Indian and AP Economy — Mains Depth · Chapter 4

External sector

What to remember

Foreign trade policy is made by the Ministry of Commerce and Industry and run by the DGFT under the Foreign Trade (Development and Regulation) Act, 1992. Its aim is to raise exports and ease imports of needed goods.
FDI brings long-term ownership and control; FPI is short-term financial investment in shares and bonds, and is more volatile. Both are governed by FEMA, 1999.
The WTO (1995) replaced GATT and sets global trade rules. India's main concern is farm support and food security. Regional trade agreements range from preferential trade to economic union.

Foreign trade policy

Foreign trade means exports and imports of goods and services. Its health is judged by the trade balance, the share in world trade and the range of products and markets.

Law: the Foreign Trade (Development and Regulation) Act, 1992 gives the Government power to regulate trade. The Directorate General of Foreign Trade (DGFT) issues the policy and implements it, including the Importer-Exporter Code.
Policy: India used to announce a five-year Foreign Trade Policy. The policy of 2023 was announced without a fixed end date, so it can be updated as needed. Its themes are incentives to remission, export promotion through collaboration, ease of doing business and emerging areas, with a focus on "Districts as Export Hubs".
Common schemes
EPCG (Export Promotion Capital Goods): import capital goods at low or zero duty against an export obligation.
Advance Authorisation: duty-free import of inputs used to make export products.
RoDTEP: refunds embedded central and state duties and taxes that were not refunded earlier.
Export Oriented Units (EOUs) and Special Economic Zones (SEZs): duty-free enclaves for export production. The SEZ Act, 2005 governs SEZs.
Trade facilitation: single window clearance, paperless customs and Trade Facilitation Agreement measures.

Terms of trade and trade deficit. The terms of trade are the ratio of export prices to import prices. A trade deficit means imports exceed exports. India's major imports include crude oil, gold and electronics; major exports include petroleum products, gems and jewellery, engineering goods and services such as IT.

Andhra Pradesh in foreign trade. AP has a long coast with ports at Visakhapatnam, Krishnapatnam, Kakinada and Gangavaram. The state is among the leading exporters of marine products, especially shrimp. It also hosts SEZs and industrial clusters such as Sri City, the Visakhapatnam apparel park at Atchutapuram and Kakinada. The Visakhapatnam-Chennai Industrial Corridor is meant to attract manufacturing and export investment.

Trade barriers and remedies. Tariffs are taxes on imports, such as customs duty. Non-tariff barriers include quotas, licences, technical standards and sanitary rules. Three remedies are allowed under trade rules when imports hurt domestic industry: anti-dumping duty (when a foreign firm sells below its normal value), countervailing duty (to offset a foreign subsidy) and safeguard duty (against a sudden surge in imports). In India the Directorate General of Trade Remedies (DGTR) investigates and recommends these duties, and the Finance Ministry imposes them. Import substitution tried to make goods at home; export-led growth tries to sell to the world. India's policy since 1991 has moved from high tariffs and licences to lower tariffs and open trade, although recent years have also seen higher duties on some items to support local manufacturing.

FDI and FPI

Foreign Direct Investment (FDI) is investment by a foreign entity that gives a lasting interest and control in an enterprise. In India an investment of 10 per cent or more of the paid-up equity of a listed company, or any investment in an unlisted company, is treated as FDI. Foreign Portfolio Investment (FPI) is investment in shares and bonds without control, below 10 per cent of a company by each investor.

Feature	FDI	FPI
Aim	Control and long-term presence	Financial return
Stability	Stable	Volatile ("hot money")
Regulated by	FEMA, DPIIT policy	SEBI (FPI regulations), RBI
Forms	Greenfield (new unit), brownfield (existing unit)	Shares, bonds, mutual funds
Effect	Technology, jobs, management	Liquidity in markets

Routes: the automatic route needs no prior approval; the government route needs approval through the concerned ministry. Foreign Investment Promotion Board (FIPB) was abolished in 2017 and approvals now go through administrative ministries.
Nodal body: the Department for Promotion of Industry and Internal Trade (DPIIT) makes FDI policy. FEMA, 1999 replaced FERA, 1973.
Sector caps: sectors have limits on foreign ownership. Some sectors are prohibited, for example lotteries and gambling.
Types of FDI: horizontal (same business abroad), vertical (supply chain) and conglomerate (unrelated business).

