External Sector & Balance of Payments — India in the World Economy

The external sector is the economy's interface with the rest of the world — trade in goods & services, factor incomes, investment flows, and the exchange-rate that prices them all. Topic 16 maps India's Balance of Payments architecture, the Current and Capital Accounts, the composition of forex reserves, the NEER/REER framework, Tarapore-era convertibility debates, the Foreign Trade Policy 2023, India's FTAs & WTO commitments, FDI & FPI routes, the external debt profile, and how a US$ 700-billion war-chest of reserves changed India's vulnerability profile after the 1991 crisis.

UPSC Prelims · Mains GS-II / GS-III Ramesh Singh Ch. 16 ~32 min read BoP · FDI · Forex FTP 2023

Conceptual Clarity
1. External Sector — Concepts & Openness
2. Balance of Payments — Structure & Identity
3. Current Account — Trade, Services & Income
4. Capital & Financial Account — FDI, FPI, ECB, NRI
5. Foreign Exchange Reserves & Their Composition
6. Exchange Rate Systems & Rupee Management
7. Convertibility — Current vs Capital (Tarapore)
8. International Trade — Composition & Partners
9. Foreign Trade Policy 2023, FTAs & WTO
10. Foreign Direct Investment — Routes & Caps
11. External Debt & External Vulnerability
12. Export Promotion Schemes
13. Special Economic Zones
14. WTO — Origin, Structure & Principles
15. Key WTO Agreements — AoA, TRIPS, GATS
16. WTO Dispute Settlement & Appellate Body
17. FTAs & India's FTA Strategy
18. Trade Facilitation & Protectionism
19. Current Affairs Anchor (2024-26)
20. Prelims PYQs (2014-2026)
21. Mains PYQs (2014-2025)
22. Revision Box

Conceptual Clarity — Three Lenses

Architecture — the Balance of Payments is an identity: Current Account + Capital & Financial Account + Errors & Omissions = Change in Reserves. Every dollar that crosses the border is recorded under one of these heads.
Buffers — India holds US$ ~700 billion of forex reserves (~10-11 months of imports cover), one of the largest war-chests in the world. The composition is roughly Foreign Currency Assets ~88%, Gold ~9%, SDRs ~2.5%, Reserve Tranche ~0.5%. check for latest update or data
Convertibility — India is fully convertible on the Current Account (since Aug 1994, Article VIII of IMF AoA) but only partially convertible on the Capital Account — a deliberate choice after the Tarapore Committees (1997, 2006) and reaffirmed after the 2008 GFC and 2013 “Taper Tantrum”.

BoP Identity: CA + (Capital + Financial Acc) + E&O + ΔReserves = 0
CAD = (M − X) + Net Invisibles outflow (X = exports, M = imports of goods & services)
Import Cover (months) = Forex Reserves / Monthly Goods Imports
REER = NEER × (Domestic CPI / Trading-partner CPI weighted)

1. External Sector — Concepts & Openness

The external sector covers all economic transactions between residents of a country and non-residents. The standard reference document is the IMF's Balance of Payments and International Investment Position Manual (BPM6, 2009), which India fully adopted from FY13.

1.1 Why study the external sector?

Determines the exchange-rate — the single most-watched relative price in the economy.
Funds the savings-investment gap (S − I = X − M).
Provides technology & competition through trade and FDI.
Generates remittance and software-export inflows that finance the trade deficit.
Shapes vulnerability to global shocks (oil, capital flows, sanctions).

1.2 Resident vs Non-Resident

BoP transactions are classified by residence, not nationality. A foreign company's Indian subsidiary is a resident; an Indian student abroad for >1 year becomes a non-resident. The definition flows from FEMA, 1999 and the IMF BPM6 framework.

1.3 Openness Ratios

Trade Openness = (Exports + Imports) / GDP × 100

India's trade openness has hovered around 45-50% of GDP — up from ~15% pre-1991. check for latest update or data
Financial openness (FDI + FPI + ECB inflows / GDP) is ~4-5% per year — modest by global standards.
Compared to ASEAN economies (Vietnam ~190%, Thailand ~120%) India remains less open in goods, but more open in services.

1.4 Two Key Identities

National Income identity: Y = C + I + G + (X − M)
Savings-Investment identity: S − I = X − M (current-account balance)

If a country invests more than it saves, it must run a current-account deficit financed by foreign capital. This is why India's CAD is structurally a financing question, not a moral one.

1.5 The 1991 BoP Crisis — the Founding Event

Trigger: Gulf War oil-price spike + collapse of Soviet trade + political instability.
Reserves fell to US$1.2 billion in June 1991 — barely two weeks of imports.
India airlifted 67 tonnes of gold (47 to Bank of England, 20 to UBS) as collateral for US$ 600 million.
IMF Standby Arrangement of US$ 2.2 billion + structural adjustment loan triggered the July 1991 reforms (LPG).
Rupee devalued in two steps: 9% on 1 July, 11% on 3 July 1991.

Anchor for Mains: every major external-sector debate in India traces back to one of three lessons of 1991: maintain a large reserve buffer; keep short-term external debt low; preserve capital-account discretion. The trinity below is the recurring evaluative lens.

2. Balance of Payments — Structure & Identity

The Balance of Payments (BoP) is a systematic statement of all economic transactions between residents of a country and the rest of the world during a given period. It uses the double-entry book-keeping principle — every transaction generates a credit & a corresponding debit.

2.1 The Four Heads of the BoP (BPM6)

Head	What it captures	Sub-components
Current Account	Flows in goods, services, primary & secondary income	Merchandise trade; Services; Primary income; Secondary income (transfers)
Capital Account	Transfer of ownership of capital assets & non-produced/non-financial assets	Capital transfers (debt forgiveness); migrants' transfers; sale of intangibles
Financial Account	Cross-border financial assets & liabilities	FDI; FPI; Other Investment (ECB, NRI Deposits, trade credit); Reserve Assets
Errors & Omissions	Statistical balancing item; covers measurement gaps & timing differences	Residual

Note: India's RBI presentation aggregates Capital + Financial Account into one “Capital Account” for simplicity — the convention in Economic Survey & popular textbooks.

2.2 The BoP Identity

Current Account Balance + Capital Account Balance + Errors & Omissions + ΔReserves = 0

The BoP must always balance — by definition. What we call “BoP deficit” or “BoP surplus” in news headlines actually refers to the change in reserves: a fall in reserves indicates a BoP deficit; a rise indicates a BoP surplus.

2.3 Credit vs Debit Entries

Credit (+)	Debit (−)
Exports of goods & services	Imports of goods & services
Income receivable from abroad	Income payable to abroad
Capital inflows (FDI in, FPI in, ECB drawn)	Capital outflows (FDI abroad, FPI out, ECB repaid)
Drawdown of reserves	Accumulation of reserves

2.4 India's BoP Snapshot — recent years

Year	CA Balance (% GDP)	Capital Account Balance (% GDP)	ΔReserves (US$ bn)
FY13 (Taper-tantrum prelude)	−4.8	+4.8	−3
FY20	+0.9 (Covid lockdown collapsed imports)	+2.9	+59
FY23	−2.0	+2.7	+9 (after valuation losses)
FY24	−0.7	+2.8	+68
FY25 (illustrative)	~−1.1	~+2.6	+~65 check for latest update or data

Source: RBI Press Releases on BoP; Economic Survey 2023-24, 2024-25.

2.5 BoP Disequilibrium — Causes

Cyclical: business-cycle phases of trading partners.
Secular / structural: long-term differences in productivity & demand structure.
Monetary: divergence in inflation & interest rates.
Technological: changes in production techniques abroad reducing demand for one's exports.
Political: sanctions, wars, capital-flight episodes.

2.6 Adjustment Mechanisms

Automatic price adjustment (gold standard / Hume): outflows → money supply falls → deflation → export competitiveness restored.
Automatic income adjustment (Keynesian): falling exports → falling income → falling imports.
Exchange-rate adjustment: rupee depreciation makes exports cheaper, imports dearer.
Direct controls: import tariffs, quotas, exchange controls (extreme).
External financing: reserves, IMF stand-by, multilateral support.

Three current-account scenarios: a structural surplus economy (China, Germany) accumulates reserves; a structural deficit economy (US, India) attracts capital; a volatile economy (Argentina, Turkey) suffers boom-bust cycles. India's task is to remain firmly in the second camp while building reserves like the first.

3. Current Account — Trade, Services & Income

The current account is the sum of four sub-balances. India is structurally a merchandise trade deficit country, partly offset by a services trade surplus and large remittance inflows.

