growth.

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