External Sector: Getting FDI Right | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


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


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


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 4


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 5


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.