Foreign Capital Flows and India's Balance of Payments | 09 Sep 2025

Source: IE

Why in News? 

India has emerged as the world’s fastest-growing major economy, recording an average annual GDP growth of 8.2% from 2021 to 2024, outpacing countries like Vietnam, China, and the United States.

• Despite strong growth, India faces low net foreign capital inflows, reflecting a gap between GDP expansion and investor sentiment in its Balance of Payments.

What is Balance of Payments? 

• About: The BoP serves as a crucial economic indicator, detailing all financial transactions between India and the rest of the world.  
  • This comprehensive ledger tracks the inflow and outflow of money where inflows are marked positive and outflows negative, reflecting the country's economic interactions globally. 
  • It measures the relative demand for the rupee against foreign currencies, crucially influencing exchange rates and economic stability. 
• Component of BoP: 
  • Current Account: 
    • Trade of Goods: Tracks physical imports and exports, indicating the balance of trade. A deficit suggests higher imports than exports. 
    • Trade of Services (Invisibles): Includes sectors like IT, tourism, and remittances, contributing positively to India's current account surplus despite trade deficits. 
    • The net of these two components determines the current account balance.
  • Capital Account: 
    • Captures investments such as Foreign Direct Investment (FDI) and Foreign Institutional Investments (FII), essential for economic growth and stability. 
    • The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital. 

What is the Current State of India's Balance of Payments (BoP)?

• Trade Deficit and Invisibles Account: India's trade deficit continues to widen, reaching USD 287.2 billion in 2024-25. 
  • However, this has been offset by surpluses in the "invisibles" account, primarily due to services exports and remittances from the Indian diaspora. 
  • These surpluses have helped maintain a manageable Current Account Deficit (CAD), even as merchandise trade deficits balloon.
• Growth & Investment Paradox: Despite robust growth, India has faced challenges in attracting foreign investments. In the financial year 2023-24, foreign portfolio investments (FPIs) amounted to USD 25.3 billion. 
  • However, India experienced significant net outflows in previous years, with USD 5.1 billion in 2022-23, USD 14.6 billion in 2024-25, and USD 2.9 billion in 2025-26 (as of September 5). 
    • This trend highlights a paradox where India's economic expansion does not align with foreign capital influx.
• Private Equity and Venture Capital Exits: The increase in exits from private equity (PE) and venture capital (VC) investments reflects profit-booking and matured investments, rather than new capital creation.
  • The total value of PE/VC exits was USD 24 billion in 2022, USD 29 billion in 2023, and USD 33 billion in 2024.
  • Foreign investors prioritize corporate earnings, the overall business climate, and market valuations over the headline GDP growth figures.