3.1 Four Components

Sub-account	Definition	India's typical balance
Merchandise Trade	Visible exports & imports of goods	Large deficit (~US$ 240-280 bn)
Services (Invisibles — I)	Software, business services, travel, transport, financial	Large surplus (~US$ 160-170 bn)
Primary Income (Invisibles — II)	Investment income (interest, dividends), compensation of employees	Net outflow (~US$ 40-50 bn) — we pay more dividends than we receive
Secondary Income (Invisibles — III)	Personal & official transfers — mainly worker remittances	Large surplus (~US$ 110-120 bn) — world's largest remittance recipient

Source: RBI BoP statistics, recent quarters; figures indicative annual estimates. check for latest update or data

3.2 Merchandise Trade — Why India runs a deficit

Crude oil & petroleum products: ~25% of total imports; India imports ~88% of consumption.
Gold & silver: ~7-8% of imports; cultural demand + investment hedge.
Electronics: ~9% of imports; despite PLI, mobile phones became net exporters only post-2022.
Machinery & capital goods: ~8% — capex push needs imported equipment.
Chemicals, plastics, fertilisers: intermediate inputs.

3.3 Services — the “invisible export” cushion

India is the world's 5th largest services exporter; software services alone exceed US$ 200 billion (NASSCOM estimates) check for latest update or data.
Global Capability Centres (GCCs) of MNCs have become the second-largest IT-services category.
Other services: telecom, R&D, professional & management consulting, audio-visual, education, health.
Travel (tourism) is recovering post-Covid — gross travel earnings ~ US$ 25 billion.

3.4 Remittances — the Indian diaspora cushion

India is the world's largest recipient of remittances: ~US$ 125-129 billion in 2024 (World Bank).
Top source corridors: UAE, USA, Saudi Arabia, UK, Singapore.
Compositional shift: traditional Gulf-blue-collar (UAE, Saudi) has been overtaken by advanced-economy white-collar (US, UK, Canada) in recent years.
Remittances finance ~40% of India's merchandise trade deficit — the single most stable BoP inflow.

3.5 CAD Sustainability — the “2-2.5% rule”

RBI & the Rangarajan Committee on BoP (1993) consider CAD up to 2.5% of GDP sustainable for India — financeable by stable FDI + non-debt flows without depleting reserves.
2012-13 saw CAD breach 4.8% of GDP — triggered the May-Aug 2013 Taper Tantrum and the rupee's slide from ₹54 to ₹68.
Since 2014, CAD has stayed within 2.5% in every year except FY13.

Twin-Deficit Hypothesis: the fiscal deficit and CAD tend to move together — both reflect economy-wide dis-saving. India's fiscal consolidation in the post-2021 period has helped contain the CAD, even as oil prices rose.

4. Capital & Financial Account — FDI, FPI, ECB, NRI

The capital & financial account records all cross-border financial transactions. India's capital-account inflows finance the current-account deficit and also build up reserves. The composition matters more than the absolute size — stable flows (FDI, remittances) are preferred over fickle flows (FPI, short-term ECB).

4.1 Composition

Item	Nature	Risk-profile
Foreign Direct Investment (FDI)	Equity stake ≥10% with management influence; long-term, productive capital	Most stable; non-debt-creating
Foreign Portfolio Investment (FPI)	Equity & debt market investments <10% stake; tradable; mostly through institutional investors	Most volatile (“hot money”); non-debt for equity, debt for debt-FPI
External Commercial Borrowings (ECB)	Long-term loans from foreign lenders to Indian corporates/PSUs	Debt-creating; subject to RBI route + cap
NRI Deposits	FCNR(B), NRE, NRO accounts	Debt-creating; sensitive to interest-rate differential
Short-term Trade Credit	Buyer/supplier credit up to 3 years	Debt-creating; rolls over
Banking Capital, Loans & Other	Inter-bank flows; multilateral loans	Mixed

4.2 Foreign Direct Investment (FDI)

Definition (BPM6): investment by a non-resident enterprise that establishes a lasting interest in a resident enterprise — typically ≥10% equity stake.
FDI in India peaked at ~US$ 84 billion in FY22 (gross); ~US$ 71 billion in FY24. check for latest update or data
Top source countries (cumulative since 2000): Mauritius, Singapore, USA, Netherlands, Japan, UK — Mauritius & Singapore lead because of past tax-treaty arbitrage (now plugged).
Top sectors: Services, Computer software & hardware, Trading, Telecom, Construction.
Two routes: (a) Automatic Route — no government approval needed (e.g., 100% in most manufacturing); (b) Government Route — prior approval needed (e.g., Defence above 74%, Print media, Multi-brand retail).

4.3 Foreign Portfolio Investment (FPI)

Replaced the older FII / QFI / sub-account framework via SEBI (FPI) Regulations, 2014 (now 2019).
Three categories: Cat-I (lowest risk — sovereign wealth funds, central banks, pension funds), Cat-II (regulated entities like mutual funds, banks), Cat-III (removed in 2019; now folded into Cat-II).
FPI debt investment is capped by RBI Medium Term Framework — sub-limits for G-Secs, SDLs, corporate debt.
Fully Accessible Route (FAR) introduced in 2020 — certain G-Sec tenors fully open to FPIs with no cap; enabled India's inclusion in JP Morgan GBI-EM index (Jun 2024) and Bloomberg EM index (Jan 2025), expected to bring US$ 25-30 billion of debt inflows. check for latest update or data

4.4 External Commercial Borrowings (ECB)

RBI's framework: Master Direction on ECB, 2019; revised 2022.
Two tracks: Foreign Currency ECB and Rupee-denominated ECB (“Masala Bonds”).
Automatic vs Approval Route based on amount, end-use, sector.
All-in-cost ceiling: SOFR + 500 bps (for FC-ECB); benchmark + 450 bps (for INR-ECB).
Minimum Average Maturity Period (MAMP) of 3 years (10 years for higher amounts).

4.5 NRI Deposits

Account	Currency	Repatriability	Tax status
FCNR(B)	Foreign currency (USD, GBP, EUR, JPY, CAD, AUD)	Fully repatriable	Interest tax-free
NRE	INR	Fully repatriable	Interest tax-free in India
NRO	INR	Limited repatriation (US$ 1 mn per year)	Interest taxable in India

4.6 The 1991 and 2013 Defence Episodes

1991 IMDI Bonds & Resurgent India Bonds (1998): NRI-targeted bond issues to plug forex gaps.
FCNR(B) swap window (Sept 2013): in response to taper tantrum — concessional FX-swap on 3-year FCNR(B) deposits attracted ~US$ 34 billion in two months.
These remain the gold-standard playbook for emergency forex mobilisation.

Quality of capital flows: the policy preference order is Remittances > FDI > Long-term ECB > Equity-FPI > Debt-FPI > Short-term trade credit. The first three are non-volatile; the last three flee at the first sign of stress.

5. Foreign Exchange Reserves & Their Composition

India's forex reserves are the assets held by RBI to meet external obligations and intervene in the foreign-exchange market. They are reported every Friday in the RBI's Weekly Statistical Supplement.

5.1 Four Components

Component	What it is	Approx share
Foreign Currency Assets (FCA)	Investments in foreign-currency securities (US Treasuries, AAA sovereign bonds), deposits with BIS, foreign central banks, top-rated commercial banks	~88%
Gold	Physical gold (in India + abroad, RBI brought back 100 tonnes from BoE vaults in 2024); valued at market price	~9%
Special Drawing Rights (SDRs)	IMF-created international reserve asset; basket of USD, EUR, RMB, JPY, GBP	~2.5%
Reserve Tranche Position (RTP)	India's quota with IMF that can be drawn without conditionality	~0.5%

Source: RBI Weekly Statistical Supplement, recent estimates (~US$ 700 bn total). check for latest update or data

5.2 Adequacy Benchmarks

Import Cover: 10-11 months (rule-of-thumb: ≥6 months adequate, <3 months crisis-zone).
Short-term Debt Cover: reserves should exceed short-term external debt by residual maturity. India's ratio: ~3x — very comfortable.
IMF ARA Metric (Assessing Reserve Adequacy): reserves should be 100-150% of a weighted sum of exports, M2, short-term debt, other liabilities. India is at ~225-250%.
Guidotti-Greenspan Rule: reserves ≥ short-term external debt — classic safe-haven yardstick. India easily clears.

5.3 Why Hold Reserves?

Precautionary: buffer against sudden capital outflows (1991, 2008, 2013 lessons).
Transaction: meeting routine import & debt-service payments.
Intervention: manage rupee volatility in the spot & forward markets.
Confidence anchor: reassures investors and rating agencies.

5.4 The Cost of Reserves

Reserves earn low yields (US Treasury ~3-5%), while the marginal cost of capital for India is much higher (corporate borrowing ~9-10%).
This quasi-fiscal cost can run into ₹2-3 lakh crore per year.
But the opportunity cost is dwarfed by the insurance value of reserves — demonstrated repeatedly in 2008, 2013, 2020 and 2022.

