External Sector: Getting FDI Right (2024-25) | Indian Economy for UPSC CSE PDF Download

 Page 1


03
CHAPTER
79
EXTERNAL SECTOR: 
GETTING FDI RIGHT
India’s external sector continued to display resilience amidst global headwinds 
of economic and trade policy uncertainties. Total exports (merchandise and 
services) have registered a steady growth in the first nine months of FY25, 
reaching USD 602.6 billion (6 per cent). Growth in services and goods exports, 
excluding petroleum and gems and jewellery, was 10.4 per cent. Total imports 
during the same period reached USD 682.2 billion, registering a growth of 6.9 
per cent on the back of steady domestic demand. 
The evolving global trade dynamics, marked by gradual shifts towards greater 
protectionism, require assessing the situation and developing a forward-
looking strategic trade roadmap. By adapting to these trends and leveraging 
its strengths, India can accelerate its growth and enhance its presence in global 
trade. To strengthen its competitiveness and further integrate into global supply 
chains, the country can focus on reducing trade-related costs and enhancing 
export facilitation to create a more vibrant export sector. This proactive 
approach will help India continue to thrive in an ever-changing global market.
On the capital front, foreign portfolio investments (FPIs) have shown a 
mixed trend in FY25 so far. Uncertainty in the global markets and profit-
taking by foreign portfolio investors led to capital outflows. However, strong 
macroeconomic fundamentals, a favourable business environment, and high 
economic growth have kept FPI flows positive overall. Gross foreign direct 
investment (FDI) inflows have shown signs of revival in the first eight months of 
FY25, though net FDI inflows declined relative to April-November 2023 due to a 
rise in repatriation/disinvestment.
India’s foreign exchange reserves stood at USD 640.3 billion as of the end of 
December 2024, sufficient to cover approximately 90 per cent of the country’s 
external debt of USD 711.8 billion as of September 2024, reflecting a strong 
buffer against external vulnerabilities.
Page 2


03
CHAPTER
79
EXTERNAL SECTOR: 
GETTING FDI RIGHT
India’s external sector continued to display resilience amidst global headwinds 
of economic and trade policy uncertainties. Total exports (merchandise and 
services) have registered a steady growth in the first nine months of FY25, 
reaching USD 602.6 billion (6 per cent). Growth in services and goods exports, 
excluding petroleum and gems and jewellery, was 10.4 per cent. Total imports 
during the same period reached USD 682.2 billion, registering a growth of 6.9 
per cent on the back of steady domestic demand. 
The evolving global trade dynamics, marked by gradual shifts towards greater 
protectionism, require assessing the situation and developing a forward-
looking strategic trade roadmap. By adapting to these trends and leveraging 
its strengths, India can accelerate its growth and enhance its presence in global 
trade. To strengthen its competitiveness and further integrate into global supply 
chains, the country can focus on reducing trade-related costs and enhancing 
export facilitation to create a more vibrant export sector. This proactive 
approach will help India continue to thrive in an ever-changing global market.
On the capital front, foreign portfolio investments (FPIs) have shown a 
mixed trend in FY25 so far. Uncertainty in the global markets and profit-
taking by foreign portfolio investors led to capital outflows. However, strong 
macroeconomic fundamentals, a favourable business environment, and high 
economic growth have kept FPI flows positive overall. Gross foreign direct 
investment (FDI) inflows have shown signs of revival in the first eight months of 
FY25, though net FDI inflows declined relative to April-November 2023 due to a 
rise in repatriation/disinvestment.
India’s foreign exchange reserves stood at USD 640.3 billion as of the end of 
December 2024, sufficient to cover approximately 90 per cent of the country’s 
external debt of USD 711.8 billion as of September 2024, reflecting a strong 
buffer against external vulnerabilities.
Economic Survey 2024-25
80
INTRODUCTION
3.1 The world is experiencing increasing political and economic uncertainty in the 
wake of geopolitical conflicts, increasing trends of geoeconomic fragmentation, and 
recurrent climate events. The Great Election year of 2024, during which more than half 
of the world's population was exercising their franchise to elect their new governments, 
meant further declining policy predictability. Such political and economic uncertainty 
can be detrimental to growth. The International Monetary Fund (IMF) estimates that 
a one standard deviation increase in uncertainty correlates with a 0.4 to 1.3 percentage 
point decrease in output growth.
1
 Economists like Keynes and Tobin have pointed 
out that higher uncertainty requires investors to seek more significant compensation 
for risks, thereby raising risk premia and the overall cost of finance. Additionally, 
uncertainty increases the likelihood of borrower defaults, leading to higher capital 
costs. Moreover, uncertainty shocks in advanced economies like the US have often led 
to lower output and reduced prices.