WTO and India

The General Agreement on Tariffs and Trade (GATT) was signed in 1947. The World Trade Organization (WTO) came into being on 1 January 1995 after the Uruguay Round, as agreed at Marrakesh. It has its headquarters in Geneva.

Structure: the Ministerial Conference is the highest body and meets about every two years. A General Council works between meetings. The Dispute Settlement Body hears trade disputes.
Main agreements: Agreement on Agriculture (AoA), GATS (services), TRIPS (intellectual property), TRIMS (investment measures) and SPS (food safety).
Principles: non-discrimination (Most Favoured Nation and national treatment), transparency and binding tariffs.
Doha Development Round (2001): talks on agriculture and development remain unfinished. The Trade Facilitation Agreement was agreed at Bali (2013) and entered into force in 2017.
India's issues: public stockholding for food security (minimum support price purchases), special safeguard mechanism for farmers, fisheries subsidies and the protection of small farmers. India is a founding member of GATT and the WTO.

AoA boxes: the green box holds subsidies with minimal trade distortion and is allowed; the amber box holds trade-distorting subsidies that have limits; the blue box covers payments linked to production limits.

External debt

External debt is the money owed by residents to non-residents, repayable in foreign currency or goods. Its parts are:

Sovereign (government) and non-sovereign (private).
Long-term (original maturity above one year) and short-term.
Main components: external commercial borrowings (ECBs), NRI deposits, trade credit, multilateral and bilateral loans, and short-term debt.

Warning signs are a high ratio of external debt to GDP, a high share of short-term debt in total debt, and a high debt-service ratio (debt service payments as a share of current receipts). Foreign exchange reserves act as a buffer. India's policy on external debt has been cautious since the 1991 crisis, and the Ministry of Finance publishes the details.

Regional trade agreements

Regional integration takes several levels, from loose to deep:

Level	Features
Preferential Trade Agreement (PTA)	Lower tariffs on selected goods
Free Trade Area (FTA)	Zero tariffs among members; each sets its own external tariff
Customs union	FTA plus a common external tariff
Common market	Customs union plus free movement of labour and capital
Economic union	Common market plus shared economic policy

Comprehensive agreements, such as a CECA or CEPA, cover services, investment and cooperation as well as goods.

India's agreements

SAFTA: the South Asian Free Trade Area among SAARC members.
ASEAN-India FTA (goods).
India-Japan, India-Korea and India-Singapore agreements: comprehensive economic partnership or cooperation agreements.
India-UAE CEPA (2022) and India-Australia ECTA (2022): more recent agreements. India has also negotiated with the EFTA group and the UK; check the latest official release for their status.
RCEP: India chose not to join the Regional Comprehensive Economic Partnership when it was signed in 2020, citing the trade deficit with some members and the effect on farmers and small industry.
Other groupings: BIMSTEC, Asia-Pacific Trade Agreement (APTA) and the India-Mercosur preferential trade agreement.

Exam traps

FDI is not the same as FPI: only FDI gives control.
FEMA replaced FERA; it is a civil law, unlike FERA.
WTO replaced GATT in 1995, not 1947 (GATT began in 1947).
WTO headquarters is in Geneva.
The green box is allowed; the amber box is limited.
A free trade area has no common external tariff; a customs union has one.
India did not join RCEP.
Short-term debt is up to one year; long-term is above one year.
FIPB no longer exists; DPIIT and ministries handle approvals.
SEZ Act is 2005; the FTDR Act is 1992.

One-liners

1. DGFT works under the Ministry of Commerce and Industry.
2. The FTDR Act was passed in 1992.
3. FEMA was enacted in 1999.
4. DPIIT frames FDI policy.
5. The WTO began on 1 January 1995.
6. WTO headquarters is in Geneva.
7. The Ministerial Conference is the highest WTO body.
8. TRIPS deals with intellectual property rights.
9. The Trade Facilitation Agreement came from Bali.
10. India stayed out of RCEP.
11. A customs union has a common external tariff.
12. Visakhapatnam, Krishnapatnam and Kakinada are major AP ports.

