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India’s balance of payments pressure is likely to remain a challenge as rising imports, dependence on key commodities, high global interest rates and competition for capital weigh on the external account, said V Anantha Nageswaran, the government’s chief economic adviser, on Thursday.
Funds mobilised by the Reserve Bank of India (RBI) under its concessional swap window this year provide “a lot of breathing room” in the near term but they are not a lasting solution, he said at State Bank of India Banking & Economics Conclave 2026 in Mumbai.
“What the government and the RBI did this year…is an act of foresight which does give us a lot of breathing room in the near term. But at the same time, this is not a lasting solution or a lasting answer because the pressure on balance of payments will remain,” Nageswaran said.
“With rising imports, with rising import dependence on key commodities, global competition for capital including from developed countries and higher interest rates, the balance of payments will remain a challenge not just episodically but almost continuously,” he said.
The RBI said this week that inflows from its concessional forex swap window — operationalised on June 8 — had topped $143.5 billion as of September 18 across Foreign Currency Non-Resident (Bank) deposits, overseas foreign currency borrowings and external commercial borrowings. FCNR(B) deposits account for the bulk of the inflows at nearly $133 billion. Aided by the flows, India is expected to post an overall balance of payments surplus of $100 billion in FY27, compared with a deficit of $23 billion in FY26.
India will have to look more carefully at both capital inflows and outflows as the competition for global capital intensifies, Nageswaran said. Developed economies are also competing, with demand coming from both the public and private sectors.
India’s goods trade deficit is between 3.5 and 4 per cent of the gross domestic product after excluding oil and gold, Nageswaran said, making manufacturing crucial. Promoting manufacturing is not merely about diversifying growth but also about building resilience and economic security, as global supply chains become vulnerable to disruption, he said.
“India does not have the luxury of a binary choice between manufacturing and services. It has to do both.”
As the economy grows, imports will inevitably rise even if India succeeds as an exporter, he said. Imports will have to be financed through exports, foreign direct investment (FDI) or a combination of the two. The focus, therefore, should be on making domestic production globally competitive rather than replacing imports.
Three challenges
India will need to do more to attract FDI as developed economies compete aggressively for global capital, he said. Sub-national government policies, tax certainty and simplicity, investor protection, sanctity and continuity of contracts, and a skilled workforce would all be important.
“There is no excuse for preparation because the global world is an exogenous factor. We have to take it as given, but we have to do what is within our limit,” Nageswaran said.
The changing external environment presents three near-term headwinds for India: An unsettled relationship with the United States, uncertainty over energy supplies and prices amid the Persian Gulf conflict, and the country’s absence from the capital-intensive artificial intelligence (AI) hyperscaler investment boom.
India, given its location and size, cannot belong to any geopolitical bloc. Maintaining sovereignty and independence, however, comes with a cost in the form of higher energy prices and possible supply interruptions.
Nageswaran said India will have to account for the fact that its transition to a developed economy by 2047 will happen under conditions different from those faced by East Asian economies. Those economies had more benign conditions, while India faces geopolitical tensions, weaponisation of supply chains, climate variability and the challenge of managing its demographic dividend, he said.
India’s demographic dividend needs to be “managed and earned”, Nageswaran said, adding that this goes beyond education and skilling to include mental, physical and emotional health. “We have to reimagine and be prepared to reinvent many of the ways in which we operate, whether you are in the private or the public sector,” he said.
AI growth
Nageswaran said India should not be overly concerned about not being part of the capital-intensive hyperscaler-led model of AI growth. The country could instead find opportunities in the AI inference layer and Edge AI, where computing requirements are relatively affordable. “Not being the first mover but the second might turn out to be an advantage when it comes to AI,” he said.
The more immediate concern is the impact of AI on employment, particularly for younger workers.
“From the Indian standpoint, given the demographic dividend, we have to be mindful that junior-level jobs are indeed slower than what was their pre-AI,” Nageswaran said. India should focus on creating jobs that use AI rather than looking only at the technology’s impact on information technology jobs.
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