External Sector


  • Bop is the overall record of all economic transaction of a country in a given period, with rest of the

Structure of Balance of Payments

  • Balance of Payments (BoP) account broadly comprises of the following components

Current account

  • Current account of Balance of payments consists of all transactions relating to goods, services and income, it is functionally classified into merchandise and
  • Current account deficit is the situation where payments on the country are more than the payments into the country. in current account surplus, there is a net inward payment into the country on the current

Capital Account

  • Capital account is that account which records all such transactions between residents of a country and rest of the world, which causes a charges in the asset or liability status of the residents of a country or its government. Investments (FDI and FII) and borrowings (ECB) are part of the capital account.

Components of capital account

  • Following are the principle forms of capital account transactions
  • Foreign investment it has two sub – components which are as follows
  1. Foreign direct investment (FDI) : referring to the purchase of assets in the rest of the world, which allow control over that assets. e.g : purchase of a firm by TATA in the rest of the
  2. Portfolio investment referring to purchase of an asset in the rest of the world, without any control over that asset. Portfolio investment into India also consists of foreign institutional investment (FII)

e.g : purchase of some shares of a company by TATA in the rest of the world.

  • Loans it has two sub components which are as follows
  1. Commercial borrowings referring to borrowing by a country                                                (including government and the private sector), from the international money market. This involves market rate of interest without considerations of any concession.
  2. Borrowings as external assistance: referring to borrowing by a country with considerations of assistance. It involves lower rate of interest compared to that prevailing in the open
  • Banking Capital Transactions: referring to transactions of external financial assets and liabilities of commercial banks and cooperative banks operating as authorised dealers in foreign exchange. These transactions include NRI
  • Reserve Account: The official reserve account records the changes in stock of reserve assets (also

known as foreign exchange reserves at the country’s monetary authority.

  • Net errors and omissions: This is the last components of the balance of payments and principally exists to correct any possible errors made in accounting for the three other accounts. They are often referred to as balancing
  • All capital transactions causing flow of foreign exchange into the country are recorded as positive items in the capital account of BoP.
  • While FDI and portfolio investments are non debt creating capital transactions, borrowings are debt – creating

BoP Trends

  • India had faced pressure on balance of payments (BoP), since planning period due to either internal or external

Period I (1956-57 to 1975-76)

  • The period comprising the 2nd, 3rd and 4th plans and first 2 years of 5th plan saw heavy deficit in balance of payments (BoP) and extremely tight payment
  • This period witnessed three wars, several and the first oil shock in 1973, though the government

resorted to serve import controls and foreign exchange regulation etc.

Period II (1976-77 to 1979-80)

  • This was relatively short period and was a golden periods as far as BoP is concerned. In this period, India had a small current account surplus of 6% of the GDP and also possessed foreign exchange reserves equivalent to about seven months imports.

and was marked by severe BoP difficulties

  • The reasons for severe difficulties are as follows
    • Widening trade deficits
    • Gradual decline in net receipts from invisibles.
    • Reductions in flows of concessional assistance to India principally from World Bank Group

Devaluation of Currency

Devaluation refers to reducing the value of the Indian rupee in comparison to the US dollar  in  the  world  market.  In  1947,  India  became  a  member  of  the  IMF  which necessitated fixing the exchange value of the Indian rupee as per the IMF standards. As a result, India was obliged to devalue the rupee. So far, the following devaluations have taken place. The first devaluation took place in June 1949, when the Indian rupee was devalued  by  30.5  percent.  Dr  John  Mathai  was  the  Finance  Minister.  In  the  second devaluation  in  June  1966,  the  Indian  rupee  was  further  devalued  by  57  percent. Sachindra  Chaudhury  was  the  Finance  Minister.  In  the  third  devaluation  on  1  July 1991, the Indian rupee was devalued by 9 percent and devalued for the fourth time by 11 percent on 3 July 1991, bringing the total devaluation to 20 percent. This was during the tenure of Dr.Manmohan Singh as the Finance Minister. This devaluation brought an appreciable increase in Indian exports. Since 20 August 1994, the rupee has been made a freely convertible currency on current account.

Period III (1980-81 to 1990-91)

  • This period broadly corresponds to the period 6th and 7th plans
  • The third    oil     shock     during


  • During 1990s, domestic political developments affected confidence abroad in Indian economy etc.
  • Substantial outflow of deposits held by NRIS
  • Reserves declined to a low of

$0.9 billion in January 1991.