2
3.2 Various indicators are used to monitor global risks and uncertainties and measure 
policy-related uncertainty's impact on global economic activity. These include the 
Geopolitical Risk (GPR) index
3
, which tracks adverse geopolitical events through 
newspaper articles; the Trade Policy Uncertainty (TPU) index
4
, which covers the 
frequency of articles mentioning trade policy uncertainty and heightened trade tensions, 
and the Global Economic Policy Uncertainty (GEPU) index
5
, which is a GDP-weighted 
average of national Economic Policy Uncertainty (EPU) indices for 21 countries. These 
indices capture changes occurring in economies constituting about 71 per cent of global 
output.
6
3.3 These indices provide valuable insights into how uncertainty from trade issues, 
geopolitical events, and economic policy measures can impact global economic 
conditions. As of November 2024, the GEPU index remains high, reflecting ongoing 
global economic policy concerns. Similarly, the TPU index has risen since December 
2023, primarily driven by trade tensions and policy changes among major economies. 
1  Döttling, R., Malaika, M., & Terrones, M. (2013). Held Back by Uncertainty: Recoveries are slowed when 
businesses and consumers are unsure of the future. Finance & Development, 0050(001), A012. https://tinyurl.
com/324z5ux4.
2  Leduc, S., and Liu, Z. (2016). Uncertainty Shocks are Aggregate Demand Shocks. Journal of Monetary Economics, 
82, 20-35; Kumar, A., Mallick, S., and Sinha, A. (2021). Is Uncertainty the Same Everywhere? Advanced versus 
Emerging Economies. Economic Modelling, 101, 105524, https://tinyurl.com/6n74paw2.
3  Geopolitical Risk Index, https://www.policyuncertainty.com/gpr.html.
4  Trade Policy Uncertainty Index, https://www.matteoiacoviello.com/tpu.htm.
5  Global Economic Policy Uncertainty Index, https://www.policyuncertainty.com/.
6  Global output is calculated on the basis of purchasing power parity. If the economies are accounted at market 
exchange rates the economies constitute roughly 80 per cent of the global economy.
Page 3


03
CHAPTER
79
EXTERNAL SECTOR: 
GETTING FDI RIGHT
India’s external sector continued to display resilience amidst global headwinds 
of economic and trade policy uncertainties. Total exports (merchandise and 
services) have registered a steady growth in the first nine months of FY25, 
reaching USD 602.6 billion (6 per cent). Growth in services and goods exports, 
excluding petroleum and gems and jewellery, was 10.4 per cent. Total imports 
during the same period reached USD 682.2 billion, registering a growth of 6.9 
per cent on the back of steady domestic demand. 
The evolving global trade dynamics, marked by gradual shifts towards greater 
protectionism, require assessing the situation and developing a forward-
looking strategic trade roadmap. By adapting to these trends and leveraging 
its strengths, India can accelerate its growth and enhance its presence in global 
trade. To strengthen its competitiveness and further integrate into global supply 
chains, the country can focus on reducing trade-related costs and enhancing 
export facilitation to create a more vibrant export sector. This proactive 
approach will help India continue to thrive in an ever-changing global market.
On the capital front, foreign portfolio investments (FPIs) have shown a 
mixed trend in FY25 so far. Uncertainty in the global markets and profit-
taking by foreign portfolio investors led to capital outflows. However, strong 
macroeconomic fundamentals, a favourable business environment, and high 
economic growth have kept FPI flows positive overall. Gross foreign direct 
investment (FDI) inflows have shown signs of revival in the first eight months of 
FY25, though net FDI inflows declined relative to April-November 2023 due to a 
rise in repatriation/disinvestment.
India’s foreign exchange reserves stood at USD 640.3 billion as of the end of 
December 2024, sufficient to cover approximately 90 per cent of the country’s 
external debt of USD 711.8 billion as of September 2024, reflecting a strong 
buffer against external vulnerabilities.
Economic Survey 2024-25
80
INTRODUCTION
3.1 The world is experiencing increasing political and economic uncertainty in the 
wake of geopolitical conflicts, increasing trends of geoeconomic fragmentation, and 
recurrent climate events. The Great Election year of 2024, during which more than half 
of the world's population was exercising their franchise to elect their new governments, 
meant further declining policy predictability. Such political and economic uncertainty 
can be detrimental to growth. The International Monetary Fund (IMF) estimates that 
a one standard deviation increase in uncertainty correlates with a 0.4 to 1.3 percentage 
point decrease in output growth.