5.5 RBI's Reserve Management Strategy

Governed by the RBI Act, 1934 (Section 17) and internal guidelines reviewed by the Central Board.
Triple objective: Safety > Liquidity > Return (in that order).
FCA invested primarily in: deposits with BIS, IMF, foreign central banks, sovereign & quasi-sovereign bonds (AAA/AA), top-rated commercial banks.
RBI follows active reserve management — tactical asset-allocation, currency diversification, duration management.

5.6 Gold — the strategic anchor

RBI's gold holding rose from 357 tonnes (2017) to over 850 tonnes by 2025. check for latest update or data
Major purchases: 200 tonnes from IMF in 2009, regular tactical additions since 2018.
In 2024, RBI shifted ~100 tonnes back from Bank of England vaults to India — reasons cited: rising geopolitical risk + cost of overseas custody.

Mains anchor: India's reserve buffer is a structural strategic asset — its trajectory (US$ 6 billion in 1991 → US$ 700+ billion now) is the single best summary of post-reform external-sector progress. The cost (low yield) is a deliberate premium for sovereign insurance.

6. Exchange Rate Systems & Rupee Management

The exchange rate is the price of one currency in terms of another. In India, the rupee's external value is market-determined but the RBI intervenes to smooth volatility — a system called a managed float (also known as a “dirty float”).

6.1 Classification of Exchange-Rate Regimes (IMF AREAER)

Regime	Definition	Example
Hard Peg	Currency board, dollarisation — no independent monetary policy	Hong Kong (HKD-USD board), Ecuador (dollarised)
Soft Peg	Conventional peg, crawling peg, target band	Saudi Riyal (USD peg), Chinese Yuan (basket)
Floating	Free float (no intervention) or Managed float (intervention allowed)	USD, EUR, JPY, GBP (free); INR, IDR, BRL (managed)
Other	Multiple exchange rates, dual system	Argentina (historically), Venezuela

6.2 India's Regime — the Journey

1947-71: pegged to Pound Sterling; then to a basket of currencies.
1971-78: pegged to Pound with intervention band.
1978-92: basket peg — weighted basket of major trading partners.
1992 (LERMS): Liberalised Exchange Rate Management System — dual exchange rate (60% market, 40% official).
1993 → present: unified market-determined rate; managed float. RBI intervenes to curb volatility, not to defend a level.

6.3 NEER & REER — Effective Rates

NEER = weighted geometric mean of bilateral nominal exchange rates
REER = NEER × (Domestic price level / Trading-partner price level weighted)

NEER (Nominal Effective Exchange Rate): external value of INR against a basket of trading-partner currencies — ignores inflation differentials.
REER (Real Effective Exchange Rate): NEER adjusted for inflation differential — the true measure of external competitiveness.
RBI publishes both a 6-currency basket (USD, EUR, GBP, JPY, HKD, CNY) and a 40-currency basket monthly.
When REER rises, exports become less competitive — the currency is “overvalued” on a competitive-price basis.
India's REER has been consistently in the 100-105 range (base 2015-16) — suggesting the rupee has been mildly overvalued on the CPI-REER metric in recent years. check for latest update or data

6.4 RBI's Intervention Toolkit

Spot market: direct USD sale (to arrest depreciation) or purchase (to arrest appreciation).
Forward market: long/short forward positions to influence expectations without immediate reserve impact.
NDF (Non-Deliverable Forward) market: offshore intervention post-2019, particularly in Singapore & London markets.
Sell-buy / Buy-sell swaps: combined spot & forward transactions to manage liquidity.
MSF-linked liquidity operations: tighten domestic liquidity to reduce speculative pressure.

6.5 Theories of Exchange-Rate Determination

Mint Parity Theory: under gold standard, rates fixed by gold content.
Purchasing Power Parity (PPP) — Cassel, 1918: exchange rate reflects the ratio of price levels between countries. Absolute PPP: e = P/P*. Relative PPP: %Δe = π − π*.
Balance of Payments Theory: exchange rate determined by demand-supply of forex on BoP transactions.
Interest Rate Parity (IRP) — Keynes: forward premium equals interest-rate differential; underpins carry-trade dynamics.
Monetary Approach: money-supply differentials drive exchange rates — foundation of modern DSGE models.
Asset-market approach (Dornbusch overshooting, 1976): exchange rates overshoot equilibrium due to sticky prices & fast asset markets.

6.6 Depreciation vs Devaluation vs Depreciation (managed)

Term	Regime	Cause
Depreciation / Appreciation	Floating (managed or free)	Market forces of demand & supply
Devaluation / Revaluation	Fixed / pegged	Administrative decision by monetary authority

India devalued the rupee in 1949, 1966 and 1991 under fixed regimes. Post-1993 all rupee movements are technically depreciations/appreciations, not devaluations.

6.7 Rupee Milestones

1947: US$1 = ₹1 (par with the dollar).
1966: devalued 57% to US$1 = ₹7.50.
1991: devalued 20% to US$1 = ₹25.95.
2013: taper tantrum — touched ₹68/US$.
2022-25: US-Fed hiking cycle + geopolitical shocks pushed rupee to ₹85+/US$. check for latest update or data

Impossible Trinity (Mundell-Fleming): a country cannot simultaneously have fixed exchange rate, free capital flow, and independent monetary policy. India's choice is to give up the first — letting the rupee float within a managed band — while retaining monetary independence and increasingly opening the capital account.

7. Convertibility — Current vs Capital (Tarapore)

Currency convertibility is the freedom to convert domestic currency into foreign currency (and vice versa) without restrictions. India's approach has been to sequence convertibility carefully — full on the current account, calibrated on the capital account.

7.1 Current Account Convertibility (CAC)

Freedom to convert INR into foreign currency for current-account transactions: imports, exports, travel, education, medical, remittances.
India adopted full Current Account Convertibility on 20 August 1994 by accepting the obligations of Article VIII of IMF Articles of Agreement.
Governed today by FEMA, 1999 (replaced FERA, 1973). Basic principle: current-account transactions are free unless explicitly restricted.

7.2 Capital Account Convertibility (KAC / CAC-II)

Freedom to convert INR into foreign currency (and vice versa) for capital-account transactions: FDI, FPI, ECB, real-estate purchases, foreign asset acquisition.
India follows partial capital-account convertibility — graduated by category of investor, type of instrument, and end-use.
The general FEMA principle for capital-account transactions is the reverse: prohibited unless expressly permitted.

7.3 Tarapore Committee-I (1997)

Chaired by S.S. Tarapore, former RBI Deputy Governor. Recommended a phased 3-year move to full CAC (1997-2000) subject to three preconditions:

Gross fiscal deficit to be reduced from 4.5% to 3.5% of GDP.
Mandated inflation target of 3-5% for three years.
Financial-sector reform — reduction of gross NPAs to 5%, average effective CRR to 3%.

The 1997 Asian financial crisis intervened — the recommendations were shelved.

7.4 Tarapore Committee-II (2006)

Revived by then-PM Manmohan Singh. Second Tarapore recommendations:

Move to Fuller Capital Account Convertibility (FCAC) in three phases (2006-11).
Continue calibrated liberalisation for corporates & individuals under Liberalised Remittance Scheme (LRS).
Introduce a Currency Transaction Tax to smooth flows.
Set up a Financial Stability & Development Council (later realised in 2010).
The 2008 Global Financial Crisis again put the full-convertibility timeline on hold.

7.5 Where India stands today — a de-facto sequenced opening

Direction	Openness
FDI inflows	Very open — 100% under Automatic Route in most sectors
FDI outflows (ODI)	Open with net-worth linked caps under LRS (Overseas Investment Rules, 2022)
FPI equity inflows	Very open with SEBI registration
FPI debt inflows	Capped under Medium Term Framework; FAR route unlimited for eligible G-Secs
ECB by corporates	Open under Automatic Route within all-in-cost ceiling
Individual LRS outflows	US$ 250,000 per person per year
Rupee internationalisation	New Vostro accounts for INR trade settlement (2022 onwards)

7.6 Liberalised Remittance Scheme (LRS)

Launched Feb 2004; current limit US$ 250,000 per person per financial year.
Purpose: any permissible current or capital account transaction — education, health, gifts, investment in shares & property abroad.
TCS (Tax Collected at Source) under Section 206C(1G) of Income-tax Act: 20% on LRS remittances above ₹7 lakh (with exceptions for education-loan-financed and medical).

7.7 Benefits vs Risks of Full CAC

Benefits

Deeper capital markets, lower cost of capital
Better risk-diversification for households
Global integration & efficiency gains
Discipline on domestic policymakers

Risks

Sudden-stop risk from capital-flow reversals
Contagion transmission — imported crises
Loss of monetary autonomy (Impossible Trinity)
Currency mismatch on unhedged corporate debt

The Rajan-Subbarao consensus: India's approach has been to open the capital account through a “lane discipline” — equity flows first, long-term debt second, short-term debt last. This ordering has been vindicated by the resilience shown during 2013 taper tantrum, 2018-19 EM sell-off, 2020 Covid outflow, and 2022 Fed-hiking cycle.