Period IV (1991-92 onwards)

  • The reforms of 1990’s have facilitated India to move away from closed economy framework towards a more open liberal economy.
  • Foreign exchange reserves were built to very comfortable positions and that difficulties of BoP came under control and the reasons for the same are as follows.
  • Trade balance has always been in deficit since imports have always exceeded exports
  • When current account deficits are larger than capital account surpluses, foreign exchange reserves are also used to cover these

Reasons for Deficit in India’s Balance of Payments (BoP)

The important reasons for deficit in India’s BoP Position can be citied as follows

  • Irreversible Trade Deficit: Our imperative imports of oil and coal and India’s passion for
  • Rise in imports: The reasons for rapid rise in imports are building industrial base (in the early stages) increase in export related imports (gems, jewellery, capital goods) increase in imports of Petroleum, Oil and Lubricants (POL) products etc.
  • Devaluation and depreciation of the Rupee : The devaluation and depreciation of the rupee have led to an increase in the price of imports. Exports have become cheaper, the low price and income elasticises of demand for experts have resulted in slow increase in exports.
  • Slow Rise in Export Earnings : Exports earnings rose, however, they were not sufficient enough to meet the rising imports. Thus, rise in exports has neither been substantial nor continuous. The growth in exports has not been

sufficient enough to finance the rising imports.

  • Debt service : The Balance of Payments (BoP) problem has also aggravated due to the rising obligation of amortising payments in 2011-12, debt service ratio was 6% with the ever increasing imports and slow pace of exports, the most effective solution for India’s Balance of Payments (BoP) problem is cost reduction and competitiveness in global
  • Appreciation : The recent appreciation of the rupee has made exports costlier and imports cheaper. This may also add to the Balance of Payments (BoP) problem.


  • Foreign capital inflow to the country can be either in the form of concessional assistance or non

– concessional flow.

  • Non – concessional flows include mainly external commercial borrowings (ECBs), loans on market terms, NRI deposits and foreign investment. Foreign investment can be categorised into Foreign direct investment (FDI) and Foreign Institutional Investment (FII)

Foreign Direct Investment (FDI)

  • It refers to direct investment in the productive capacities of a country by someone from outside the country. Such an investment can be in the form of setting up a new plant or through purchase of shares of a company, where the shareholding gives the foreign entity control over the business of the
  • A foreign company can set – up its business in India in two ways, by setting up a company under the Companies Act or by setting up an unincorporated entity like liaison office, project office or branch

Sector which are open to FDI

  • Most sectors are at least partially open to FDI, subject to a cap and specific conditions. There are two entry routes for FDI in India. In sectors where FDI is allowed up to 100%, FDI enters under the automatic route, subject to sect oral regulation and other
  • In this instance, no approval is required from the Reserve Bank of India (RBI) or the government however, the investment must be notified to the RBI’s regional office within FDI is capped, prior approval from the Foreign Investment Promotion Board (FIPB) is required, FIPB recommendation must be cleared by the Ministry of Finance for FDI proposals below or equivalent to `12 billion and by the Cabinet Committee of Economic Affairs for FDI proposals of `12 billion or

Tabular Representation of the Key Changes Proposed under the FDI Limits

Sector / Activity% of FDI/ EquityEntry Route
Defence sector49%FIPB route
Telecom Service100%Automatic up to 49% / government route beyond 49% and up to 100%
Tea Plantation100%Automatic up to 49% / government beyond 49% and up to 100%
Asset Reconstruction Company100%Automatic up to 49 % / government beyond 49% and up to 100%
Petroleum and Natural Gas49%Automatic Route
Commodity Exchanges49%Automatic Route
Power Exchanges49%Automatic Route
Stock Exchanges/Clearing Corporations49%Automatic Route
Credit information Companies74%Automatic Route
Courier Services100%Automatic Route
Single Brand Product Retail Trading100%Automatic up to 49 % / government route beyond 49 % and up to 100 %
Insurance Sector49%FIPB route (The CCEA on 24th December, 2014, 49 % FDI in insurance)

Functions of FIPB

The main functions of the board will be as follows:

  1. To ensure expeditious clearance of the proposals for foreign investment;
  2. To review periodically the implementation of the proposals cleared by the board;
  3. To review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the administrative ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investmentin various sectors;
  4. To undertake investment promotion activities including the establishment of contract with and inviting selected international companies to invest in India in appropriate
  5. To interact with the industry association/bodies and other concerned government and non-government agencies on relevant issues to facilitate increased inflow of FDI;
  6. To identify sectors into which investment may be sought, keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts;
  7. To interact with the Foreign Investment Promotion Council (FIPC) being constituted separately in the Ministry of Industry;
  8. To undertake all other activities for promoting and facilitating FDI, as considered necessary from time to
  9. The board will submit its recommendations to the government for suitable action.

