Indian Economy: Foreign Trade — BOP, Forex, FDI, WTO

Foreign trade and international economics carry 3-5 questions in Kerala PSC graduate-level exams. This note covers Balance of Payments, forex reserves, FDI, WTO, and India’s trade profile comprehensively.

1. Balance of Payments (BOP)

Component	What It Includes
Current Account	Trade in goods (visible), trade in services (invisible), income (investment returns), transfers (remittances)
Capital Account	FDI, FPI, loans, banking capital, NRI deposits
Financial Account	(In IMF’s BPM6 format, replaces old “Capital Account” usage)
Overall BOP	Current Account + Capital Account + Errors and Omissions = Change in Forex Reserves

Current Account Components

Item	Details
Trade Balance (Visible)	Exports minus Imports of goods
Services (Invisible)	IT services, tourism, shipping, insurance
Income	Investment income, compensation of employees
Transfers	Remittances from abroad (India is world’s top remittance receiver)

India’s BOP Situation

Parameter	Typical Status
Trade balance	Deficit (imports exceed exports, mainly due to oil)
Services balance	Surplus (IT and software exports)
Remittances	Large surplus (India: highest remittance receiver globally — $125 billion in FY2024)
Current Account	Usually deficit (CAD); occasionally surplus
Capital Account	Usually surplus (FDI, FPI inflows)

2. Foreign Exchange Reserves

Aspect	Details
Definition	External assets held by RBI — foreign currency assets, gold, SDRs, Reserve Tranche Position in IMF
Current level (2025)	Approximately $640–660 billion
Managed by	Reserve Bank of India (RBI)
Purpose	Defend rupee, pay for imports, service external debt, build confidence
Import cover	India’s reserves cover approximately 10–11 months of imports
India’s global rank	4th largest forex reserves (after China, Japan, Switzerland)

Composition of Forex Reserves

Component	Share (approx.)
Foreign Currency Assets (FCA)	~90%
Gold	~8–9%
SDRs	~1%
Reserve Tranche Position	Small fraction

3. Foreign Direct Investment (FDI)

Aspect	Details
Definition	Investment where foreign entity acquires 10% or more stake in an Indian company
Routes	Automatic Route (no government approval needed) and Government Route (approval required)
Regulator	DPIIT (Department for Promotion of Industry and Internal Trade)
FDI equity inflow	$70–85 billion/year (recent years)
Top investing countries	Singapore, Mauritius, USA, Netherlands, Japan
Top recipient states	Maharashtra, Karnataka, Gujarat, Delhi, Tamil Nadu
Top sectors	Services, Computer Software/Hardware, Telecom, Trading, Automobiles

FDI Limits in Key Sectors

Sector	FDI Limit	Route
Defence	74% (100% in certain cases)	Up to 74% Automatic; beyond — Government
Telecom	100%	Up to 49% Automatic; beyond — Government
Insurance	74%	Automatic
Banking (private)	74%	Automatic (up to 49%); Government (49–74%)
Multi-brand retail	51%	Government
Single-brand retail	100%	Automatic
Airlines (scheduled)	49%	Automatic
Print media (news)	26%	Government
Agriculture	Not permitted (except specific areas)	—
Lottery/Gambling/Chit funds	Not permitted	—
Atomic energy	Not permitted	—

4. Foreign Portfolio Investment (FPI)

Feature	FDI	FPI
Stake	10% or more	Less than 10%
Nature	Long-term, control over management	Short-term, no control
Stability	Stable	Volatile (“hot money”)
Examples	Setting up factory, acquiring company	Buying stocks, bonds on exchanges
Regulator	DPIIT	SEBI

5. Trade Deficit and Major Trade Items

India’s Trade Profile

Parameter	Approximate (FY 2024-25)
Total Exports	$775–800 billion (goods + services)
Total Imports	$850–900 billion (goods + services)
Trade Deficit (goods)	$240–260 billion
Services Surplus	$160–175 billion
Current Account Deficit	1–2% of GDP

Major Export Items

Category	Items
Petroleum products	Refined petroleum (India is a major refiner)
IT and software services	Largest service export
Gems and jewellery	Cut and polished diamonds
Pharmaceuticals	Generic drugs (“Pharmacy of the world”)
Textiles and garments	Cotton, readymade garments
Agriculture	Rice, spices, marine products, tea
Automobiles	Cars, two-wheelers, auto components
Chemicals	Organic and inorganic chemicals