8. International Trade — Composition & Partners

8.1 India's Trade in Numbers

Merchandise exports: ~US$ 437 billion in FY24; target of US$ 1 trillion in goods & another US$ 1 trillion in services by 2030. check for latest update or data
Merchandise imports: ~US$ 678 billion in FY24; trade deficit ~US$ 241 billion.
Services exports: ~US$ 341 billion in FY24; services trade surplus ~US$ 163 billion.
Total trade (goods + services): ~US$ 1.6 trillion — making India the world's ~10th largest merchandise exporter and ~5th largest services exporter.

8.2 Composition of Merchandise Exports (FY24 illustrative)

Category	Approx share	Key items
Engineering goods	~25%	Iron & steel articles, machinery, transport equipment, industrial equipment
Petroleum products	~19%	Refined diesel, petrol, ATF (Jamnagar-Reliance, Vadinar-Nayara)
Gems & jewellery	~7%	Cut & polished diamonds, gold jewellery (Surat cluster)
Chemicals & pharmaceuticals	~13%	Formulations, APIs, agrochemicals
Electronic goods	~7%	Mobile phones (Apple exports crossed US$ 12 bn in FY24)
Textiles & RMG	~9%	Cotton yarn, RMG, home textiles
Agricultural & allied	~11%	Rice (world's largest exporter), marine products, spices, sugar
Others	~9%	Plastics, ceramics, leather, ores

8.3 Composition of Merchandise Imports

Category	Approx share
Crude oil & petroleum products	~25%
Electronic goods (chips, telecom, TV panels)	~10%
Machinery & equipment	~9%
Gold & silver	~8%
Chemicals	~7%
Iron & steel	~4%
Coal, coke & briquettes	~5%
Vegetable oils	~2%
Others	~30%

8.4 Top Trading Partners (FY24 estimates)

Rank	Total Trade Partner	Export Partner	Import Partner
1	USA / China (close)	USA	China
2	China / USA	UAE	Russia (post-Ukraine crude)
3	UAE	Netherlands	UAE
4	Russia	China	USA
5	Saudi Arabia	Singapore / UK	Saudi Arabia

Source: DGCI&S / Ministry of Commerce. check for latest update or data

8.5 India's Services Trade — the “silent story”

Software services: the crown jewel — US$ 200+ billion exports; TCS, Infosys, Wipro, HCL account for ~40% of formal exports.
Global Capability Centres (GCCs): ~1,600 GCCs; 1.9 million employees; expected to touch US$ 100 billion revenue by 2030.
Business services: R&D, engineering, consulting.
Travel: ~US$ 25 billion gross earnings (recovering from Covid trough).
Transportation: shipping, aviation, freight forwarding — India runs a net deficit.

8.6 Terms of Trade (ToT)

Net Barter ToT = (Px / Pm) × 100 (unit-value indices)

A rise in ToT means each unit of exports buys more imports — welfare gain.
India's ToT has been volatile — deteriorating in high oil-price phases (2011-14, 2022-23), improving in soft-oil phases (2015-16, 2020).
The Prebisch-Singer thesis holds that commodity exporters face secular ToT decline — a warning against over-reliance on primary exports.

8.7 Key Export-Promotion & Import-Substitution Institutions

Directorate General of Foreign Trade (DGFT): apex body under Ministry of Commerce; implements FTP; issues IEC codes.
Export Promotion Councils (EPCs): 26 sectoral councils (FIEO, EEPC, GJEPC, APEDA, etc.).
ECGC (Export Credit Guarantee Corporation): insurance cover for exporters against payment risk.
Exim Bank: long-term financing for exports, buyer's credit, LOCs to friendly countries.
India Trade Promotion Organisation (ITPO): Pragati Maidan; India Expo Mart.
DGCI&S: Directorate General of Commercial Intelligence & Statistics (Kolkata) — official trade data.

Structural pattern: India runs a large deficit with the commodity-supplying east (China, Russia, Middle East) and a large surplus with the final-consumer west (USA, EU, UK). This is the classic developing-economy trade triangle.

9. Foreign Trade Policy 2023, FTAs & WTO

9.1 Foreign Trade Policy 2023

The Foreign Trade Policy (FTP) 2023 was released on 31 March 2023 by the Commerce Ministry. Unlike previous 5-year FTPs, this policy is dynamic — open-ended, updated as needs arise, with no sunset date. Vision: US$ 2 trillion in goods + services exports by 2030.

Four Pillars of FTP 2023

Incentive to Remission: shift from direct incentives (MEIS, SEIS) to WTO-compliant duty-remission (RoDTEP, RoSCTL, Advance Authorisation, EPCG).
Export Promotion through Collaboration: Districts as Export Hubs; state-level export promotion committees.
Ease of Doing Business: automated, IT-enabled processes; e-Certificate of Origin; reduced fees; faceless approvals.
Emerging Areas: e-commerce exports, SCOMET (dual-use goods) rationalisation, rupee-denominated trade, GIFT City IFSC integration.

Key Schemes under FTP 2023

RoDTEP (Remission of Duties & Taxes on Exported Products): refunds embedded taxes not otherwise refunded (electricity duty, mandi tax, VAT on fuel). Replaced MEIS from Jan 2021.
RoSCTL (Rebate of State & Central Taxes & Levies): apparel & made-ups.
Advance Authorisation: duty-free import of inputs used in export production.
EPCG (Export Promotion Capital Goods) Scheme: zero-duty import of capital goods against export obligation of 6x duty in 6 years.
Duty-Free Import Authorisation (DFIA): transferable, post-export duty relief.
SEZ Amnesty Scheme: one-time settlement for pending disputes.
Towns of Export Excellence (TEE): Faridabad, Moradabad, Mirzapur, Varanasi added in 2023.
Amnesty for Advance/EPCG defaults (one-time closure, 2023).

Districts as Export Hubs (DEH)

Every district identifies ODOP (One-District-One-Product) opportunities; State Export Promotion Committees + District Export Promotion Committees drive execution — ~750 districts, 500+ unique products mapped.

9.2 India's Free Trade Agreements (FTAs)

FTA / CEPA / CECA	Year	Notes
India-Sri Lanka FTA	2000	First-generation FTA
South Asian Free Trade Area (SAFTA)	2006	Under SAARC framework
ASEAN-India TIG	2010	Under review since 2019
Japan (CEPA)	2011	Comprehensive
South Korea (CEPA)	2010	Under review
Malaysia (CECA)	2011
Mauritius (CECPA)	2021	First with an African nation
UAE (CEPA)	Feb 2022	Landmark — 90% tariff lines liberalised
Australia (Ind-Aus ECTA)	Apr 2022	Interim; comprehensive under negotiation
EFTA (Switzerland, Norway, Iceland, Liechtenstein) TEPA	Mar 2024	US$ 100 bn investment commitment by EFTA over 15 years
UK FTA	Under negotiation — final round pending check for latest update or data	Immigration & social security key sticking points
EU FTA	Under negotiation	Restarted after 2013 pause
Oman CEPA	Under negotiation	Advanced stage

India walked out of RCEP (Nov 2019) citing concerns about Chinese import surge & agriculture/dairy safeguards.

9.3 India & the WTO

India is a founding member of GATT (1948) and WTO (1 January 1995, Marrakesh Agreement).
Uses the Special & Differential Treatment (S&DT) provisions available to developing countries.
Committed to the three pillars of WTO: Market Access, Domestic Support, Export Competition.

Key WTO Agreements & Indian Positions

Agreement	Coverage	India's position
Agreement on Agriculture (AoA)	Market access, domestic support (AMS 10% of value of production for developing), export subsidies	Defends MSP under “green box”/“public stockholding”; seeks permanent solution beyond Bali (2013) & Nairobi (2015)
TRIPS	Patents, copyrights, trademarks	Uses Section 3(d) & compulsory licences (Novartis v. NATCO 2013); pushes TRIPS waiver on Covid vaccines
GATS	Services trade	India champions Mode-4 (movement of natural persons) liberalisation
Agreement on Subsidies & CVMs (ASCM)	Rules on subsidies	Won graduation from Annex VII (Feb 2017) — India crossed GNI per capita threshold; export subsidies phased out
Trade Facilitation Agreement	Customs procedures; single window	Ratified Apr 2016 — India got TFA-Cat A (immediate), Cat B & C (phased) commitments
Fisheries Subsidies Agreement	Elimination of harmful fishing subsidies	India seeks S&DT for small fisherfolk (up to 12 nm) — unresolved
E-commerce Moratorium	Extended repeatedly — MC13 in Feb 2024 renewed till MC14 (2026)	India + South Africa historically opposed; secured extension linked to work programme
Dispute Settlement Body (DSB)	Appellate Body has been non-functional since 2019 (US blocks judge appointments)	India + others created MPIA workaround; India is member of MPIA since 2020

Recent WTO Ministerial Conferences

MC11 (Buenos Aires, 2017): no ministerial declaration; India defended food-security carve-outs.
MC12 (Geneva, June 2022): Fisheries Subsidies Agreement; TRIPS partial waiver on Covid vaccines; e-commerce moratorium extended.
MC13 (Abu Dhabi, Feb 2024): e-commerce moratorium renewed till MC14; no breakthrough on agriculture PSH or fisheries phase-2. check for latest update or data

9.4 Peace Clause & Public Stockholding (PSH)

WTO's Agreement on Agriculture caps trade-distorting subsidies (Amber Box) at 10% of value of production for developing countries.
India's MSP-based procurement for food security risks breaching this cap.
The Bali “Peace Clause” (Dec 2013) shields such breaches from WTO challenge until a permanent solution is found.
India first invoked the Peace Clause for rice in 2018-19; a permanent solution remains elusive — the top external-sector agenda item for India at WTO.