Procedures of FIPB

FIPB should meet an a fixed day every week to ensure quick disposal of cases and may have more frequent meetings whenever considered necessary.

  • Foreign investment proposals received by the board’s secretariat should be put to the board within 15 days of receipt and the administrative ministries must offer their comments either before and / or  in  the  meeting of the
  • It should be the endeavour of FIPB to ensure that, as far as possible, the government’s decisions on FDI proposal are communicated to the applicant within six
  • The board shall have the flexibility of purposeful negotiation with investors and consider project-proposals in totality, free from parameters, to ensure maximum FDI into the
  • It would function as a transparent, effective and investor-friendly single window, providing clearance for foreign investment
  • The board will lay down its own mode and working procedures keeping in view the requirements of each proposal considered by

Foreign Institutional Investment

  • A foreign institutional investor is one which is registered in a country outside of the one in which it is investing. In India, it is used to refer to companies which invest in the country’s financial markets.
  • In 2013, India accepted the internationally, laid down definition of FII to remove the ambiguity between FII and

Now, when an investor has a stake of less than 10% in a company, it will be treated as FII and where and investor has a stake of more than 10 %, it will be treated as FDI.

  • FIIs may invest in securities in both the primary and secondary market and in shares, debentures and warrants of listed or unlisted companies.
  • Some of the entities eligible to be treated as FII in India are, pension funds. Mutual funds, banks, investments trusts, sovereign wealth funds, Foreign Central Bank
  • FIIs can invest in securities in the primary and secondary markets dated governments securities, commercial paper, derivatives, units of schemes floated by domestic mutual fund (including UTI), Indian depository receipts and security

Foreign Direct Investment(FDI) VS Foreign Institutional Investor (FII)

Investments made in India by a foreign investor can either be FDI or FII. Both look the same but are in reality quite different. FDI is an investment that a parent company makes in a foreign country; it is concerned with the secondary market. On the contrary, FII is an investment made by an investor in the markets of a foreign nation and as such concerned with primary markets.

Means of FII Investment

  • FIIs can invest through a registered broker on recognised India stock exchanges. They can purchase shares/ convertible debentures either though private placement or through offer for sale.
  • FIIs can also invest through a sub – account ( a person outside India on whose behalf investments are proposed to be made)
  • FIIs can also issue off shore Derivative Instruments (ODIs) to persons who are regulatory by an appropriate foreign regulatory authority and after compliance with KYC
  • Large amount of FII investment into India comes through participatory

Participatory Notes (p – Notes)

  • These are financial instruments used by investors or hedge funds that are not registered with the securities and exchange board of India to invest in India securities.
  • Indian – based brokerages buy India based securities and then issue participatory notes to foreign investors. Any dividends or capital gains collected from the underlying securities go back to the

Qualified foreign Investor (QFI)

  • QFI is a person who full fills the following criteria
  • Resident in a country or group which is a member of Financial Action Task Force (FATF)
  • Resident in a country that is signatory to IOSCO’s MoU or a signatory of a bilateral MoU with
  • Such person should not be resident in India or registered with SEBI as an FII or a sub account of
  • QFIs are distinct from FIIs and non – resident Indians. They are allowed to invest directly into mutual funds and stocks of Indian
  • It was felt that foreign investors had been kept at bay owing to concerns relating to money laundering and due

diligence by the government and regulators.

  • For this reason, the new scheme of QFI was started to ensure more foreign capital inflows, reduce market volatility and deepen the markets.

Global Depository Receipts (GDRs)

  • These are equity instruments issued in international markets like London, Luxemburg etc. Indian companies use GDRs to raise capital from abroad. GDRs designated in dollars, Euros

American Depository Receipts (ADRs)

  • These are equity instruments issued to American retail and institutional investors. They are listed in New York, either on Nasdaq or New York Stock Exchange.

