India, June 20 -- The world has become more uncertain, volatile and unforgiving. Assumptions that shaped economic policy for decades are being challenged. India must now revisit the belief that a current account deficit (CAD) of 1.5-2% of the gross domestic product (GDP) is normal, manageable and perhaps inevitable.

This took hold after the 1991 reforms. Liberalisation lifted India from the old 3% growth path to an average growth rate of about 6.5% for three decades. This growth attracted enough global capital in normal times to finance the CAD. So, in the last 35 years, we registered a CAD in 31. Over time, the deficit came to be as a feature of India's growth model, not a vulnerability.

The standard argument was simple. India lacked d...