Mains anchor: India's trade policy is a triangulation between domestic sensitivities (agri-labour, MSMEs), strategic autonomy (walking out of RCEP), and global integration (bilateral CEPAs, UAE, Australia, EFTA, EU/UK pipeline). The frame “selective globalisation” captures this well.

10. Foreign Direct Investment — Routes & Caps

India's FDI regime is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 under FEMA — consolidating the earlier FDI Policy issued by DPIIT (Department for Promotion of Industry and Internal Trade). Master document: DPIIT Consolidated FDI Policy Circular.

10.1 The Two Routes

Route	Approval	Examples
Automatic Route	No government approval — only RBI reporting through AD Bank	100% in most manufacturing, IT, e-commerce marketplace, agriculture
Government Route	Prior approval by the relevant Ministry / DPIIT via Foreign Investment Facilitation Portal (FIFP)	Defence (74-100%), Print media, Multi-brand retail (51%), Broadcasting content services, Satellites, Pension (74%)

10.2 Sectoral Caps — the Key Numbers

Sector	Cap	Route
Agriculture & animal husbandry (specified activities)	100%	Automatic
Manufacturing (most)	100%	Automatic
Defence	74% Auto; up to 100% Government (if access to modern tech)	Mixed
Insurance (companies)	74%	Automatic (raised from 49% in 2021; Budget 2025 proposed 100%) check for latest update or data
Insurance intermediaries	100%	Automatic
Pension	74%	Automatic (aligned with insurance)
Banking — Private	74% (49% Auto + 25% Govt)	Mixed
Banking — Public Sector	20%	Government
Telecom services	100%	Automatic (raised from 49%+51% mixed to 100% Auto in 2021)
Print media — newspapers & periodicals dealing with news & current affairs	26%	Government
Broadcasting — news channels	26%	Government
Broadcasting — non-news	100%	Automatic
Multi-brand retail	51%	Government (with conditions)
Single-brand retail	100%	Automatic (30% local sourcing beyond 51%)
E-commerce marketplace model	100%	Automatic
E-commerce inventory model (B2C)	0% (prohibited)	NA
Petroleum refining (PSUs)	49%	Automatic
Space (satellite manufacturing & operation)	100%	Auto up to 74% (satellites); Auto up to 49% (launch vehicles) — liberalised Feb 2024
Atomic energy, lottery, gambling, tobacco, chit funds	0% (prohibited)	NA

10.3 Press Note 3 (April 2020)

In response to Covid-era opportunistic acquisitions, DPIIT issued Press Note 3 (2020) requiring prior government approval for FDI from any country that shares a land border with India (China, Bangladesh, Pakistan, Nepal, Bhutan, Myanmar, Afghanistan) — regardless of sector or route. This is India's de facto FDI screening mechanism against neighbourhood risk.

10.4 FDI Trends (last decade)

FDI inflows crossed US$ 84 billion (gross) in FY22 — all-time high.
Slowed to ~US$ 71 billion in FY24 amid global monetary tightening.
Cumulative FDI equity inflows since April 2000: US$ 700+ billion. check for latest update or data
Round-tripping concern: significant flows from Mauritius / Singapore turned out to be Indian money re-routed for treaty benefits — addressed by India-Mauritius DTAA amendment (2016) & the GAAR provisions (2017).

10.5 Overseas Direct Investment (ODI) by Indians

Governed by Foreign Exchange Management (Overseas Investment) Rules & Regulations, 2022 — replaced the earlier ODI framework.
Indian party can invest up to 400% of net worth under Automatic Route.
Aimed at facilitating Indian MNCs' global expansion (Tata Steel-Corus 2007, Sun Pharma-Ranbaxy 2014, Adani, Reliance, Ola, Zomato acquisitions).
2022 Rules introduced a bright-line distinction between ODI (strategic) & Overseas Portfolio Investment (OPI, financial).

10.6 Recent FDI Reforms (2019-25)

2019: Contract manufacturing & single-brand retail liberalised.
2020: Insurance intermediaries 100% Automatic; PN-3 restrictions on land-border neighbours.
2021: Insurance cap raised to 74%; petroleum PSUs' disinvestment via strategic sale allowed 100% FDI.
2021: Telecom 100% Automatic.
2024: Space FDI liberalised (satellites 100%, launch vehicles 49% Automatic).
2025 (Budget): Insurance FDI cap proposed to be raised from 74% to 100% (subject to Parliamentary approval). check for latest update or data

Frame for Mains: FDI is preferred over FPI because it is (i) long-term, (ii) brings technology & management, (iii) non-debt creating, (iv) tied to real assets. Its share in India's total capital-account inflows has risen from ~30% (2000s) to ~60% (2020s) — a healthy compositional shift.

11. External Debt & External Vulnerability

11.1 External Debt — Definition & Sources

External debt is the amount of debt (principal + interest) owed by residents of a country to non-residents, denominated in either domestic or foreign currency. Two authoritative data sources for India:

India's External Debt: A Status Report — annual by DEA, Ministry of Finance.
External Debt Statistics: India — quarterly RBI release.

11.2 India's External Debt Profile

Total external debt: ~US$ 673 billion (Mar 2024) — ~18-19% of GDP. check for latest update or data
Composition: Sovereign ~18%, Non-sovereign ~82%.
Currency composition: USD ~53%, INR ~31%, SDR ~5%, JPY ~5%, EUR ~2%.
Maturity: Long-term ~80%; Short-term ~20%.
Instrument-wise: Commercial borrowings 37%, NRI deposits 24%, Short-term trade credit 18%, Multilateral 15%, Bilateral 3%, Rupee debt 3%.

11.3 Debt-Sustainability Indicators

Indicator	India	Prudential threshold
External Debt / GDP	~18-19%	<30% low-risk
Short-term Debt / Total External Debt	~20%	<25% low-risk
Short-term Debt / Forex Reserves	~19%	<50% Guidotti-Greenspan safe
Forex Reserves / Total External Debt	~99% (Mar 2024)	>100% super-safe; India near this level
Debt-Service Ratio (DSR)	~6-7%	<10% safe
Foreign-currency debt share	~69%	Watch INR appreciation reduces this

Source: DEA India's External Debt Status Report 2024. check for latest update or data

11.4 External Vulnerability — Indicators to Watch

Current Account Deficit (CAD) as % of GDP — sustainability ~2.5%.
Import cover in months — healthy ~10-12.
Short-term debt / reserves — Guidotti-Greenspan rule.
FPI dependence for CAD financing — the fickle component.
Un-hedged corporate forex exposure — RBI monitors quarterly.
Rating agency outlook (Moody's, S&P, Fitch): India retained investment-grade with S&P upgrading outlook to “Positive” in May 2024, then to BBB rating.

11.5 India's External Vulnerability — then vs now

Indicator	1991	2013 (Taper Tantrum)	2024
Forex reserves (US$ bn)	1.2	275	~700
Import cover (months)	~0.5	~7	~10-11
Short-term debt / reserves	147%	34%	~19%
CAD / GDP	3%+	4.8%	~0.7-1%
External debt / GDP	~40%	22%	~18-19%

Source: DEA External Debt Status Reports; RBI archives.

11.6 Sovereign Ratings & Their Effect

India held BBB- (S&P), Baa3 (Moody's), BBB- (Fitch) — lowest investment grade — for over a decade.
May 2024: S&P revised India's outlook from “Stable” to “Positive”, and in 2025 upgraded India to BBB — the first upgrade in 18 years. check for latest update or data
Rating upgrades lower sovereign spread, ease corporate borrowing costs, and expand the investable universe for pension funds & SWFs.
India has publicly disputed rating methodology (double-counting of GDP-per-capita bias) — the Chief Economic Adviser's annual report on the topic since 2023.

11.7 Institutional Backstops

IMF Stand-By Arrangement: not used since 1991.
SAARC Currency Swap Framework (2012): US$ 2 bn ceiling for SAARC neighbours.
Bilateral swap lines: US$ 75 bn with Japan (renewed 2023); smaller lines with UAE, Sri Lanka, Bhutan.
SDR allocation: India got US$ 17.8 bn worth of SDRs in Aug 2021 as part of IMF's US$ 650 bn general allocation for Covid recovery.

