External Sector: Trade, Balance of Payments, Exchange Rate and WTO

Balance of payments (BoP)

• Current account:
  • merchandise trade, which is in deficit because of oil, gold and electronics imports;
  • services, which are in surplus (IT, business services);
  • primary income (interest, dividends);
  • secondary income: remittances, the largest in the world at about US$ 129 billion in 2024.
• Capital and financial account:
  • FDI, FPI, external commercial borrowings (ECBs), NRI deposits and loans.
• Overall balance: shows up as a change in foreign exchange reserves.
• India's position: the current account deficit has usually been around 1–2% of GDP. More than 2.5–3% is a warning sign. In 2022–23 it was about 2%.

Foreign exchange reserves

• Reserves are made up of foreign currency assets, gold, SDRs and the reserve position with the IMF.
• India's reserves are about US$ 650–700 billion, which is among the top five in the world and enough for about 11 months of imports.
• In the 1991 crisis reserves covered only about 2 weeks of imports. India pledged gold with the Bank of England and the Bank of Japan.

Exchange rate

• Regimes: fixed (Bretton Woods) or floating. India has a managed float: the rate is set by the market, and the RBI steps in to smooth volatility.
• History: devaluations in 1966 and 1991; the LERMS dual rate (1992); a unified market rate from 1993.
• Convertibility:
  • Current account convertibility came in 1994.
  • Capital account convertibility is partial; it was discussed by the Tarapore Committees (1997, 2006).
• Key terms:
  • Depreciation (market-driven) vs devaluation (by policy).
  • Real effective exchange rate (REER).
  • A weak rupee helps exports and hurts importers, including oil.
  • Internationalisation of the rupee: rupee trade settlement through Vostro accounts (2022).

The 1991 crisis and reforms

• Causes:
  • high fiscal deficits;
  • the Gulf War oil price shock and the loss of remittances;
  • political instability;
  • credit rating downgrades;
  • NRI deposit outflows.
• Reforms (LPG):
  • devaluation;
  • an IMF loan with conditions;
  • trade liberalisation: lower tariffs, quantitative restrictions removed by 2001;
  • industrial delicensing;
  • FDI opened up;
  • FEMA 1999 replaced FERA 1973.

FDI and FPI

• FDI is a lasting interest, meaning 10% or more of equity. It brings technology and jobs.
• FPI is short-term and volatile ("hot money").
• Routes:
  • the automatic route and the government route;
  • Press Note 3 (2020): approval is needed for FDI from countries that share a land border with India, such as China.
• Sources: Mauritius and Singapore are the top sources, because of tax-treaty routing.
• Schemes: PLI schemes in 14 sectors (2020–21) aim to raise manufacturing and exports, for example of smartphones. India became a major exporter of iPhones.

Trade policy

• Foreign Trade Policy 2023: open-ended (no end date); target of US$ 2 trillion of exports by 2030; rupee trade.
• India's main partners: the USA (largest; India has a surplus) and China (India has its largest deficit). Then the UAE, Russia (oil) and Saudi Arabia.
• Export promotion:
  • Special Economic Zones (SEZ Act 2005);
  • Export Promotion Councils;
  • RoDTEP (Remission of Duties and Taxes on Export Products);
  • Districts as Export Hubs.
• US tariffs (2025): high additional tariffs on Indian goods affected textiles, gems and seafood. Check the current status of the India–US trade talks.

WTO and trade agreements

• GATT came in 1947. The Uruguay Round (1986–94) led to the WTO, 1 January 1995, with its headquarters in Geneva.
• Key agreements:
  • Agreement on Agriculture, which classifies support into "boxes":
    • Green box: non-distorting, allowed, for example research and PM-KISAN-type income support.
    • Blue box: production-limiting.
    • Amber box: distorting, capped at 10% de minimis for developing countries.
    • India's MSP-based procurement is protected by the peace clause (Bali, 2013) for food security stockholding.
  • TRIPS: patents and the Indian Patents Act amendments of 2005, including Section 3(d).
  • TRIMS; GATS.
  • Special and differential treatment for developing countries.
• Problems: the Appellate Body has been unable to work since December 2019. Ministerial conferences: MC13 Abu Dhabi (2024), MC14 Cameroon (2026).
• India's trade agreements:
  • India–UAE CEPA and India–Australia ECTA (2022);
  • India–EFTA TEPA (March 2024): US$ 100 billion investment commitment;
  • India–UK CETA (July 2025);
  • India–EU FTA talks.
  • India opted out of RCEP (2019), fearing a flood of Chinese goods and harm to dairy and agriculture.

Exam tip: Draw the BoP as a T: current account on the left and capital account on the right, with reserves as the balancing item. Then check each item in a question against the right side of the T.