1
 Economists like Keynes and Tobin have pointed 
out that higher uncertainty requires investors to seek more significant compensation 
for risks, thereby raising risk premia and the overall cost of finance. Additionally, 
uncertainty increases the likelihood of borrower defaults, leading to higher capital 
costs. Moreover, uncertainty shocks in advanced economies like the US have often led 
to lower output and reduced prices.
2
3.2 Various indicators are used to monitor global risks and uncertainties and measure 
policy-related uncertainty's impact on global economic activity. These include the 
Geopolitical Risk (GPR) index
3
, which tracks adverse geopolitical events through 
newspaper articles; the Trade Policy Uncertainty (TPU) index
4
, which covers the 
frequency of articles mentioning trade policy uncertainty and heightened trade tensions, 
and the Global Economic Policy Uncertainty (GEPU) index
5
, which is a GDP-weighted 
average of national Economic Policy Uncertainty (EPU) indices for 21 countries. These 
indices capture changes occurring in economies constituting about 71 per cent of global 
output.
6
3.3 These indices provide valuable insights into how uncertainty from trade issues, 
geopolitical events, and economic policy measures can impact global economic 
conditions. As of November 2024, the GEPU index remains high, reflecting ongoing 
global economic policy concerns. Similarly, the TPU index has risen since December 
2023, primarily driven by trade tensions and policy changes among major economies. 
1  Döttling, R., Malaika, M., & Terrones, M. (2013). Held Back by Uncertainty: Recoveries are slowed when 
businesses and consumers are unsure of the future. Finance & Development, 0050(001), A012. https://tinyurl.
com/324z5ux4.
2  Leduc, S., and Liu, Z. (2016). Uncertainty Shocks are Aggregate Demand Shocks. Journal of Monetary Economics, 
82, 20-35; Kumar, A., Mallick, S., and Sinha, A. (2021). Is Uncertainty the Same Everywhere? Advanced versus 
Emerging Economies. Economic Modelling, 101, 105524, https://tinyurl.com/6n74paw2.
3  Geopolitical Risk Index, https://www.policyuncertainty.com/gpr.html.
4  Trade Policy Uncertainty Index, https://www.matteoiacoviello.com/tpu.htm.
5  Global Economic Policy Uncertainty Index, https://www.policyuncertainty.com/.
6  Global output is calculated on the basis of purchasing power parity. If the economies are accounted at market 
exchange rates the economies constitute roughly 80 per cent of the global economy.
External Sector
81
Chart III.1: Rise in global uncertainty
 
0
100
200
300
400
500
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
May-20
Nov-20
May-21
Nov-21
May-22
Nov-22
May-23
Nov-23
May-24
Nov-24
Policy Uncertainty Index
Global Economic Policy Uncertainty Index Trade Policy Uncertainty Index
Source: GEPU Index and TPU Index website
3.4 The Reserve Bank of India (RBI) has developed a policy uncertainty index 
specifically for India, utilising various global indices. This index leverages internet 
search data from Google Trends to assess policy uncertainty from domestic and 
international events. Furthermore, the index is updated in real-time.
7,8
 
3.5 With this backdrop, the chapter presents the performance of India’s external 
sector amidst the prevailing global environment. Section I provides an overview of 
the global trade dynamics, emphasising tariffs and non-tariff measures (NTMs) and 
the performance of the global external sector amidst challenges. Section II delves into 
India’s trade performance, highlighting the trends across both the merchandise and 
services sectors. It examines the performance of India’s textile exports and the factors 
restricting its global expansion. Further, a detailed analysis of India’s diversification in 
exports to new markets has been presented. The key drivers and challenges affecting 
India’s e-commerce export growth are also discussed in depth. Section III discusses the 
factors restricting export growth and outlines the government initiatives to simplify 
export procedures to enhance trade performance. Section IV presents India’s Balance 
of Payments (BoP) situation, highlighting current and capital account trends, foreign 
exchange reserves, exchange rate movements, and India’s external debt position. The 
last section concludes the chapter with an outlook for India’s external sector, considering 
the evolving global and domestic economic landscape. 
7  When faced with heightened uncertainty, it is typical of economic agents to 'search' for more information. The 
Google Trends-based uncertainty index (India-GUI) leverages this behaviour to measure overall uncertainty by 
using internet search volumes for a list of keywords about fiscal, monetary and trade policy in India. The policy-
related keywords are curated, based on mentions in central bank policy statements as well as coverage in the 
financial press. 
 Pratap, B., and Priyaranjan, N. (2023). Macroeconomic Effects of Uncertainty: a Google trends-based Analysis for 
India. Empirical Economics, 65(4), 1599-1625, https://tinyurl.com/5fb373we.
8  Recalibrating from Divergence to Convergence: The Indian Experience - Inaugural Address delivered by Michael 
Debabrata Patra, Deputy Governor, RBI - October 21, 2024 - at the New York Fed Central Banking Seminar 
organised by the Federal Reserve Bank, New York, USA, https://tinyurl.com/mvajhcj7.