Indian Depository Receipts (IDRs)

  • These are similar to ADR / GDR. They are used by non – Indian companies in the Indian stock markets for issuing equity to Indian


  • FDI inflows are preferred over FII inflows for the following reasons
  • FDI is considered to be long – term and stable investment whereas FII is considered as hot money. i.e. it can move out quickly during advise circumstances leading to instability and volatility  in  the exchange rate and the stock
    • Since, FDI represents ownership, it leads to the inflow of better technology management practices etc while FII is generally only interested in short term gains.
    • While the above arguments are true to a certain extent, FII’s have also been influencing the incorporation of            better technology and management in the companies where they hold shares.


  • Foreign exchanges reserves are an important component of the BoP and essential element in the

analysis of an economy’s external position.

  • India’s foreign exchange reverse comprise Foreign Currency Assets (FCAs), gold, special drawing (SDRs) and Reverse Tranche Position (RTP) in the International Monetary Fund (IMF)

Exchange Rate

  • Exchange rate is the rate, at which Indian rupee will be exchanged other international currencies, say US dollar, in the foreign exchange market.
  • The rupee was historically linked to the British pound sterling till 1 After independence, India had to fix and maintain the external value of the rupee in term of gold or the US dollars as required under IMF rules. Therefore, India fixed the value of rupee at `3.30 per US dollar. This was the official rate of exchange and RBI would buy and sell foreign currencies at this rate.
  • The 1994-95, budget announced full convertibility of the rupee on current account i.e. freedom to

buy or sell foreign exchange in connection with the current account transaction under article VIII of the IMF.


  • The nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) includes are used as indicators of external competitiveness of the country over a period of
  • NEER is the weighted average of bilateral nominal exchange rate of the home currency in terms of foreign currencies, while REEP is defined as a weighted average of nominal exchanges rate, adjusted for home and foreign country relative price
  • Nominal rupee depreciation, while having some adverse effects such as greater imported inflation, is also useful over time in offsetting higher domestic inflation and ensuring Indian exports remain
  • REEP capture movements in cross currency exchange rates as well as inflation differentials between India and its major trading partner and reflects the

degree                 of                 external competitiveness of Indian products.

  • The RBI has been constructing 6 currency (US dollar, euro for euro zone, pound sterling, Japanese Yen, Chinese Rimini and Hong Kong dollar) and 36 currency indices of NEER and

Present Exchange Rate Policy

  • India has transited from fixed exchange rate policy to a market determined exchange rate. It is broadly a floating rate regime with the central intervening only for reducing excess volatility, preventing the emergence of destabilising speculative activities, a maintaining adequate           reserves       and developing on orderly foreign exchange
  • At present, the exchange rate policy is guided by the broad principles of careful monitoring and management of exchange rates with flexibility, when allowing the underlying demand and supply conditions to determine exchanges rate

movements over a period in an orderly manner.

Policy Options with RBI to Manage Exchange Rate

  • Using Policy Rates RBI can use policy rates (repo, CRR, SLR etc) to manage the exchange rate. By lowering interest rates, supply of rupee’s increased in the market leading to depreciation of the currency. Increasing interest rates on the other hand, takes out rupee from the system leading to shortage of rupee supply and thus, appreciation of the
  • Using Forex Reserves RBI can sell forex reserves and buy Indian rupees leading to demand for rupee. Based on weekly reserves data, RBI seems to be selling forex reserves selectively to support rupee. Its intervention has been limited as liquidity in money markets has remained tight and further intervention only tightens liquidity
  • Easing Capital Controls Capital controls be eased to allow more capital inflows. “Resisting currency depreciation is best done by increasing the supply of

foreign currency by expanding market participation” This in essence, has been RBI’s response to depreciating rupee.

  • FERA (Foreign Exchange Regulation Act) in place since 1947 did not succeed in restricting activities such as the expansion of Trans National Corporations (TNCs). After the amendment of FERA in 1993 it was decided that the act would become the FEMA. (foreign exchange Management Act)
  • This was done in order to relax the controls on foreign exchange in India, as a result of economic liberalisation FEMA served to make transactions for external trade (exports and imports) easier. Involving current account for external trade no longer required RBI’s
  • The deals in foreign exchange were to be managed instead of regulated. The switch to FEMA shows the change on the part of the government in terms of foreign

Main Features of FEMA

  • Activities such as payments made to any person outside India or receipts from them, along with the deals in foreign security is restricted. It is FEMA that gives, the Central Government the power to impose the
  • Restrictions are imposed on people living in India, who carry out transactions in foreign exchange or foreign security and payments from outside the country to India the transactions should be by an authorised
  • Deals in foreign exchange under the current account by an authorised person can be restricted by the central government, based on public interest.
  • Although, selling of drawing of foreign exchange is done through an authorised person, the RBI is empowered by this act to support the capital transactions to a number of restriction.

