External Sector: Stability Amid Plenty (2023-24) | Indian Economy for UPSC CSE PDF Download

 Page 1


CHAPTER
04
EXTERNAL SECTOR: 
STABILITY AMID PLENTY
India’s external sector remained strong amidst ongoing geopolitical headwinds 
accompanied by sticky inflation. Though merchandise exports moderated owing to 
lower demand from major trading partners, services exports continued to perform 
well, cushioning the overall trade deficit from USD 121.6 billion in FY23 to USD 78.1 
billion in FY24. Lower prices of imported commodities, including crude oil, also helped.
The moderation in merchandise imports and rising services exports have improved 
India’s current account deficit (CAD). Amongst services exports, software/IT services 
have driven an increase in overall exports; at the same time, business services exports 
have also been rising, supported by India emerging as a hub for Global Capability 
Centres (GCCs). 
India is moving up the global value chains (GVCs), with the share of GVC-related 
trade in gross trade rising to 40.3 per cent in 2022 from 35.1 per cent in 2019. The 
improvement in GVC participation is also reflected in increased pure backward GVC 
participation. Aided by government measures on trade facilitation and reduction in 
logistics cost, India’s rank in the World Bank’s Logistics Performance Index improved 
by six places, from 44th in 2018 to 38th in 2023 out of 139 countries.
India witnessed positive net foreign portfolio investment (FPI) inflows in FY24 of USD 
44.1 billion, supported by strong economic growth, a stable business environment, 
and increased investor confidence. Rising FPI inflows kept the Indian Rupee in a 
manageable range of ?82 to ?83.5/USD in FY24. The Rupee emerged as the least 
volatile currency among its emerging market peers and a few advanced economies 
in FY24. The shock absorbers of India’s external sector - forex reserves, sustainable 
external debt indicators, and market-determined exchange rate, are in place to cushion 
the global headwinds.
In the future, the changing composition of India’s export basket, enhancement in 
trade-related infrastructure, enhanced quality consciousness and product safety 
considerations in the private sector and stable policy environment are expected to play 
a significant role in driving India’s rise as a global supplier of goods and services.
Page 2


CHAPTER
04
EXTERNAL SECTOR: 
STABILITY AMID PLENTY
India’s external sector remained strong amidst ongoing geopolitical headwinds 
accompanied by sticky inflation. Though merchandise exports moderated owing to 
lower demand from major trading partners, services exports continued to perform 
well, cushioning the overall trade deficit from USD 121.6 billion in FY23 to USD 78.1 
billion in FY24. Lower prices of imported commodities, including crude oil, also helped.
The moderation in merchandise imports and rising services exports have improved 
India’s current account deficit (CAD). Amongst services exports, software/IT services 
have driven an increase in overall exports; at the same time, business services exports 
have also been rising, supported by India emerging as a hub for Global Capability 
Centres (GCCs). 
India is moving up the global value chains (GVCs), with the share of GVC-related 
trade in gross trade rising to 40.3 per cent in 2022 from 35.1 per cent in 2019. The 
improvement in GVC participation is also reflected in increased pure backward GVC 
participation. Aided by government measures on trade facilitation and reduction in 
logistics cost, India’s rank in the World Bank’s Logistics Performance Index improved 
by six places, from 44th in 2018 to 38th in 2023 out of 139 countries.
India witnessed positive net foreign portfolio investment (FPI) inflows in FY24 of USD 
44.1 billion, supported by strong economic growth, a stable business environment, 
and increased investor confidence. Rising FPI inflows kept the Indian Rupee in a 
manageable range of ?82 to ?83.5/USD in FY24. The Rupee emerged as the least 
volatile currency among its emerging market peers and a few advanced economies 
in FY24. The shock absorbers of India’s external sector - forex reserves, sustainable 
external debt indicators, and market-determined exchange rate, are in place to cushion 
the global headwinds.
In the future, the changing composition of India’s export basket, enhancement in 
trade-related infrastructure, enhanced quality consciousness and product safety 
considerations in the private sector and stable policy environment are expected to play 
a significant role in driving India’s rise as a global supplier of goods and services.
Economic Survey 2023-24
104
INTRODUCTION
4.1 Since the COVID-19 pandemic, the global economy has been buffeted by several shocks 
- the Russia-Ukraine conflict, developments in the Middle East and the Red Sea crisis, leading 
to supply dislocations in several commodities and a considerable rise in inflation in many 
countries. Moreover, citizens of about 64 countries (plus the European Union), about 49 per 
cent of the world population, will exercise their franchise in 2024. This adds to the policy 
uncertainty confronting the global economy, especially in the context of international trade 
and immigration policies. Foreign investments, which drive international trade and commerce, 
have slowed down recently due to these uncertainties, higher interest rates in the developed 
world, and the pursuit of active industrial policies by developed countries. For example, the 
Inflation Reduction Act of the United States of America not only incentivised investment capital 
to stay at home but also lured capital from elsewhere.
1
4.2 As per the United Nations Conference on Trade and Development (UNCTAD)
2
, global 
foreign direct investment (FDI) decreased marginally by 2 per cent to USD 1.3 trillion in 2023 
from USD 1.4 trillion in 2022. Global trade, too, has been on a slow path, with the value of 
world merchandise trade declining by 5 per cent in 2023. External debt as a percentage of GDP 
of Emerging Market and Developing Economies (EMDEs) increased from 26.2 per cent in 2012 
to 29.8 per cent in 2023. After witnessing a deficit in their current account balance in 2022, 
Advanced Economies (AEs) saw a surplus in 2023. For EMDEs, the current account balance 
has been in surplus in 2022 and 2023, albeit a moderation from 1.5 per cent of the GDP in 2022 
to 0.6 per cent of GDP in 2023.
3
  