Page 4


03
CHAPTER
79
EXTERNAL SECTOR: 
GETTING FDI RIGHT
India’s external sector continued to display resilience amidst global headwinds 
of economic and trade policy uncertainties. Total exports (merchandise and 
services) have registered a steady growth in the first nine months of FY25, 
reaching USD 602.6 billion (6 per cent). Growth in services and goods exports, 
excluding petroleum and gems and jewellery, was 10.4 per cent. Total imports 
during the same period reached USD 682.2 billion, registering a growth of 6.9 
per cent on the back of steady domestic demand. 
The evolving global trade dynamics, marked by gradual shifts towards greater 
protectionism, require assessing the situation and developing a forward-
looking strategic trade roadmap. By adapting to these trends and leveraging 
its strengths, India can accelerate its growth and enhance its presence in global 
trade. To strengthen its competitiveness and further integrate into global supply 
chains, the country can focus on reducing trade-related costs and enhancing 
export facilitation to create a more vibrant export sector. This proactive 
approach will help India continue to thrive in an ever-changing global market.
On the capital front, foreign portfolio investments (FPIs) have shown a 
mixed trend in FY25 so far. Uncertainty in the global markets and profit-
taking by foreign portfolio investors led to capital outflows. However, strong 
macroeconomic fundamentals, a favourable business environment, and high 
economic growth have kept FPI flows positive overall. Gross foreign direct 
investment (FDI) inflows have shown signs of revival in the first eight months of 
FY25, though net FDI inflows declined relative to April-November 2023 due to a 
rise in repatriation/disinvestment.
India’s foreign exchange reserves stood at USD 640.3 billion as of the end of 
December 2024, sufficient to cover approximately 90 per cent of the country’s 
external debt of USD 711.8 billion as of September 2024, reflecting a strong 
buffer against external vulnerabilities.
Economic Survey 2024-25
80
INTRODUCTION
3.1 The world is experiencing increasing political and economic uncertainty in the 
wake of geopolitical conflicts, increasing trends of geoeconomic fragmentation, and 
recurrent climate events. The Great Election year of 2024, during which more than half 
of the world's population was exercising their franchise to elect their new governments, 
meant further declining policy predictability. Such political and economic uncertainty 
can be detrimental to growth. The International Monetary Fund (IMF) estimates that 
a one standard deviation increase in uncertainty correlates with a 0.4 to 1.3 percentage 
point decrease in output growth.
1
 Economists like Keynes and Tobin have pointed 
out that higher uncertainty requires investors to seek more significant compensation 
for risks, thereby raising risk premia and the overall cost of finance. Additionally, 
uncertainty increases the likelihood of borrower defaults, leading to higher capital 
costs. Moreover, uncertainty shocks in advanced economies like the US have often led 
to lower output and reduced prices.
2
3.2 Various indicators are used to monitor global risks and uncertainties and measure 
policy-related uncertainty's impact on global economic activity. These include the 
Geopolitical Risk (GPR) index
3
, which tracks adverse geopolitical events through 
newspaper articles; the Trade Policy Uncertainty (TPU) index
4
, which covers the 
frequency of articles mentioning trade policy uncertainty and heightened trade tensions, 
and the Global Economic Policy Uncertainty (GEPU) index
5
, which is a GDP-weighted 
average of national Economic Policy Uncertainty (EPU) indices for 21 countries. These 
indices capture changes occurring in economies constituting about 71 per cent of global 
output.
6
3.3 These indices provide valuable insights into how uncertainty from trade issues, 
geopolitical events, and economic policy measures can impact global economic 
conditions. As of November 2024, the GEPU index remains high, reflecting ongoing 
global economic policy concerns. Similarly, the TPU index has risen since December 
2023, primarily driven by trade tensions and policy changes among major economies. 
1  Döttling, R., Malaika, M., & Terrones, M. (2013). Held Back by Uncertainty: Recoveries are slowed when 
businesses and consumers are unsure of the future. Finance & Development, 0050(001), A012. https://tinyurl.
com/324z5ux4.
2  Leduc, S., and Liu, Z. (2016). Uncertainty Shocks are Aggregate Demand Shocks. Journal of Monetary Economics, 
82, 20-35; Kumar, A., Mallick, S., and Sinha, A. (2021). Is Uncertainty the Same Everywhere? Advanced versus 
Emerging Economies. Economic Modelling, 101, 105524, https://tinyurl.com/6n74paw2.
