Complete Notes on External Sector of the Indian Economy for BPSC and Other Competitive Exams in 2025
Economics- 7
Here are detailed notes on the External Sector of the Indian Economy
- Balance of Payments (BoP)
- Foreign Trade Policy (FTP)
- FDI, WTO, IMF, and World Bank
External Sector of Indian Economy
The external sector of the Indian Economy includes all economic transactions between India and the rest of the world—trade, investment, aid, loans, and remittances. It reflects India’s economic strength and integration with the global economy.
Balance of Payments (BoP)
Definition:
The Balance of Payments is a systematic record of all economic transactions between the residents of a country and the rest of the world in a given period (usually one year).
BoP Components:
| Account | Description |
| 1. Current Account | Includes exports and imports of goods and services, and remittances |
| 2. Capital Account | Deals with capital transfers like FDI, FII, ECBs, NRI deposits |
| 3. Financial Account | Tracks foreign assets/liabilities |
| 4. Errors and Omissions | Adjustments to reconcile accounts |
| 5. Foreign Exchange Reserves | Shows change in RBI’s forex reserves |
Current Account Deficit (CAD):
Occurs when imports > exports (deficit in current account).
BoP Surplus/Deficit:
- If total inflow > outflow → BoP surplus
- If total outflow > inflow → BoP deficit
Foreign Trade Policy (FTP)
Objective:
To boost exports, generate employment, and strengthen India’s global trade presence.
Administered by:
- Ministry of Commerce & Industry
- Implemented via Directorate General of Foreign Trade (DGFT)
Key Elements of FTP 2023 (Current Policy):
- Shift from incentive-based to remission-based schemes.
- No fixed duration; dynamic and responsive framework.
- Promotion of e-commerce exports, district export hubs.
- Emphasis on trade facilitation and digitization.
- Reduce trade logistics cost to global standards.
Important Schemes:
- RoDTEP (Remission of Duties and Taxes on Exported Products)
- RoSCTL (for textile sector)
- Advance Authorization Scheme
- Export Promotion Capital Goods (EPCG)
Foreign Direct Investment (FDI)
Definition:
FDI is an investment made by a foreign entity in the capital of a domestic company, typically to acquire a controlling stake.
Routes of FDI:
- Automatic Route – No government approval required.
- Government Route – Approval needed from DPIIT and FIPB (now abolished).
Sectors attracting FDI:
- Services, IT, telecom, automobiles, pharma, construction, fintech.
Recent Trends:
- India among top 10 FDI recipients globally.
- Major investors: USA, Singapore, Mauritius, Netherlands, Japan.
International Economic Institutions
1. World Trade Organization (WTO)
- Established: 1995 (replaced GATT)
- Headquarters: Geneva
- Functions:
- Promote free and fair trade
- Settle trade disputes
- Monitor trade policies
- India’s Concern:
- Protection of agriculture
- TRIPS (patents) affecting medicine access
2. International Monetary Fund (IMF)
- Established: 1944 (Bretton Woods)
- Headquarters: Washington D.C.
- Purpose:
- Ensure global monetary cooperation
- Provide financial assistance to member countries facing BoP crisis
- Quota-based membership (India is a founding member)
- Special Drawing Rights (SDR): International reserve asset of IMF
3. World Bank Group
- Main Institutions:
- IBRD (International Bank for Reconstruction and Development)
- IDA (International Development Association)
- Established: 1944
- Headquarters: Washington D.C.
- Functions:
- Provide long-term loans for development projects
- Focus areas: infrastructure, health, education, environment
- India is a major borrower
Objective Questions: External Sector of the Indian Economy
1. Balance of Payments includes which of the following?
A) Government budget
B) International economic transactions
C) Domestic tax collection
D) Foreign aid only
Answer: B
2. Current Account includes:
A) FDI inflows
B) Gold imports
C) Exports and imports of goods & services
D) Foreign loans
Answer: C
3. A surplus in the BoP means:
A) More expenditure than income
B) More imports than exports
C) More inflows than outflows
D) Balanced trade
Answer: C
4. Which organization handles international trade disputes?
A) IMF
B) World Bank
C) WTO
D) UNCTAD
Answer: C
5. FDI under automatic route requires:
A) Prior RBI permission
B) Cabinet approval
C) No prior government approval
D) Approval from DGFT
Answer: C
6. India’s foreign trade policy is formulated by:
A) RBI
B) Ministry of Finance
C) Ministry of Commerce and Industry
D) SEBI
Answer: C
7. What is SDR in IMF terminology?
A) Sovereign Debt Ratio
B) Standardized Development Resource
C) Special Drawing Rights
D) Specific Deposit Reserves
Answer: C
8. The World Bank provides:
A) Short-term liquidity
B) Loans for infrastructure and development
C) Weapons to developing nations
D) Technical military training
Answer: B