Practice questions

Which authority issues and implements India's Foreign Trade Policy?
1. SEBI
2. Competition Commission of India
3. Reserve Bank of India
4. Directorate General of Foreign Trade
Answer
D. Directorate General of Foreign Trade
DGFT works under the Ministry of Commerce and Industry.
The Foreign Trade (Development and Regulation) Act was passed in
1. 2005
2. 1973
3. 1999
4. 1992
Answer
D. 1992
It gives the Government power to regulate foreign trade.
Duty-free import of inputs used to make export goods is allowed under
1. Advance Authorisation
2. SEZ Act
3. FEMA
4. RoDTEP
Answer
A. Advance Authorisation
Advance Authorisation allows duty-free inputs for exports.
Import of capital goods at low duty against an export obligation is allowed under
1. RoDTEP
2. SAFTA
3. TRIPS
4. EPCG scheme
Answer
D. EPCG scheme
EPCG ties capital goods imports to exports.
The Special Economic Zones Act was enacted in
1. 2005
2. 1992
3. 2016
4. 1991
Answer
A. 2005
The SEZ Act came in 2005.
FDI differs from FPI mainly because FDI
1. Gives long-term interest and control
2. Is invested only in bonds
3. Is always short-term
4. Is not regulated
Answer
A. Gives long-term interest and control
FDI involves lasting interest and control.
Hot money refers to
1. Government grants
2. Aid from the World Bank
3. Long-term direct investment
4. Volatile portfolio investment
Answer
D. Volatile portfolio investment
FPI flows can leave quickly.
Which Act regulates foreign exchange transactions in India at present?
1. Banking Regulation Act, 1949
2. FEMA, 1999
3. FERA, 1973
4. SEBI Act, 1992
Answer
B. FEMA, 1999
FEMA replaced FERA.
Which department frames India's FDI policy?
1. SEBI
2. DGFT
3. DPIIT
4. Department of Revenue
Answer
C. DPIIT
The Department for Promotion of Industry and Internal Trade frames FDI policy.
Setting up a new factory abroad by a foreign firm is called
1. Greenfield FDI
2. Portfolio investment
3. Brownfield FDI
4. External borrowing
Answer
A. Greenfield FDI
A new unit is greenfield.
Buying a stake in an existing company is called
1. Venture grant
2. Remittance
3. Brownfield FDI
4. Greenfield FDI
Answer
C. Brownfield FDI
An existing unit is brownfield.
Under the automatic route of FDI
1. Cabinet approval is needed
2. RBI auctions the shares
3. No prior government approval is needed
4. Only NRIs can invest
Answer
C. No prior government approval is needed
The government route needs approval.
The WTO came into existence in
1. 1947
2. 1995
3. 1991
4. 2001
Answer
B. 1995
It started on 1 January 1995.
The WTO replaced
1. OECD
2. UNCTAD
3. IMF
4. GATT
Answer
D. GATT
GATT (1947) became the WTO.
The headquarters of the WTO is at
1. Geneva
2. Paris
3. New York
4. Washington
Answer
A. Geneva
Geneva is the seat.
The highest decision-making body of the WTO is the
1. General Council
2. Ministerial Conference
3. Dispute Settlement Body
4. Secretariat
Answer
B. Ministerial Conference
It meets about every two years.
Which WTO agreement deals with intellectual property rights?
1. TRIMS
2. GATS
3. SPS
4. TRIPS
Answer
D. TRIPS
TRIPS is on trade-related IP rights.
Which WTO agreement covers trade in services?
1. TRIPS
2. GATS
3. AoA
4. TRIMS
Answer
B. GATS
GATS is the General Agreement on Trade in Services.
The Trade Facilitation Agreement was agreed at the WTO ministerial conference held at
1. Seattle
2. Doha
3. Cancun
4. Bali
Answer
D. Bali
Bali (2013) produced the TFA.
Subsidies with minimal trade distortion that are freely allowed fall in the
1. Amber box
2. Red box
3. Green box
4. Blue box only
Answer
C. Green box
Green box subsidies are not limited.
India's main concern in WTO agriculture talks is
1. Public stockholding for food security
2. Gold imports
3. Capital controls
4. Currency convertibility
Answer
A. Public stockholding for food security
Procurement at MSP is affected by subsidy limits.
External debt is money owed by
1. Residents to non-residents
2. Non-residents to residents
3. Banks to the Government
4. The RBI to banks
Answer
A. Residents to non-residents
It is repayable to non-residents.
Which of the following is a component of external debt?
1. Customs duty
2. Income tax
3. NRI deposits
4. Land revenue
Answer
C. NRI deposits
NRI deposits are owed to non-residents.
A high share of short-term debt in total external debt is a sign of
1. A trade surplus
2. Strong reserves
3. A low debt service ratio
4. Vulnerability to sudden outflows
Answer
D. Vulnerability to sudden outflows
Short-term debt must be repaid soon.
A trade bloc with zero internal tariffs and a common external tariff is
1. A preferential trade area
2. A customs union
3. A free trade area
4. A tariff quota
Answer
B. A customs union
A customs union adds a common external tariff.
Zero tariff among members, but each member sets its own external tariff, defines
1. A common market
2. A free trade area
3. A customs union
4. An economic union