3  Geopolitical Risk Index, https://www.policyuncertainty.com/gpr.html.
4  Trade Policy Uncertainty Index, https://www.matteoiacoviello.com/tpu.htm.
5  Global Economic Policy Uncertainty Index, https://www.policyuncertainty.com/.
6  Global output is calculated on the basis of purchasing power parity. If the economies are accounted at market 
exchange rates the economies constitute roughly 80 per cent of the global economy.
External Sector
81
Chart III.1: Rise in global uncertainty
 
0
100
200
300
400
500
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
May-20
Nov-20
May-21
Nov-21
May-22
Nov-22
May-23
Nov-23
May-24
Nov-24
Policy Uncertainty Index
Global Economic Policy Uncertainty Index Trade Policy Uncertainty Index
Source: GEPU Index and TPU Index website
3.4 The Reserve Bank of India (RBI) has developed a policy uncertainty index 
specifically for India, utilising various global indices. This index leverages internet 
search data from Google Trends to assess policy uncertainty from domestic and 
international events. Furthermore, the index is updated in real-time.
7,8
 
3.5 With this backdrop, the chapter presents the performance of India’s external 
sector amidst the prevailing global environment. Section I provides an overview of 
the global trade dynamics, emphasising tariffs and non-tariff measures (NTMs) and 
the performance of the global external sector amidst challenges. Section II delves into 
India’s trade performance, highlighting the trends across both the merchandise and 
services sectors. It examines the performance of India’s textile exports and the factors 
restricting its global expansion. Further, a detailed analysis of India’s diversification in 
exports to new markets has been presented. The key drivers and challenges affecting 
India’s e-commerce export growth are also discussed in depth. Section III discusses the 
factors restricting export growth and outlines the government initiatives to simplify 
export procedures to enhance trade performance. Section IV presents India’s Balance 
of Payments (BoP) situation, highlighting current and capital account trends, foreign 
exchange reserves, exchange rate movements, and India’s external debt position. The 
last section concludes the chapter with an outlook for India’s external sector, considering 
the evolving global and domestic economic landscape. 
7  When faced with heightened uncertainty, it is typical of economic agents to 'search' for more information. The 
Google Trends-based uncertainty index (India-GUI) leverages this behaviour to measure overall uncertainty by 
using internet search volumes for a list of keywords about fiscal, monetary and trade policy in India. The policy-
related keywords are curated, based on mentions in central bank policy statements as well as coverage in the 
financial press. 
 Pratap, B., and Priyaranjan, N. (2023). Macroeconomic Effects of Uncertainty: a Google trends-based Analysis for 
India. Empirical Economics, 65(4), 1599-1625, https://tinyurl.com/5fb373we.
8  Recalibrating from Divergence to Convergence: The Indian Experience - Inaugural Address delivered by Michael 
Debabrata Patra, Deputy Governor, RBI - October 21, 2024 - at the New York Fed Central Banking Seminar 
organised by the Federal Reserve Bank, New York, USA, https://tinyurl.com/mvajhcj7.
Economic Survey 2024-25
82
GLOBAL TRADE DYNAMICS
3.6 Disruptions in the Red Sea that began in November 2023 have forced changes in 
trade routes, causing higher shipping costs and longer delivery times.
9
  This is particularly 
true for trade between Asia and Europe, as 40 per cent of this trade passes through the 
Red Sea region.
10
 Similar conflicts in the Hormuz Strait, which channels 21 per cent of 
global petroleum liquid consumption, have disrupted energy trade and increased prices. 
Additionally, climate change is enhancing the uncertainties.
11
 For instance, the recent 
drought in the Panama Canal jeopardised international trade, affecting approximately 
5 per cent of global maritime trade volumes that transit through it. These conditions 
are creating uncertainty, leading to a slowdown in international trade,
12
 reshaping the 
contours of trade in terms of a rise in protectionist trade policies and shifting global 
supply chains. 
3.7 As evident from Chart III.2, there has been a noticeable rise in the political proximity 
of trade since late 2022. This indicates a preference for bilateral trade between countries 
with similar geopolitical stances, i.e., friend-shoring
13
 and nearshoring.
14
 Concurrently, 
there has been an increasing concentration of global trade
15
 to favour significant trade 
relationships. For instance, Russia and China’s trade dependence on the EU and the 
US’s dependence on China has declined in recent years. In contrast, the dependence of 
Russia and Vietnam on China has increased.
16,17
3.8 Government interventions, including NTMs, reinforce the change in bilateral trade 
patterns due to geopolitical considerations. The rise in NTMs, which began after the 
COVID-19 pandemic, was further fuelled by the conflict between Russia and Ukraine. 
A report by the United Nations Conference on Trade and Development (UNCTAD)
18
   indicates that technical NTMs impact over 30 per cent of products and nearly 70 per 
cent of global trade. This is discussed further in paras 3.15 to 3.20 of this chapter.