Convertibility of Rupee

Convertibility of a currency is the ease. With which it can be converted into any other foreign currency. Current account convertibility refers to freedom in respect of exports and imports, which has already been achieved to a large extent in India. Capital account convertibility refers to freedom in respect of investment and borrowing within India (by outsiders) and outside India (by those inside India).

  • People living in India will be permitted to carry out transactions in foreign exchange, foreign security or to own or hold immovable property abroad, if the currency, security or property was owned or acquired, when he

/ she was living outside India or when it was inherited to him / her by someone living outside India.

  • Exports are needed to furnish their export details to RBI. To ensure that the transaction are

carried out properly, RBI may ask the exports to comply to its necessary requirements.


  • Capital account convertibility (CAC) for Indian economy refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe. According to the Tarapore Committee, Capital Account Convertibility refers to the freedom to convert local financial assets into foreign financial assets and vice – versa at market determined rates of
  • It is associated with changes of ownership in foreign / domestic financial assets and liabilities and embodies the creation and liquidation of claim on or by the rest of the

Fiscal consolidation

  • Reduction in Gross Fiscal Deficit to GDP ratio to 5%
  • A consolidated Sinking Fund (CSF), to be set – up to meet government’s debt repayment

needs to be financed by increase in RBI’s profit transfer to the government and is investment proceeds.

Mandated inflation Rate

  • The mandated inflation rate should remain at an average 5% for the year period

Consolidation in the Financial Sector

  • Gross Non performing Assets (NPAs), of the banking sector (as a percentage of total advances). To be brought down to 5%
  • A reduction in the average effective cash reserve ratio (CRR) for the banking system to 3%


  • India’s external debt has increased over time and India is one of the highly indebted countries of the world in terms of total debt
  • Gross external debt is defined, at a point of time, as not contingent liabilities that required payments of principal and interest by the debtor at same points in the future and that are owed to non

residents by residents of an economy.

  • India’s external debt stock at end March, 2012 stood at US $ 4 billion recording an increase of US $ 39.5 billion (12.9%) over end march 2011 level of US $

305.9 billion (1365929 crore). The rise in external debt is largely due to higher NRI deposits, short term debt and commercial borrowings.

  • The maturity profile of India’s external debt indicates the dominance of long term borrowings. Long term external debt accounted for 9 % of the total external debt, while the remaining 23.1% was short term debt.

Concepts of External Debt Sovereign (Government) and Non Sovereign      (Non –                          Government) Debt

  • Sovereign debt includes
    • External debt outstanding an account of loans received by government of India, under the external assistance programme and civilian component of rupee
  • Other government debt comprising borrowing from IMF, defence debt component of rupee debt as well as foreign currency defence debt and FII in government
  • Non sovereign includes
    • the remaining components of external debt. All other debt is non sovereign

External commercial borrowing (ECBs)

  • The definition of commercial borrowing includes loans from commercial  banks,                                                         other commercial financial institutions, money raised through issue of securitised instruments like bonds including India development Bonds(IDBs) and Resurgent India Bonds (RIBs) floating rate notes (FRN) etc.
  • It also includes borrowings through buyer’s credit and supplier credit mechanism of the concerned countries international finance corporation, Washington (IFC (W), Nordic investment bank and private sector borrowings from Asian Development Bank (ADB)
  • During good times, domestic borrower could enjoy triple benefits of
    • Lower interest rates – longer maturity and
    • Capital gains due to domestic currency appreciation. This would happen, when the local currency is appreciating due to surge in capital flows and the debt service liability is falling in domestic currency terms. The opposite would happen, when the domestic currency is depreciating due to reversal of capital flows during crisis situations, as happened during the 2008, global
  • A sharp depreciation in local currency would            mean corresponding increase in debt service liability, as more domestic currency would be required to buy same amount of foreign exchange for debt service
  • This would lead to erosion in profit margin and have market to market implications for the corporate. There would also be debt overhang problem, as the volume of debt would rise in local currency
  • Together, these could create corporate distress, especially because the rupee tends to depreciate precisely, when the India economy is also under stress and corporate revenues and margins are under