Answer
B. A free trade area
This is a free trade area.
Which is the highest level of regional economic integration?
1. Customs union
2. Free trade area
3. Economic union
4. Preferential trade area
Answer
C. Economic union
It adds shared economic policy.
India decided not to join which mega trade agreement?
1. SAFTA
2. ASEAN-India FTA
3. APTA
4. RCEP
Answer
D. RCEP
India stayed out of RCEP.
SAFTA is the free trade area of
1. South Asian countries
2. ASEAN countries
3. Pacific countries
4. African countries
Answer
A. South Asian countries
SAFTA is a SAARC arrangement.
A duty imposed when a foreign firm sells in India below its normal value is
1. Excise duty
2. Safeguard duty
3. Countervailing duty
4. Anti-dumping duty
Answer
D. Anti-dumping duty
Anti-dumping duty counters dumping.
A duty meant to offset a foreign subsidy is
1. Customs duty
2. Countervailing duty
3. Entry tax
4. Anti-dumping duty
Answer
B. Countervailing duty
It cancels the effect of the subsidy.
Which of these is an AP port?
1. Paradip
2. Tuticorin
3. Krishnapatnam
4. Kochi
Answer
C. Krishnapatnam
Krishnapatnam is on AP's coast.
AP is among the leading exporters of which product group?
1. Marine products
2. Rubber
3. Tea
4. Jute
Answer
A. Marine products
Shrimp and other marine products are major exports.
Consider the following statements: 1. DGFT works under the Ministry of Commerce and Industry. 2. FEMA was enacted in 1973. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
FEMA is of 1999; FERA was of 1973.
Consider the following statements: 1. FPI is mostly long-term and stable. 2. FDI usually brings technology and management. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
FPI is volatile.
Consider the following statements: 1. The WTO was established in 1995. 2. GATT was signed in 1947. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both statements are correct.
Consider the following statements: 1. The Ministerial Conference is the WTO's highest body. 2. WTO headquarters is in Brussels. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
WTO is in Geneva.
Consider the following statements: 1. A free trade area has a common external tariff. 2. A customs union has a common external tariff. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Free trade area members set their own external tariffs.
Consider the following statements: 1. India is a member of RCEP. 2. India is a member of SAFTA. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
India did not join RCEP.
Consider the following statements: 1. External debt is owed by Indians to other Indians. 2. External debt includes ECBs and NRI deposits. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
It is owed to non-residents.
Consider the following statements: 1. The FIPB still examines every FDI proposal. 2. FDI policy is framed by SEBI. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
D. Neither 1 nor 2
FIPB was abolished in 2017 and DPIIT frames FDI policy.
Consider the following statements: 1. The green box covers subsidies with minimal trade distortion. 2. The amber box subsidies are unrestricted. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
Amber box subsidies are subject to limits.
Consider the following statements: 1. Anti-dumping duty is imposed when imports surge suddenly. 2. Safeguard duty is imposed to offset a foreign subsidy. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
D. Neither 1 nor 2
Anti-dumping addresses sales below normal value; safeguard duty addresses surges.
Consider the following statements: 1. SEZs are governed by the 2005 SEZ Act. 2. EOUs and SEZs are duty-free enclaves for exports. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both are correct.
Consider the following statements: 1. FPI by one investor can exceed 10 per cent of a company. 2. FDI of 10 per cent or more in a listed company is treated as FDI. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Above 10 per cent by an investor is treated as FDI, not FPI.

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1.Which sector is agriculture classified under in economic terms?
2.Which sector contributes the most to India's GDP currently?
3.SIDBI mainly provides finance to which sector?
4.Which is the largest employer sector in India?
5.Manufacturing industries are classified under which sector?
6.Mixed economy refers to a system combining which two sectors?
7.Which committee's recommendations led to banking sector reforms in India in the 1990s?
8.Which sector does agriculture belong to?
9.The following device allows the user to add external components to a computer system:
10.The Economic Survey 2024–25 states that India’s foreign exchange reserves were adequate to cover approximately what percentage of external debt as of December 2024? (RRB NTPC GRADUATE CBT 1 (19/03/2026) Shift 3)

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