9  UNCTAD rapid assessment, ‘Impact to Global Trade of disruption of shipping routes in the Red Sea, Black Sea 
and Panama Canal’, https://unctad.org/system/files/official-document/osginf2024d2_en.pdf.
10 Bonnell and McHugh, 2024, https://tinyurl.com/5n7wy8xj.
11  U.S. Energy Information Administration, https://www.eia.gov/.
12   IMF Working Paper dated 9 July 2024, ‘The Heterogenous Effects of Uncertainty on Trade’, https://tinyurl.
com/2xywd48v.
13   Friend shoring is calculated as trade-weighted political proximity as measured by the United Nations voting patterns.
14  Nearshoring is calculated as the reverse of the trade-weighted average distance in km.
15  Trade concentration is calculated based on the Herfindahl concentration index.
16  UNCTAD estimates based on national statistics (https://unctad.org/statistics) 
   The dependence of an economy on another is calculated as the ratio of their bilateral trade over the total trade of the 
dependent economy. Annual change is calculated using a trade-weighted moving average over the past four quarters.
17  UNCTAD Global trade update, July 2024, https://tinyurl.com/uwputbfs.
18   UNCTAD report, ‘Tariff trends mostly downward, but non-tariff measures increasingly used’, https://sdgpulse.
unctad.org/trade-barriers/.
Page 5


03
CHAPTER
79
EXTERNAL SECTOR: 
GETTING FDI RIGHT
India’s external sector continued to display resilience amidst global headwinds 
of economic and trade policy uncertainties. Total exports (merchandise and 
services) have registered a steady growth in the first nine months of FY25, 
reaching USD 602.6 billion (6 per cent). Growth in services and goods exports, 
excluding petroleum and gems and jewellery, was 10.4 per cent. Total imports 
during the same period reached USD 682.2 billion, registering a growth of 6.9 
per cent on the back of steady domestic demand. 
The evolving global trade dynamics, marked by gradual shifts towards greater 
protectionism, require assessing the situation and developing a forward-
looking strategic trade roadmap. By adapting to these trends and leveraging 
its strengths, India can accelerate its growth and enhance its presence in global 
trade. To strengthen its competitiveness and further integrate into global supply 
chains, the country can focus on reducing trade-related costs and enhancing 
export facilitation to create a more vibrant export sector. This proactive 
approach will help India continue to thrive in an ever-changing global market.
On the capital front, foreign portfolio investments (FPIs) have shown a 
mixed trend in FY25 so far. Uncertainty in the global markets and profit-
taking by foreign portfolio investors led to capital outflows. However, strong 
macroeconomic fundamentals, a favourable business environment, and high 
economic growth have kept FPI flows positive overall. Gross foreign direct 
investment (FDI) inflows have shown signs of revival in the first eight months of 
FY25, though net FDI inflows declined relative to April-November 2023 due to a 
rise in repatriation/disinvestment.
India’s foreign exchange reserves stood at USD 640.3 billion as of the end of 
December 2024, sufficient to cover approximately 90 per cent of the country’s 
external debt of USD 711.8 billion as of September 2024, reflecting a strong 
buffer against external vulnerabilities.
Economic Survey 2024-25
80
INTRODUCTION
3.1 The world is experiencing increasing political and economic uncertainty in the 
wake of geopolitical conflicts, increasing trends of geoeconomic fragmentation, and 
recurrent climate events. The Great Election year of 2024, during which more than half 
of the world's population was exercising their franchise to elect their new governments, 
meant further declining policy predictability. Such political and economic uncertainty 
can be detrimental to growth. The International Monetary Fund (IMF) estimates that 
a one standard deviation increase in uncertainty correlates with a 0.4 to 1.3 percentage 
point decrease in output growth.
1
 Economists like Keynes and Tobin have pointed 
out that higher uncertainty requires investors to seek more significant compensation 
for risks, thereby raising risk premia and the overall cost of finance. Additionally, 
uncertainty increases the likelihood of borrower defaults, leading to higher capital 
costs. Moreover, uncertainty shocks in advanced economies like the US have often led 
to lower output and reduced prices.
2
3.2 Various indicators are used to monitor global risks and uncertainties and measure 
policy-related uncertainty's impact on global economic activity. These include the 
Geopolitical Risk (GPR) index
3
, which tracks adverse geopolitical events through 
newspaper articles; the Trade Policy Uncertainty (TPU) index
4
, which covers the 
frequency of articles mentioning trade policy uncertainty and heightened trade tensions, 
and the Global Economic Policy Uncertainty (GEPU) index
5
, which is a GDP-weighted 
average of national Economic Policy Uncertainty (EPU) indices for 21 countries. These 
indices capture changes occurring in economies constituting about 71 per cent of global 
output.