Decisions on ECB Norms Relaxation at a Glance

  • Automatic approval limit increased to $750 million from $ 500 million
  • $30 billion over ceiling can be increased later, if
  • Refinancing of rupee loans allowed through ECB.
  • ECB can be raised in Chinese currency Renminbi
  • Refinance of buyer’s / supplier’s credit permitted through ECB
  • Interest during construction under ECB permitted
  • Allowed availing of ECB denominated in rupee
  • High net worth individuals can invest in infra debt
  • Inclusion of infra finance companies as eligible issues for FII’s debt limit
  • Tax exemption on interest on withholding tax to be taken up with revenue

NRI Deposits

  • Non-Resident Indian (NRI), deposits are of three types
  • Non-Resident (External) Rupee Account (NRE Account) Deposits were introduced in 1970. Any NRI can open an NRE account with funds remitted to India through a bank abroad. The amount held in these deposits together with the interest accrued can be repatriated.
  • Foreign Currency Non- Resident (Banks) [Deposits (FCNR-B)] were introduced with effect from 15th May, 1993. These are term deposits maintained only pound sterling, US dollar, Japanese Yen, Euro, Canadian dollar and Australian dollar. The minimum maturity period of these deposits was raised from 6 months to 1 year effective October, 1999. From 26th July, 2005, banks have been allowed to accept FCNR

(B) deposits up to a maximum maturity period of 5 years against the earlier maximum limit of 3 years.

  • Non-Resident Ordinary Rupee (NRO) Accounts Any person, resident outside India may open and maintain NRO account with an authorised dealer or in authorised bank for the purpose of putting through bonafide transactions denominated in Indian rupee. NRO Accounts may be opened/maintained in the form of current, saving, recurring or fixed deposits. NRI/Persons of Indian Origin (PIO), may remit an amount not exceeding USD 1 million per financial year, out of the balances held in NRO Accounts.


  • Foreign trade plays a significant role in the economy of each country. Foreign trade helps a country to utilise its natural resources and to export its surplus production. It can import technical know-how.
  • A country can industrialise itself by importing necessary capital, machines and raw materials from more advanced    and

industrialised nations. By proper control of foreign trade, employment, output, prices, industrialisation and economic development of the country can be influenced favourably.

Trade Composition

Export Composition

  • Noticeable compositional changes have taken place in India’s export basket between 2000-01 and 2013-14 with the share of petroleum, crude and products increasing by nearly five times to 1%, catapulted by its 33.5% growth (CAGR). While there has been a small fall in share of primary products, there was a 15.1% point fall in share of manufactured goods.
  • Among the four major items under manufactured goods, the shares of gems and jewellery and textiles (including RMG) fell, with the fall in the latter to 7% being more than half. Two major manufactured goods items, engineering goods and chemicals and related products, gained in shares, due to their nearly 20% CAGR. The fall in export shares of

manufactured goods between 2000-01 and 2013-14, is mainly on account of the fall in export shares of these items to a major destination like the USA.

  • Among these items, the shares of exports of textiles and gems and jewellery to the US fell while those of chemicals and related items and engineering goods
  • In the case of the EU, the shares of textiles, engineering goods and chemicals and related products increased while those of gems and jewellery and leather declined. In the case of China, the shares of textiles and engineering goods increased and that of chemicals and related products decreased. Thus, not only has there been a composition change, there has also been a directional change in India’s
  • The recent sectoral performance of exports shows while many sectors were in the negative growth zone in 2012-13, in 2013- 14, except gems and jewellery and electronic goods all other major sectors have moved to positive growth territory. In the first 2

months of 2014-15 (P), there was further improvement in the performance of engineering goods (21.7%)       petroleum      products

(14.0%), marine products (40.1%)

and textiles (13.2%).

Import Composition

  • Import growth decelerated sharply from 3% in 2011-12 to 0.3% in 2012-13 and fell to a negative – 8.3% in 2013-14, owing to fall in non-oil imports by 12.8%. Among the major items of import, the value of Petroleum, Oil and Lubricants (POL), which constituted 36.7% of total imports in 2013-14 grew marginally by 0.7%.
  • The other major item of import is gold, the import of which declined from 1078 tonnes in 2011-12 to 1037 tonnes in 2012-13 and further to 664 tonnes in 2013-14, on the back of several measures taken by government. In value terms, gold and silver imports fell by 1% to US $33.4 billion in 2013-14. Capital goods is the other major import category.
  • As in 2012-13, capital goods imports had negative growth in

2013-14 also of -14.7%, which is a cause for concern. Within capital goods, import growth of machinery except electrical and machine tools and transport equipment fell by more than 10% in 2013-14. However, the quantum of capital goods imports has actually increased in 2012-13 as indicated earlier.

