upsc current affairs for 8 December 2025

Capital Account Latest News

• India has a long-standing problem with its current account deficit (CAD) — the part of the balance of payments that tracks what the country earns from the world versus what it pays out.
• In the last 25+ years, India has recorded a current account surplus only four times: 2001–02; 2002–03; 2003–04; 2020–21. 
• Every other year, India imported more goods and services than it exported, leading to a deficit.
• The CAD hit record highs of $78.2 billion in 2011–12 and $88.2 billion in 2012–13. 
• In most years since then, it stayed below $50 billion, except in 2018–19 ($57.3 billion) and 2022–23 ($67.1 billion), when it rose again.”

India’s Current Account: The Role of the Invisible Hand

• The current account in the BOP has two subcomponents. The first is merchandise trade — exports and imports of physical goods. 
• The second one is called invisibles subcomponent. The “invisibles” trade has to do with the global flows of services, people, data and ideas, as opposed to the movement of tangible stuff (“visible”) across national borders through sea and by air.

Merchandise Trade Deficit Keeps Widening

• India has always imported more physical goods than it exports, leading to a persistent merchandise trade deficit.
• Key trends:
  • $91.5 billion deficit in 2007–08
  • Peaked at $195.7 billion in 2012–13
  • Narrowed to $102.2 billion in 2020–21
  • Jumped to $286.9 billion in 2024–25
• At the current pace, the 2025–26 deficit may cross $300 billion.

Invisibles: The Surplus That Saves India’s Current Account

• India consistently earns large surpluses here due to:
  • High private remittances
  • Strong IT and business service exports
  • Skilled professional services (finance, design, consulting, medicine, etc.)
• These surpluses offset India’s payments for:
  • Interest and dividends to foreign investors
  • Royalty payments
  • Education of Indians abroad

Invisibles Surplus Has Grown Dramatically

• India’s invisibles surplus has risen strongly:
  • $75.7 billion in 2007–08
  • $150.7 billion in 2021–22
  • $263.9 billion in 2024–25
• This year, it is likely to exceed $280 billion — a new record.

Why India’s CAD Doesn’t Blow Up

• Even though India’s merchandise trade deficit is massive, the invisibles surplus almost balances it out, preventing the current account deficit (CAD) from becoming unsustainable.
• This explains why India’s CAD has often remained manageable despite weak goods exports.

India as the “Office of the World”

• India’s rising invisibles surplus reflects its global economic role:
  • Just as China is the “factory of the world”,
  • India has become the “office of the world”, exporting white-collar skills — software engineers, accountants, doctors, designers, auditors, and other professionals.
• These service exports act as an economic stabiliser, cushioning the impact of India’s large goods imports.

CAD Is Not the Problem — Capital Flows Are

• India’s current account deficit (CAD) has actually declined, falling from $25.3 billion (Apr–Sep 2024) to $15.1 billion (Apr–Sep 2025).
• Despite this improvement, the rupee has weakened sharply against major currencies.
• The real culprit is not the CAD but the capital account, where inflows have dried up.

Rupee’s Slide Driven by Weak Capital Inflows

• Over the past year, the rupee has depreciated significantly against the:
  • US dollar (84.73 → 89.92)
  • Euro (89.20 → 104.82)
  • British pound (107.76 → 120)
  • Yen (0.5658 → 0.5815)
  • Chinese yuan (11.66 → 12.72)
• This fall is linked to shrinking foreign investments, not excessive import bills.
• Foreign capital inflows hit a record $107.9 billion in 2007–08, consistently exceeding the CAD and boosting forex reserves for many years.
• But now:
  • 2024–25: Net capital inflows crashed to $18 billion, lower than the CAD
  • 2025–26 (Apr–Sep): Only $8.6 billion of inflows, again below the CAD
• This mismatch is directly pressuring the rupee.

Sharp Decline in Foreign Investment

• Direct and Portfolio Investment Have Both Weakened.
  • Foreign investment (overall): $80.1 bn (2020–21); $21.8 bn (2021–22); $22.8 bn (2022–23); $54.2 bn (2023–24); $4.5 bn (2024–25); $3.6 bn (Apr–Sep 2025).
  • Foreign Direct Investment (FDI): $44 bn (2020–21); $38.6 bn (2021–22); $28 bn (2022–23); $10.2 bn (2023–24); Collapsed to $959 million (2024–25); Slight recovery in 2025–26 (Apr–Sep): $7.7 bn.
  • Foreign Portfolio Investment (FPI): From 2021–22 onward, only one year (2023–24) saw net inflows.
  • Most years recorded massive outflows: –$18.5 bn (2021–22); –$5.1 bn (2022–23); –$14.6 bn (2024–25); –$4.3 bn so far in 2025–26.

Why This Is Surprising Given India’s Growth

• India’s economy has been growing at 8.2% annually (2021–22 to 2024–25) and 8% in the first half of 2025–26 — a level of growth that should normally attract significant foreign capital.
• Yet, paradoxically, foreign investors have pulled back, leaving India with a capital account deficit.

Capital Dry-Up Is the Main Driver of Rupee Weakness

• The rupee’s current slump is not due to rising imports or CAD pressure.
• Rather, it is caused by the sharp fall in foreign capital inflows, which reduces dollar availability and weakens the currency.
• The capital account, not the current account, is where India’s external vulnerability now lies.

Source: IE