6
3.3 These indices provide valuable insights into how uncertainty from trade issues, 
geopolitical events, and economic policy measures can impact global economic 
conditions. As of November 2024, the GEPU index remains high, reflecting ongoing 
global economic policy concerns. Similarly, the TPU index has risen since December 
2023, primarily driven by trade tensions and policy changes among major economies. 
1  Döttling, R., Malaika, M., & Terrones, M. (2013). Held Back by Uncertainty: Recoveries are slowed when 
businesses and consumers are unsure of the future. Finance & Development, 0050(001), A012. https://tinyurl.
com/324z5ux4.
2  Leduc, S., and Liu, Z. (2016). Uncertainty Shocks are Aggregate Demand Shocks. Journal of Monetary Economics, 
82, 20-35; Kumar, A., Mallick, S., and Sinha, A. (2021). Is Uncertainty the Same Everywhere? Advanced versus 
Emerging Economies. Economic Modelling, 101, 105524, https://tinyurl.com/6n74paw2.
3  Geopolitical Risk Index, https://www.policyuncertainty.com/gpr.html.
4  Trade Policy Uncertainty Index, https://www.matteoiacoviello.com/tpu.htm.
5  Global Economic Policy Uncertainty Index, https://www.policyuncertainty.com/.
6  Global output is calculated on the basis of purchasing power parity. If the economies are accounted at market 
exchange rates the economies constitute roughly 80 per cent of the global economy.
External Sector
81
Chart III.1: Rise in global uncertainty
 
0
100
200
300
400
500
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
May-17
Nov-17
May-18
Nov-18
May-19
Nov-19
May-20
Nov-20
May-21
Nov-21
May-22
Nov-22
May-23
Nov-23
May-24
Nov-24
Policy Uncertainty Index
Global Economic Policy Uncertainty Index Trade Policy Uncertainty Index
Source: GEPU Index and TPU Index website
3.4 The Reserve Bank of India (RBI) has developed a policy uncertainty index 
specifically for India, utilising various global indices. This index leverages internet 
search data from Google Trends to assess policy uncertainty from domestic and 
international events. Furthermore, the index is updated in real-time.
7,8
 
3.5 With this backdrop, the chapter presents the performance of India’s external 
sector amidst the prevailing global environment. Section I provides an overview of 
the global trade dynamics, emphasising tariffs and non-tariff measures (NTMs) and 
the performance of the global external sector amidst challenges. Section II delves into 
India’s trade performance, highlighting the trends across both the merchandise and 
services sectors. It examines the performance of India’s textile exports and the factors 
restricting its global expansion. Further, a detailed analysis of India’s diversification in 
exports to new markets has been presented. The key drivers and challenges affecting 
India’s e-commerce export growth are also discussed in depth. Section III discusses the 
factors restricting export growth and outlines the government initiatives to simplify 
export procedures to enhance trade performance. Section IV presents India’s Balance 
of Payments (BoP) situation, highlighting current and capital account trends, foreign 
exchange reserves, exchange rate movements, and India’s external debt position. The 
last section concludes the chapter with an outlook for India’s external sector, considering 
the evolving global and domestic economic landscape. 
7  When faced with heightened uncertainty, it is typical of economic agents to 'search' for more information. The 
Google Trends-based uncertainty index (India-GUI) leverages this behaviour to measure overall uncertainty by 
using internet search volumes for a list of keywords about fiscal, monetary and trade policy in India. The policy-
related keywords are curated, based on mentions in central bank policy statements as well as coverage in the 
financial press. 
 Pratap, B., and Priyaranjan, N. (2023). Macroeconomic Effects of Uncertainty: a Google trends-based Analysis for 
India. Empirical Economics, 65(4), 1599-1625, https://tinyurl.com/5fb373we.
8  Recalibrating from Divergence to Convergence: The Indian Experience - Inaugural Address delivered by Michael 
Debabrata Patra, Deputy Governor, RBI - October 21, 2024 - at the New York Fed Central Banking Seminar 
organised by the Federal Reserve Bank, New York, USA, https://tinyurl.com/mvajhcj7.
Economic Survey 2024-25
82
GLOBAL TRADE DYNAMICS
3.6 Disruptions in the Red Sea that began in November 2023 have forced changes in 
trade routes, causing higher shipping costs and longer delivery times.
9
  This is particularly 
true for trade between Asia and Europe, as 40 per cent of this trade passes through the 
Red Sea region.
10
 Similar conflicts in the Hormuz Strait, which channels 21 per cent of 
global petroleum liquid consumption, have disrupted energy trade and increased prices. 