Export Promotion

  • The main thrust of India’s Foreign Trade Policy has been to promote exportable goods and produce importable goods in the country to meet the domestic demand for foreign goods. A brief account of these major policy thrust are as
  • Export promotion refers to policies and measures of the government designed to encourage exports with a view to improving forex reserves and correcting the BoP deficit. The significance of           export promotion (as a strategy to combat BoP deficit), has come into greater focus after imports have been liberalised in

accordance with the emerging trend towards globalisation.

  • The government is trying to encourage exports through various kinds of cash incentives, subsidies as well as concessions.

10.7     MEASURES FOR EXPORT Promotion

  • Several committees have been appointed to offer suggestions for the promotion of exports, vi Gorewala Committee 1950, De Souza Committee 1957, import and export policy committee 1962, Alexander committee 1979. Tondon Committee 1980, Abid Hussian Committee 1984 and Rangarajan Committee 1991.
  • It is on the recommendation of these committees that several steps have been initiated for the promotion of

Export processing zone

  • A free trade Zone (FTZ) or export processing zone (EPZ), also called foreign – trade zone, formerly free port, is an area within which goods may be landed, handled manufactured

or reconfigured and re – exported without the intervention of the customs authorities.

  • Only when the goods are move to consumers with in the country in the country in which zone is located do they become subject to the prevailing customs
  • Free – trade zone are organised around major seaports, international airports and national frontiers – areas with many geographic advantages for trade, it is a region where group of countries has agreed to reduce or eliminate trade
  • Free trade zones can be defined as labour            intensive manufacturing centres that involve the import of raw materials or components and the export of factory

Special Economic Zone (SEZ)

  • Asia’s first export processing zone (EPZ) was set up in Kandla, India in 1965
  • The first SEZ policy was announced in April 2000 which inter – alia provided for to make SEZ an engine of growth supported by quality

infrastructure backed up by attractive fiscal package.

  • To import stability to the SEZ regime, SEZ act, 2005 was enacted and which came into effect from 10th February 2006.
  • As per the provisions of the SEZ act, 2005 100% FDI is allowed in SEZs through the automatic route.
  • Incentives the act offers a highly attractive fiscal incentive package which
  • Exemption from custom duties, central excise duties, service tax, central sales and securities transaction tax to both the developers and the
  • Tax holidays for 15 years (currently the units enjoy a 7 years tax holiday) 100% tax exemption for 5 years, 50% for the next 5 years and 50% for the ploughed back export profits for the next 5
  • 100% income tax exemption for 10 years in a block period of 15 years for SEZ

Infrastructure provisions have been made for

  • The establishment of free trade and warehousing zone to create world class trade – related infrastructure to facilitate import and export of goods aimed at making India a global trading hub.
  • The setting up of off shore banking units and units in an international Financial Service Centre in SEZs
  • The public private participation in infrastructure
  • The setting up of SEZ authority in each central government SEZ for developing new infrastructure and strengthening the exiting one.

General Agreement on Tariffs and Trade

  • The general agreement of Tariffs and Trade (GATT) was a multilateral agreement regulation international trade. According to its preamble, its purpose was the substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a

reciprocal and mutually advantageous basis.

  • It was negotiated during the United Nations Conference of Trade and Employment and was the outcome of the failure of negotiating government to create the International                 Trade Organisation (ITO)
  • GATT was signed in 1947 and lasted until 1994, when it was replaced by the world trade organisation in 1995. The original GATT text (GATT 1947) is still in effect under the WTO frame work, subject to the modification of GATT 19

GATT and the World Trade Organisation

  • In 1993, the GATT was updated (GATT 1994) to include new obligations upon its signatories. One of the most significant changes was the creation of the world trade organisation (WTO)
  • The 75 existing GATT members and the European Communities become the founding members of the WTO on 1st January, 1995.
  • The other GATT members rejoined the WTO in the following 2 years (the last being Gongo in 1997) since the founding of the WTO, 21 new non – GATT members have joined and 29 are currently negotiating membership.
  • There are a total of 157 member countries in the WTO, with Russia and Vanuatu being new members as of 2012 of the original GATT members, Syria and the SFR Yugoslavia have not rejoined the