4.3 Against this backdrop, the chapter deals with India’s performance on external sector-
related parameters. Section 1 discusses prevailing global trade dynamics and the impact of 
ongoing geopolitical headwinds on trade. Section 2 focuses on India’s international trade 
sector, presenting some specific case studies on industries that have shown remarkable export 
performances while also dwelling on the general trends. It also presents the outcomes of some 
of India's latest Free Trade Agreements (FTAs). The section further presents some analytical 
understanding of the exposure of our exports to imports from various countries and the need 
for preparedness in the wake of any external unforeseen supply shocks. Section 3 presents 
in some detail the trends in capital flows into the country and draws some insights from the 
trends. Section 4 presents the country's balance of payments (BoP) situation, comparing it with 
some peer countries. It also presents the position of our foreign exchange reserves (FER) and 
international investment position (IIP), which buffer the economy from an uncertain external 
environment turning adverse. Section 5 dwells on India’s external debt trends and how it 
has been deftly managed. Section 6 concludes with the outlook for the external sector while 
mentioning the key challenges to tackle.
1  ‘How the US Mopped Up a Third of Global Capital Flows Since Covid’, Bloomberg, 16 June 2024 (https://tinyurl.com/39y8kt85 
- accessed 22 June 2024)
2  UNCTAD World Investment Report 2024-Investment Facilitation and Digital Government; https://tinyurl.com/3ycsh79c
3 As per the IMF World Economic Outlook Database
Page 3