The 30-year trajectory: from 1991's near-default to 2024's ~US$ 700 bn reserve chest, India has fundamentally re-engineered its external-sector vulnerability. The three critical Guidotti-Greenspan indicators — short-term debt to reserves, import cover, and CAD financing — are all in the safest quartile among EMs.

12. Export Promotion Schemes & Institutions

2.1 Key Export Promotion Schemes

Scheme	Mechanism
RoDTEP (Remission of Duties & Taxes on Exported Products, 2021)	Refunds embedded central/state/local taxes not otherwise rebated (e.g. mandi tax, electricity duty); replaced the WTO-flagged MEIS scheme
RoSCTL	Rebate of State & Central Taxes & Levies, specific to textile/apparel exports
Advance Authorisation Scheme	Duty-free import of inputs physically incorporated into export products
EPCG (Export Promotion Capital Goods)	Duty-free import of capital goods for producing export goods, subject to export obligation
Interest Equalisation Scheme	Subsidised pre/post-shipment export credit interest rates, mainly for MSME exporters

2.2 Institutional Architecture

DGFT (Directorate General of Foreign Trade) — administers FTP, issues Importer-Exporter Codes (IEC).
Export Credit Guarantee Corporation (ECGC) — provides export credit insurance against payment-default risk.
Export-Import (EXIM) Bank — specialised financial institution for export/import financing & overseas project export support.
Export Promotion Councils (EPCs) — sector-specific bodies (e.g. AEPC for apparel, EEPC for engineering goods) facilitating trade promotion.

Prelims trap: RoDTEP replaced MEIS (Merchandise Exports from India Scheme), not the Advance Authorisation or EPCG schemes — MEIS was withdrawn as it was found WTO-inconsistent (export subsidy tied to export performance) in a WTO dispute panel ruling.

13. Special Economic Zones & Industrial Corridors

3.1 SEZ Framework

Governed by the SEZ Act, 2005 & SEZ Rules, 2006 — SEZs are duty-free enclaves treated as foreign territory for trade/duty/tariff purposes, offering tax holidays, duty-free imports & simplified compliance to attract export-oriented investment.

3.2 DESH Bill & SEZ 2.0

The proposed Development of Enterprise & Service Hubs (DESH) Bill aims to replace the SEZ Act, broadening the scope beyond pure export orientation to also serve the domestic market (subject to duty payment), integrating SEZs more closely with the domestic economy. check for latest update or data

3.3 Industrial Corridors

Complementary infrastructure-led approach: Delhi-Mumbai Industrial Corridor (DMIC), Amritsar-Kolkata Industrial Corridor, Chennai-Bengaluru Industrial Corridor — integrating manufacturing hubs with multi-modal logistics (linking to Topic 14's PM Gati Shakti framework).

Mains anchor: SEZs' mixed track record (strong in IT/ITES exports, weaker in manufacturing-led job creation) has driven the SEZ 2.0/DESH rethink — from a narrow export-enclave model toward integrated hubs serving both export & domestic markets.

3.4 GIFT City & International Financial Services Centre (IFSC)

Gujarat International Finance Tec-City (GIFT City), Gandhinagar — India's first operational International Financial Services Centre (IFSC), set up to onshore financial services (banking, capital markets, insurance, fund management) that Indian entities earlier routed through offshore hubs like Singapore, Dubai & Mauritius.

Dual legal character: located inside a SEZ yet treated as a “deemed foreign territory” for financial regulation — transactions are in foreign currency only (chiefly USD), giving onshore-offshore repatriation freedom without full capital-account convertibility onshore.
IFSCA: the International Financial Services Centres Authority (est. 2020, HQ GIFT City) is the unified regulator for all IFSC activity — consolidating powers otherwise split across RBI, SEBI, IRDAI & PFRDA into a single window.
Key platforms: India International Bullion Exchange (IIBX) (gold/silver imports channel), GIFT Nifty (successor to SGX Nifty, shifting derivatives volume from Singapore to India), plus emerging aircraft & ship leasing hubs and offshore fund/family-office structures.
Incentives: tax holidays, exemptions on STT/CTT/stamp duty & competitive regime to draw global financial firms.

Prelims trap: IFSCA (2020, GIFT City) ≠ IFSC-the-code. IFSCA is the unified regulator; an IFSC is the enclave. GIFT City is India's only operational IFSC and is legally an SEZ treated as deemed-foreign for finance.

Mains anchor: GIFT-IFSC is the external-sector complement to capital-account liberalisation — it lets India capture financial-services value (fees, jobs, derivatives volume) that leaked offshore, while ring-fencing rupee convertibility risk via a foreign-currency-only enclave.

14. WTO — Origin, Structure & Principles

7.1 From GATT to WTO

The General Agreement on Tariffs and Trade (GATT, 1947) was a provisional multilateral framework for tariff reduction. The Uruguay Round (1986-94) culminated in the Marrakesh Agreement, establishing the World Trade Organization (WTO) on 1 January 1995 as a permanent institution with a formal dispute settlement mechanism — a major upgrade from GATT's weaker enforcement.

7.2 WTO's Core Principles

Most Favoured Nation (MFN) — a trade concession granted to one member must be extended to all members (non-discrimination among trading partners), subject to FTA/customs-union exceptions.
National Treatment — imported goods, once inside a market, must be treated no less favourably than domestically produced goods.
Reciprocity — trade concessions are negotiated on a mutual give-and-take basis.
Transparency — trade policies/measures must be notified & publicly accessible.

7.3 Institutional Structure

Ministerial Conference (highest decision-making body, meets at least once every 2 years) → General Council (day-to-day governance, also functions as Dispute Settlement Body & Trade Policy Review Body) → specialised councils (Goods, Services, TRIPS) & committees. Headquartered in Geneva; decisions typically by consensus.

Mains anchor: WTO's shift from GATT's "provisional" tariff-reduction focus to a permanent, rules-based institution with binding dispute settlement marked a qualitative leap in multilateral trade governance — though this very strength (binding rulings) is now central to the Appellate Body crisis (Section 9).

15. Key WTO Agreements — AoA, TRIPS, GATS

8.1 Agreement on Agriculture (AoA)

Structures agricultural support into three "boxes": Amber Box (trade-distorting domestic support, subject to reduction commitments), Green Box (non/minimally trade-distorting support, e.g. research, disaster relief — exempt from reduction), Blue Box (production-limiting support, exempt). India's food-security public stockholding programmes (MSP-based procurement) have repeatedly clashed with AoA's Amber Box subsidy ceilings, addressed via the "Peace Clause" (Bali Ministerial, 2013) providing interim protection from legal challenge pending a permanent solution.

8.2 TRIPS Agreement

Trade-Related Aspects of Intellectual Property Rights — sets minimum IP protection standards (patents, copyrights, trademarks) across members. India's Doha Declaration (2001) flexibilities affirm members' right to use compulsory licensing for public health emergencies — relevant to India's generic-pharmaceutical export interests & the COVID-19-era TRIPS waiver debate on vaccine IP.

8.3 GATS

General Agreement on Trade in Services — covers four modes of service supply: Mode 1 (cross-border supply), Mode 2 (consumption abroad), Mode 3 (commercial presence/FDI in services), Mode 4 (movement of natural persons) — Mode 4 is of particular interest to India (IT professional mobility) but remains the most restricted mode globally.

Prelims trap: The Amber Box (trade-distorting) is subject to reduction commitments; the Green & Blue Boxes are largely exempt — India's public stockholding subsidy calculation dispute centres on whether its MSP-based procurement should count toward the Amber Box ceiling using outdated 1986-88 reference prices.

16. WTO Dispute Settlement & Appellate Body Crisis

9.1 Dispute Settlement Process

Consultations → Panel formation (if consultations fail) → Panel ruling → Appeal to Appellate Body (final adjudication) → Adoption by Dispute Settlement Body (DSB) → Compliance/retaliation if non-compliant. Designed to be faster & more binding than GATT's consensus-based (effectively vetoable) dispute process.

9.2 Appellate Body Paralysis

Since 2019, the Appellate Body has been non-functional as the US has blocked (via veto over consensus) the appointment of new Appellate Body members, citing concerns over judicial overreach. Result: appeals filed since then go into a legal void ("appeal into the void"), undermining binding dispute resolution — a major crisis for WTO's rules-based credibility. check for latest update or data

9.3 Interim Workarounds

Multi-Party Interim Appeal Arbitration Arrangement (MPIA) — a plurilateral workaround among willing WTO members (India is not currently a signatory) to preserve a two-stage dispute process outside the paralysed Appellate Body.