UPSC Previous Year Questions:

  1. The problem of international liquidity is related to the non- availability of (CSE 2015)
    1. goods and services
    2. gold and silver
    3. dollars and other hard currencies
    4. exportable surplus
  1. Convertibility of rupee implies (CSE 2015)
    1. Being able to convert rupee notes into gold
  1. Allowing the value of rupee to  be fixed by          market forces
  2. freely permitting              the conversion of rupee to        other currencies and vice versa
  3. Developing an      international market for          currencies in India
  1. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? (CSE 2014)
  2. Balance of trade
  3. Foreign assets
  4. Balance of invisibles
  5. Special Drawing Rights Select the correct answer using the code given below:
  6. 1 only
  7. 2 and 3
  8. 1 and 3
  9. 1, 2 and 4
  1. Which one of the following groups of items is included in India’s Foreign Exchange    Reserves? (CSE 2013)
    1. Foreign-currency assets, Special Drawing Rights (SDRs)           and loans from foreign                           countries
  1. Foreign-currency assets, gold holdings of the RBI and SDRs
  2. Foreign currency assets, loans from the World  Bank  and  SDRs
  3. Foreign currency assets, gold holdings ·of the RBI and loans from the World Bank
  1. Which of the following constitute capital account? (CSE 2013)
  2. Foreign loans
  3. Foreign direct investment
  4. Private remittances
  5. Portfolio investment

Select the correct answer using the codes given below.

  1. 1, 2 and 3
  2. 1, 2 and 4
  3. 2, 3 and 4
  4. 1, 3 and 4
  1. Which of the following would include Foreign Direct Investment on India? (CSE 2012)
  2. Subsidiaries of            foreign companies in India
  3. Majority foreign equity holding in Indian companies
  4. Companies exclusively financed by foreign companies
  1. Portfolio investment

Select the correct answer using the codes given below:

  1. a) 1, 2, 3 and 4
    1. 2 and 4 only
    2. 1 and 3 only
    3. 1, 2 and 3 only
  1. The price of any currency in international market is decided by the (CSE 2012)
  2. World Bank
  3. Demand for goods/services provided by the country concerned
  4. Stability of the government of the concerned country
  5. Economic potential of the country in

Select the correct answer using the codes given below:

  1. a) 1,2 ,3 and 4
  2. 2 and 3 only
  3. 3 and 4 only
  4. 1 and 4 only
  1. Consider the following actions which the Government can take. (CSE 2011)
  2. Devaluing the domestic currency.
  1. Reduction in the export
  2. Adopting suitable policies which attract greater FDI and more funds from

Which is the above action/actions can help in reducing the current account deficit?

  1. a) 1 and 2 b) 2 and 3
  2. c) 3 only d) 1 and 3
  1. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two? (CSE 2011)
    1. FII helps bring better management skills and technology, while FDI only brings in capital
    2. FII helps in increasing capital availability in general, while FDI only targets specific sectors
    3. FDI flows only into the secondary market, while FII targets primary market
    4. FII is considered to be more stable than FDI
  1. In the context of the affairs of which of the following is the phrase “Special Safeguard Mechanisms” mentioned in the news frequently? (CSE 2010)
    1. United Nations     Environment Programme
    2. World Trade Organization
    3. ASEAN –    India    Free    Trade Agreement
    4. G – 20 Summits
  1. The SEZ Act, 2005, which came into effect in February 2006 has certain objectives. In this Context, consider the following: (CSE 2010)
  2. Development of    infrastructure
  3. Promotion of investment from foreign
  4. Promotion of exports of services only.

Which     of     the     above     are     the objectives of this Act?

  1. a) 1 and 2 only b) 3 only

c ) 2 and 3 only               d) 1, 2 and 3

  1. A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economics like UK and France. Why? (CSE 2010)
    1. India has preference for certain countries as regards receiving FDI.
    2. India has doubled taxation avoidance agreement with Mauritius.
    3. Most citizens of Mauritius have ethnic identity with India and so they feel secure to invest
    4. Impending dangers of global climate change prompt Mauritius to make huge investment in


1. (a) 2. (c) 3. (c) 4. (b) 5. (b) 6.(d) 7.(b)
8.(d) 9.(b) 10.(b) 11.(a) 12.(b)

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