Additionally, climate change is enhancing the uncertainties.
11
 For instance, the recent 
drought in the Panama Canal jeopardised international trade, affecting approximately 
5 per cent of global maritime trade volumes that transit through it. These conditions 
are creating uncertainty, leading to a slowdown in international trade,
12
 reshaping the 
contours of trade in terms of a rise in protectionist trade policies and shifting global 
supply chains. 
3.7 As evident from Chart III.2, there has been a noticeable rise in the political proximity 
of trade since late 2022. This indicates a preference for bilateral trade between countries 
with similar geopolitical stances, i.e., friend-shoring
13
 and nearshoring.
14
 Concurrently, 
there has been an increasing concentration of global trade
15
 to favour significant trade 
relationships. For instance, Russia and China’s trade dependence on the EU and the 
US’s dependence on China has declined in recent years. In contrast, the dependence of 
Russia and Vietnam on China has increased.
16,17
3.8 Government interventions, including NTMs, reinforce the change in bilateral trade 
patterns due to geopolitical considerations. The rise in NTMs, which began after the 
COVID-19 pandemic, was further fuelled by the conflict between Russia and Ukraine. 
A report by the United Nations Conference on Trade and Development (UNCTAD)
18
   indicates that technical NTMs impact over 30 per cent of products and nearly 70 per 
cent of global trade. This is discussed further in paras 3.15 to 3.20 of this chapter.
9  UNCTAD rapid assessment, ‘Impact to Global Trade of disruption of shipping routes in the Red Sea, Black Sea 
and Panama Canal’, https://unctad.org/system/files/official-document/osginf2024d2_en.pdf.
10 Bonnell and McHugh, 2024, https://tinyurl.com/5n7wy8xj.
11  U.S. Energy Information Administration, https://www.eia.gov/.
12   IMF Working Paper dated 9 July 2024, ‘The Heterogenous Effects of Uncertainty on Trade’, https://tinyurl.
com/2xywd48v.
13   Friend shoring is calculated as trade-weighted political proximity as measured by the United Nations voting patterns.
14  Nearshoring is calculated as the reverse of the trade-weighted average distance in km.
15  Trade concentration is calculated based on the Herfindahl concentration index.
16  UNCTAD estimates based on national statistics (https://unctad.org/statistics) 
   The dependence of an economy on another is calculated as the ratio of their bilateral trade over the total trade of the 
dependent economy. Annual change is calculated using a trade-weighted moving average over the past four quarters.
17  UNCTAD Global trade update, July 2024, https://tinyurl.com/uwputbfs.
18   UNCTAD report, ‘Tariff trends mostly downward, but non-tariff measures increasingly used’, https://sdgpulse.
unctad.org/trade-barriers/.
External Sector
83
Chart III.2: Friend shoring and trade concentration trends 
continue to shape global trade
 
-0.4%
-0.2%
1.5%
3.2%
-1.2%
-4.2%
5.1%
3.5%
-6%
-4%
-2%
0%
2%
4%
6%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2022 2023 2024
Annual change in index relative 
to 2021 (per cent)
Nearshoring index Friendshoring index Trade concentration index
Source: UNCTAD estimates based on national statistics
Global trade performance in 2024
3.9 According to the latest trade update by UNCTAD
19
, the gradual increase in global 
trade that began in H2 of 2023 has persisted into 2024. The World Trade Organisation 
(WTO) database shows a year-on-year (YoY) growth of 3.5 per cent and 3 per cent, 
respectively, in global merchandise export and import indices in Q3 of 2024 (seasonally 
adjusted, 2005 Q1=100). Further, the global services exports and imports grew by 7.9 
per cent and 6.7 per cent (YoY) during the same period.
3.10 Over the last four quarters, trade growth in developing countries generally exceeded 
that of developed nations. However, this trend reversed in Q3 of 2024, with positive 
developments in developed economies driving trade growth. In contrast, trade growth 
in East Asia stalled, and several major Asian developing economies experienced negative 
growth.
3.11 According to the UNCTAD nowcast
20
, the positive momentum in global trade 
witnessed in the first three quarters of 2024 is expected to continue into Q4. As a result, 
global trade is set to exceed its 2022 record, reaching nearly USD 33 trillion in 2024. 
This record high is likely to be driven by a 7 per cent increase in services trade (YoY), 
while goods trade is projected to grow by about 2 per cent in 2024 but remain below its 
2022 peak. Overall, global trade is expected to expand by about USD 1 trillion (or 3.3 
per cent) in 2024, with goods and services contributing approximately USD 500 billion 
each.
19    UNCTAD Global Trade Update December 2024, https://tinyurl.com/5n8fr7a3
20  Ibid note 19.