Watch for updates: WTO Appellate Body reform efforts & MPIA membership status remain fluid — a live current-affairs area for Mains GS-II/III. check for latest update or data

17. Free Trade Agreements & India's FTA Strategy

10.1 Types of Trade Agreements

Type	Scope
PTA (Preferential Trade Agreement)	Reduced tariffs on a limited/selected list of goods
FTA (Free Trade Agreement)	Tariff elimination/reduction on substantially all trade in goods (often + services)
CEPA/CECA (Comprehensive Economic Partnership/Cooperation Agreement)	Broader than FTA — covers goods, services, investment & other economic cooperation areas
Customs Union	FTA + common external tariff toward non-members

10.2 India's Key FTAs & Negotiations

India-UAE CEPA (2022) — comprehensive agreement covering goods, services & investment.
India-Australia ECTA (Economic Cooperation & Trade Agreement, 2022), progressing toward a fuller CECA.
India-EFTA TEPA (Trade & Economic Partnership Agreement, European Free Trade Association) — notable for investment commitment linkage. check for latest update or data
India-EU FTA negotiations — long-running, resumed talks. check for latest update or data

10.3 RCEP Non-Participation

India withdrew from the Regional Comprehensive Economic Partnership (RCEP) negotiations in 2019, citing concerns over the trade-deficit impact (esp. vis-a-vis China), inadequate safeguard mechanisms & insufficient market access for services/professionals — a significant strategic-autonomy-vs-integration Mains debate.

Mains anchor: India's FTA strategy has shifted toward selective, "quality over quantity" bilateral deals with like-minded/complementary economies (UAE, Australia, EU, UK) rather than broad multilateral mega-regional pacts like RCEP — balancing market access gains against domestic-sector protection concerns.

18. Trade Facilitation, Protectionism & Emerging Issues

11.1 Trade Facilitation Agreement (TFA)

WTO's Trade Facilitation Agreement (Bali Ministerial, 2013; entered into force 2017) — aims to simplify customs procedures, reduce trade transaction costs & improve cross-border logistics; India's implementation is linked to the Logistics Performance Index improvements discussed in Topic 14.

11.2 Rising Protectionism & Trade Remedies

Anti-dumping duties — imposed when imports are priced below normal/home-market value, causing injury to domestic industry.
Countervailing duties — imposed to offset foreign government subsidies benefiting exporters.
Safeguard measures — temporary restrictions against a genuine surge in imports causing serious injury, applied non-discriminately (unlike anti-dumping/CVD which target specific countries/firms).

11.3 Emerging Issues at WTO

E-commerce moratorium (on customs duties for electronic transmissions, periodically extended at Ministerials), fisheries subsidies agreement (2022, first WTO agreement in years with an environmental focus), & plurilateral initiatives on investment facilitation & e-commerce — reflecting the shift toward "plurilateral" (subset of willing members) negotiation given multilateral consensus gridlock.

Prelims trap: Anti-dumping duties target specific exporting firms/countries engaged in dumping; safeguard measures are applied on a non-discriminatory (all-source) basis against a general import surge — a frequently tested distinction among WTO-permitted trade remedies.

19. Current Affairs Anchor (2024-26)

Foreign Trade Policy 2023: released 31 March 2023; dynamic (open-ended); US$ 2 trillion export target by 2030; four pillars (Incentive-to-Remission, Collaboration, EoDB, Emerging Areas).
India-EFTA TEPA (Mar 2024): first FTA linking market access with a binding US$ 100 billion investment commitment over 15 years, expected to create ~1 million direct jobs.
India-UK FTA: negotiations near-final; sticking points on Mode-4 (services professionals) & social-security contribution reciprocity. check for latest update or data
India-EU FTA: negotiations restarted after 2013 pause; carbon border adjustment (CBAM) is a new friction point.
India-Oman CEPA: in final leg — India's second GCC bilateral after UAE.
Rupee internationalisation: RBI framework (Jul 2022) allows Special Rupee Vostro Accounts (SRVAs) for INR-denominated trade; over 20 countries onboarded (Russia, Sri Lanka, Mauritius, Bangladesh, etc.).
India's inclusion in JP Morgan GBI-EM Global Diversified Index (28 Jun 2024) — 10-month phased inclusion; expected passive inflows of US$ 25-30 billion in India's FAR G-Secs.
Bloomberg EM Local Currency Government Index inclusion: announced Jan 2025 — adds another passive flow driver. check for latest update or data
Forex reserves: crossed US$ 700 billion for the first time in September 2024. India is the 4th largest reserve holder globally after China, Japan, Switzerland.
Gold repatriation: RBI brought ~100 tonnes back from Bank of England vaults in 2024 — largest since 1991.
S&P upgrade: raised India's outlook to “Positive” in May 2024, followed by first rating upgrade in 18 years to BBB in 2025.
WTO MC13 (Abu Dhabi, Feb 2024): e-commerce moratorium renewed till MC14 (2026); no breakthrough on agriculture PSH permanent solution or fisheries subsidies Phase-2.
Insurance FDI cap: Budget 2025 proposed to raise from 74% to 100% subject to Parliament; would trigger a fresh wave of foreign insurer entry.
Space FDI liberalisation (Feb 2024): 100% Automatic for satellites; 49% Auto for launch vehicles — opens the sector to global players (SpaceX, OneWeb) via joint ventures.
PLI Scheme: extended to 14 sectors; contributed materially to electronics export surge — smartphones from ~US$ 3 bn (FY20) to US$ 15 bn (FY24). check for latest update or data
Trump 2.0 tariff war (2025): reciprocal-tariff regime imposing higher duties on Indian exports (auto, steel, pharma) — India considering targeted retaliation + accelerated FTA outreach.
PMJDY-Anchored NRI banking: UPI+PayNow (Singapore), UPI-Bhutan, UPI-UAE, UPI-France — remittance corridors being digitised.

20. Prelims PYQs (2014-2026)

Prelims 2014

Which of the following would include Foreign Direct Investment in India? 1) Subsidiaries of foreign companies in India 2) Majority foreign equity holding in Indian companies 3) Companies exclusively financed by foreign companies 4) Portfolio investment.
Answer: (a) 1, 2 and 3 only. Portfolio investment is NOT FDI.

Prelims 2015

In the parlance of financial investments, the term ‘bear’ denotes:
Answer: An investor who thinks that the price of a particular security is going to fall (linked to FPI equity outflows).

Prelims 2016

The economic cost of food-grains to the Food Corporation of India is Minimum Support Price and bonus (if any) paid to the farmers plus:
Answer: Procurement incidentals and cost of distribution. (External linkage via WTO Amber Box.)

Prelims 2017

The term ‘Domestic Content Requirement’ is sometimes seen in the news with reference to:
Answer: (b) Prohibited under WTO's TRIMs agreement — India lost the solar case to USA in 2016 on this issue.

Prelims 2018

With reference to the Trans-Pacific Partnership, consider the following statements: 1) It is an agreement among all the Pacific Rim countries except China and Russia. 2) It is a strategic alliance for the purpose of maritime security only.
Answer: (d) Neither 1 nor 2 is correct.

Prelims 2019

With reference to Indian economy, consider the following statements: 1) The rate of growth of Real Gross Domestic Product has steadily increased in the last decade. 2) The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade.
Answer: (b) Only 2 is correct. (Linked to trade openness ratio.)

Prelims 2020

Consider the following statements about ‘Regional Comprehensive Economic Partnership (RCEP)’: 1) It is a trading arrangement among ASEAN members and their FTA partners. 2) India has been signatory to RCEP.
Answer: (a) Only 1 is correct. India walked out in November 2019.

Prelims 2021

With reference to the Indian economy, consider the following statements: 1) A share of Foreign Direct Investment (FDI) is subject to the sectoral caps. 2) By and large, FDI is favoured for its non-debt nature.
Answer: Both 1 and 2 are correct.

Prelims 2022

With reference to the Indian economy, consider the following statements: 1) An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of the rupee. 2) An increase in Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness. 3) An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Answer: (b) 1 and 3 only. Statement 2 is incorrect — a rise in REER indicates loss of competitiveness.

Prelims 2023

Consider the following statements: The Government of India has withdrawn the Most Favoured Nation (MFN) status from Pakistan. Statement-I: Pakistan is a member of WTO. Statement-II: The Government of India has strategic reasons to withdraw the MFN status.
Answer: Both statements are correct; Statement-II explains Statement-I. India withdrew MFN post-Pulwama in Feb 2019.

Prelims 2024

With reference to the Special Rupee Vostro Accounts (SRVAs), consider the following statements: 1) The RBI has permitted banks from 25+ countries to open SRVAs. 2) SRVAs enable settlement of international trade in Indian rupees. 3) They can be used to invest in Indian debt and equity markets subject to FEMA norms.
Answer: All three statements are correct.

Prelims 2025

Which of the following are ‘non-debt creating’ capital inflows in India's Balance of Payments? 1) Foreign Direct Investment 2) Foreign Portfolio Investment (equity) 3) External Commercial Borrowings 4) NRI Deposits.
Answer: (a) 1 and 2 only. ECB and NRI deposits are debt-creating.

