Why a current account deficit is good for India
Crisil recently pegged investments at 33.7% of GDP in 2023-24, a 1.5 percentage point jump, that translates into a 33% savings rate for a 0.7% current account deficit. That’s also a significant rise. Here’s the clincher: a rising savings rate also allows for greater investments while keeping the current account deficit at the same level.
And if we run a modest 2% deficit, a 33% savings rate would mean an investment rate of 35%—or ₹6 trillion available towards nation-building. So even a deficit, when it’s the result of robust savings and strong investment, is guaranteed to boost growth. In theory, India’s demographic profile is perfect for a high savings rate.
A high, and increasing, share of the working-age population (that means fewer dependents such as the elderly and children) should push up production, income and savings. A declining fertility rate should be accompanied by an increasing number of women in the labour force, adding an extra boost. This is the much-discussed demographic dividend, which pays off by raising labour strength and productivity.
But India’s savings rate hasn’t grown enough in recent years, for reasons ranging from inadequate job creation and poor skilling of labour to economic setbacks caused by demonetisation and the pandemic. That’s why the current rate of growth in savings is unlikely to be enough to fund the scale of investments India needs to support strong economic expansion. That would result in a current account deficit: drawing on overseas savings will be essential to reap the demographic dividend.
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