The gap that arises when a country's spending on imports of goods and services, plus income and transfers paid abroad, exceeds what it earns from exports, income and transfers received; it must be covered by net capital inflows or by drawing on foreign exchange reserves.
Most discussions of the external sector in India end up at one number: the current account deficit. It is the most watched sign of whether the country is earning enough foreign exchange to pay its way. A deficit is not unusual for a developing economy. A young, fast-growing country with high investment needs often imports more capital goods and energy than it can pay for with exports, and borrows from the rest of the world to fill the gap. What matters is how big the gap is, why it arises and who is willing to finance it.
India has run a deficit in almost every year since independence, with brief surpluses in the early 2000s and during the Covid year of 2020–21 when imports collapsed. The deficit widened sharply in 1990–91, contributing to the crisis, and again in 2011–13, when high oil prices and record gold imports pushed it to nearly 5% of GDP. The structure of the balance of payments is covered in the main lesson; this page focuses on the causes, financing and sustainability of the deficit itself.
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