Major Import Items

Category	Items
Crude petroleum	Largest import item (India imports ~85% of oil needs)
Gold	Second largest import
Electronics	Smartphones, components, chips
Machinery	Industrial machinery, electrical equipment
Coal	Thermal and coking coal
Fertilizers	Urea, DAP, MOP
Vegetable oils	Palm oil, soybean oil

Top Trading Partners

Exports To	Imports From
USA (largest export destination)	China (largest import source)
UAE	USA
Netherlands	UAE
China	Saudi Arabia
Bangladesh	Iraq

6. World Trade Organization (WTO)

Aspect	Details
Established	1 January 1995
Predecessor	GATT (General Agreement on Tariffs and Trade, 1948)
Headquarters	Geneva, Switzerland
Members	164 (as of 2024)
India’s membership	Founding member (1 January 1995)
Director-General (2025)	Ngozi Okonjo-Iweala (Nigeria)
Decision-making	Consensus-based (one country, one vote)
Dispute settlement	Dispute Settlement Body (DSB) — “teeth” of WTO
Ministerial Conference	Highest decision-making body; meets every 2 years

Key WTO Agreements

Agreement	Subject
GATT	Trade in goods — tariff reduction
GATS	Trade in services
TRIPS	Intellectual property rights (patents, copyrights, trademarks)
TRIMS	Trade-related investment measures
AoA (Agreement on Agriculture)	Farm subsidies, market access, export competition
SPS	Sanitary and Phytosanitary measures (food safety standards)
Anti-dumping Agreement	Allows duties on goods sold below cost

WTO Ministerial Conferences — Key Ones

Conference	Year	Location	Significance
1st	1996	Singapore	”Singapore Issues” (investment, competition, government procurement)
4th	2001	Doha	Doha Development Agenda launched
5th	2003	Cancun	Collapsed (agriculture disagreements)
9th	2013	Bali	Trade Facilitation Agreement; food security clause (India’s demand)
12th	2022	Geneva	Agreement on fisheries subsidies; TRIPS waiver for COVID vaccines

7. Exchange Rate Concepts

Term	Meaning
Fixed exchange rate	Government fixes currency value against another currency
Floating exchange rate	Market forces (demand-supply) determine value
Managed float	India’s system — primarily market-driven but RBI intervenes to prevent volatility
Appreciation	Rupee gains value (e.g., from Rs 84/$ to Rs 82/$)
Depreciation	Rupee loses value (e.g., from Rs 82/$ to Rs 84/$)
Devaluation	Government officially reduces currency value (fixed rate system)
REER	Real Effective Exchange Rate — trade-weighted, inflation-adjusted
NEER	Nominal Effective Exchange Rate — trade-weighted, not inflation-adjusted

8. Trade Policy Instruments

Instrument	Purpose
Tariff (customs duty)	Tax on imports to protect domestic industry
Quota	Limit on quantity of imports
Anti-dumping duty	Extra duty on goods sold below cost by foreign firms
Countervailing duty	Duty to counter foreign government subsidies
Export subsidy	Government incentive to boost exports
SEZ (Special Economic Zone)	Tax-free enclaves for export production
EXIM policy	Government’s trade policy framework

9. Key Institutions

Institution	Role
RBI	Manages forex reserves, exchange rate
DGFT	Director General of Foreign Trade — administers EXIM policy
DPIIT	FDI policy formulation
SEBI	Regulates FPI
EXIM Bank	Provides finance for foreign trade
ECGC	Export Credit Guarantee Corporation — insures export risk
FIEO	Federation of Indian Export Organisations

10. PSC Quick-Fire Facts

Question	Answer
WTO headquarters	Geneva, Switzerland
WTO established in	1995
WTO replaced	GATT
Number of WTO members	164
India’s largest export destination	USA
India’s largest import source	China
India’s largest import item	Crude petroleum
Full form of TRIPS	Trade-Related Aspects of Intellectual Property Rights
India’s forex reserves managed by	RBI
Highest remittance-receiving country	India
FDI route that needs no approval	Automatic Route
Current exchange rate system in India	Managed float
EXIM Bank provides	Trade finance
SEZ Act passed in	2005
Doha Round launched in	2001
FDI not permitted in	Lottery, gambling, atomic energy
India’s rank in forex reserves	4th globally