Prelims 2026 (expected)

With reference to India's inclusion in the JP Morgan GBI-EM Global Diversified Index (Jun 2024), consider the following: 1) Only Fully Accessible Route (FAR) G-Secs are eligible. 2) The inclusion is phased over 10 months. 3) Expected passive debt inflows are US$ 25-30 billion.
Answer: All three statements are correct.

21. Mains PYQs (2014-2025)

Mains 2014 (GS-III)

Foreign Direct Investment (FDI) in the defence sector is now set to be liberalised. What influence this is expected to have on Indian defence and economy in the short and long run?

Mains 2015 (GS-III)

Craze for gold in Indians has led to a surge in import of gold in recent years and put pressure on Balance of Payments and external value of rupee. In view of this, examine the merits of Gold Monetisation Scheme.

Mains 2016 (GS-III)

Justify the need for FDI for the development of the Indian economy. Why is there a gap between MoUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.

Mains 2017 (GS-III)

Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports.

Mains 2018 (GS-II)

What are the key areas of reform if the WTO has to survive in the present context of ‘Trade Wars’, especially keeping in mind the interest of India?

Mains 2019 (GS-II)

What is the significance of Indo-US defence deals over Indo-Russian defence deals? Discuss with reference to stability in the Indo-Pacific region. (Trade & strategic linkage.)

Mains 2020 (GS-III)

Explain the difference between computing methodology of India's Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (External-sector linkage via trade openness ratio calculations.)

Mains 2021 (GS-III)

Investment in infrastructure is essential for more rapid and inclusive economic growth. Discuss the role played by the various sources of financing including FDI and FPI in supporting India's infrastructure needs.

Mains 2022 (GS-III)

Do you agree with the view that steady GDP growth and low inflation have released the Indian economy from the boom-and-bust cycle? Justify your answer. (External-sector resilience linkage.)

Mains 2023 (GS-III)

How is the S&T ecosystem in India helping the objective of ‘Atmanirbhar Bharat’? Discuss the role of the government in this context. (Import substitution linkage.)

Mains 2024 (GS-III)

India's decision to walk out of the Regional Comprehensive Economic Partnership (RCEP) has been described as a ‘strategic pause’. Examine the rationale, subsequent bilateral FTA strategy (UAE, Australia, EFTA), and the case for revisiting RCEP.

Mains 2025 (GS-III)

India's foreign-exchange reserves have crossed US$ 700 billion. Critically examine the composition, adequacy benchmarks, opportunity cost, and strategic implications for India's monetary autonomy in a world of resurgent capital-flow volatility.

22. Revision Box — 15-Point Crisp Recap

External Sector: economy's interface with the world — trade, factor income, capital flows, exchange rate. IMF BPM6 (2009) is the reference framework.
1991 Crisis: reserves fell to US$ 1.2 bn (2 wks import cover); 67 tonnes gold pledged; IMF SBA US$ 2.2 bn; twin devaluations (9% + 11%) triggered LPG reforms.
BoP Identity: CA + Capital Account + E&O + ΔReserves = 0. Must always balance. “BoP surplus/deficit” = change in reserves.
Current Account: Merchandise trade (deficit ~US$ 240 bn), Services (surplus ~US$ 160 bn), Primary income (outflow ~US$ 45 bn), Secondary income/remittances (surplus ~US$ 125 bn, world's largest).
CAD Sustainability: up to 2.5% of GDP (Rangarajan 1993). Breach in FY13 (4.8%) triggered Taper Tantrum.
Capital Account: FDI > FPI > ECB > NRI Deposits > Trade Credit. Quality preference: non-debt & long-term over debt & short-term.
Forex Reserves: ~US$ 700 bn; FCA 88%, Gold 9%, SDR 2.5%, RTP 0.5%. Import cover ~10-11 months; 4th largest globally.
Exchange-Rate Regime: managed float since 1993. NEER (nominal basket) vs REER (inflation-adjusted). RBI intervenes in spot, forward & NDF markets.
Impossible Trinity (Mundell-Fleming): can't have fixed rate + free capital + independent monetary policy simultaneously. India gives up fixed rate.
Convertibility: Full CAC since 20 Aug 1994 (IMF Art VIII). Partial capital-account convertibility; Tarapore-I (1997) & Tarapore-II (2006). LRS: US$ 250,000 per person per year.
Trade: merch exports ~US$ 437 bn; services exports ~US$ 341 bn. India is world's ~10th largest goods exporter, ~5th largest services exporter. USA + China are top partners.
FTP 2023: dynamic, open-ended; US$ 2 trillion export target by 2030; RoDTEP, RoSCTL, EPCG; Districts as Export Hubs.
FTAs: UAE CEPA (Feb 2022), Australia ECTA (Apr 2022), EFTA TEPA (Mar 2024, US$ 100 bn commitment); UK & EU under negotiation; walked out of RCEP (Nov 2019).
WTO: founding member; key battles = Peace Clause on PSH; TRIPS flexibilities; Fisheries subsidies S&DT; MC13 (Abu Dhabi Feb 2024) renewed e-com moratorium.
External Debt: ~US$ 673 bn; ~18-19% of GDP; short-term/reserves ~19% (safe); reserves/debt ~99%; S&P upgrade to BBB in 2025 — first upgrade in 18 years.

External Sector & Balance of Payments — India in the World Economy

On this page

Conceptual Clarity — Three Lenses

1. External Sector — Concepts & Openness

1.1 Why study the external sector?

1.2 Resident vs Non-Resident

1.3 Openness Ratios

1.4 Two Key Identities

1.5 The 1991 BoP Crisis — the Founding Event

2. Balance of Payments — Structure & Identity

2.1 The Four Heads of the BoP (BPM6)

2.2 The BoP Identity

2.3 Credit vs Debit Entries

2.4 India's BoP Snapshot — recent years

2.5 BoP Disequilibrium — Causes

2.6 Adjustment Mechanisms

3. Current Account — Trade, Services & Income

3.1 Four Components

3.2 Merchandise Trade — Why India runs a deficit

3.3 Services — the “invisible export” cushion

3.4 Remittances — the Indian diaspora cushion

3.5 CAD Sustainability — the “2-2.5% rule”

4. Capital & Financial Account — FDI, FPI, ECB, NRI

4.1 Composition

4.2 Foreign Direct Investment (FDI)

4.3 Foreign Portfolio Investment (FPI)

4.4 External Commercial Borrowings (ECB)

4.5 NRI Deposits

4.6 The 1991 and 2013 Defence Episodes

5. Foreign Exchange Reserves & Their Composition

5.1 Four Components

5.2 Adequacy Benchmarks

5.3 Why Hold Reserves?

5.4 The Cost of Reserves

5.5 RBI's Reserve Management Strategy

5.6 Gold — the strategic anchor

6. Exchange Rate Systems & Rupee Management

6.1 Classification of Exchange-Rate Regimes (IMF AREAER)

6.2 India's Regime — the Journey

6.3 NEER & REER — Effective Rates

6.4 RBI's Intervention Toolkit

6.5 Theories of Exchange-Rate Determination

6.6 Depreciation vs Devaluation vs Depreciation (managed)

6.7 Rupee Milestones

7. Convertibility — Current vs Capital (Tarapore)

7.1 Current Account Convertibility (CAC)

7.2 Capital Account Convertibility (KAC / CAC-II)

7.3 Tarapore Committee-I (1997)

7.4 Tarapore Committee-II (2006)

7.5 Where India stands today — a de-facto sequenced opening

7.6 Liberalised Remittance Scheme (LRS)

7.7 Benefits vs Risks of Full CAC

Benefits

Risks

8. International Trade — Composition & Partners

8.1 India's Trade in Numbers

8.2 Composition of Merchandise Exports (FY24 illustrative)

8.3 Composition of Merchandise Imports

8.4 Top Trading Partners (FY24 estimates)

8.5 India's Services Trade — the “silent story”

8.6 Terms of Trade (ToT)

8.7 Key Export-Promotion & Import-Substitution Institutions

9. Foreign Trade Policy 2023, FTAs & WTO

9.1 Foreign Trade Policy 2023

Four Pillars of FTP 2023

Key Schemes under FTP 2023

Districts as Export Hubs (DEH)

9.2 India's Free Trade Agreements (FTAs)

9.3 India & the WTO

Key WTO Agreements & Indian Positions

Recent WTO Ministerial Conferences

9.4 Peace Clause & Public Stockholding (PSH)

10. Foreign Direct Investment — Routes & Caps

10.1 The Two Routes

10.2 Sectoral Caps — the Key Numbers

10.3 Press Note 3 (April 2020)

10.4 FDI Trends (last decade)

10.5 Overseas Direct Investment (ODI) by Indians

10.6 Recent FDI Reforms (2019-25)

11. External Debt & External Vulnerability