CHAPTER
04
EXTERNAL SECTOR: 
STABILITY AMID PLENTY
India’s external sector remained strong amidst ongoing geopolitical headwinds 
accompanied by sticky inflation. Though merchandise exports moderated owing to 
lower demand from major trading partners, services exports continued to perform 
well, cushioning the overall trade deficit from USD 121.6 billion in FY23 to USD 78.1 
billion in FY24. Lower prices of imported commodities, including crude oil, also helped.
The moderation in merchandise imports and rising services exports have improved 
India’s current account deficit (CAD). Amongst services exports, software/IT services 
have driven an increase in overall exports; at the same time, business services exports 
have also been rising, supported by India emerging as a hub for Global Capability 
Centres (GCCs). 
India is moving up the global value chains (GVCs), with the share of GVC-related 
trade in gross trade rising to 40.3 per cent in 2022 from 35.1 per cent in 2019. The 
improvement in GVC participation is also reflected in increased pure backward GVC 
participation. Aided by government measures on trade facilitation and reduction in 
logistics cost, India’s rank in the World Bank’s Logistics Performance Index improved 
by six places, from 44th in 2018 to 38th in 2023 out of 139 countries.
India witnessed positive net foreign portfolio investment (FPI) inflows in FY24 of USD 
44.1 billion, supported by strong economic growth, a stable business environment, 
and increased investor confidence. Rising FPI inflows kept the Indian Rupee in a 
manageable range of ?82 to ?83.5/USD in FY24. The Rupee emerged as the least 
volatile currency among its emerging market peers and a few advanced economies 
in FY24. The shock absorbers of India’s external sector - forex reserves, sustainable 
external debt indicators, and market-determined exchange rate, are in place to cushion 
the global headwinds.
In the future, the changing composition of India’s export basket, enhancement in 
trade-related infrastructure, enhanced quality consciousness and product safety 
considerations in the private sector and stable policy environment are expected to play 
a significant role in driving India’s rise as a global supplier of goods and services.
Economic Survey 2023-24
104
INTRODUCTION
4.1 Since the COVID-19 pandemic, the global economy has been buffeted by several shocks 
- the Russia-Ukraine conflict, developments in the Middle East and the Red Sea crisis, leading 
to supply dislocations in several commodities and a considerable rise in inflation in many 
countries. Moreover, citizens of about 64 countries (plus the European Union), about 49 per 
cent of the world population, will exercise their franchise in 2024. This adds to the policy 
uncertainty confronting the global economy, especially in the context of international trade 
and immigration policies. Foreign investments, which drive international trade and commerce, 
have slowed down recently due to these uncertainties, higher interest rates in the developed 
world, and the pursuit of active industrial policies by developed countries. For example, the 
Inflation Reduction Act of the United States of America not only incentivised investment capital 
to stay at home but also lured capital from elsewhere.
1
4.2 As per the United Nations Conference on Trade and Development (UNCTAD)
2
, global 
foreign direct investment (FDI) decreased marginally by 2 per cent to USD 1.3 trillion in 2023 
from USD 1.4 trillion in 2022. Global trade, too, has been on a slow path, with the value of 
world merchandise trade declining by 5 per cent in 2023. External debt as a percentage of GDP 
of Emerging Market and Developing Economies (EMDEs) increased from 26.2 per cent in 2012 
to 29.8 per cent in 2023. After witnessing a deficit in their current account balance in 2022, 
Advanced Economies (AEs) saw a surplus in 2023. For EMDEs, the current account balance 
has been in surplus in 2022 and 2023, albeit a moderation from 1.5 per cent of the GDP in 2022 
to 0.6 per cent of GDP in 2023.
3
  
4.3 Against this backdrop, the chapter deals with India’s performance on external sector-
related parameters. Section 1 discusses prevailing global trade dynamics and the impact of 
ongoing geopolitical headwinds on trade. Section 2 focuses on India’s international trade 
sector, presenting some specific case studies on industries that have shown remarkable export 
performances while also dwelling on the general trends. It also presents the outcomes of some 
of India's latest Free Trade Agreements (FTAs). The section further presents some analytical 
understanding of the exposure of our exports to imports from various countries and the need 
for preparedness in the wake of any external unforeseen supply shocks. Section 3 presents 
in some detail the trends in capital flows into the country and draws some insights from the 
trends. Section 4 presents the country's balance of payments (BoP) situation, comparing it with 
some peer countries. It also presents the position of our foreign exchange reserves (FER) and 
international investment position (IIP), which buffer the economy from an uncertain external 
environment turning adverse. Section 5 dwells on India’s external debt trends and how it 
has been deftly managed. Section 6 concludes with the outlook for the external sector while 
mentioning the key challenges to tackle.
1  ‘How the US Mopped Up a Third of Global Capital Flows Since Covid’, Bloomberg, 16 June 2024 (https://tinyurl.com/39y8kt85 
- accessed 22 June 2024)
2  UNCTAD World Investment Report 2024-Investment Facilitation and Digital Government; https://tinyurl.com/3ycsh79c
3 As per the IMF World Economic Outlook Database
External Sector
105
CHANGING GLOBAL TRADE DYNAMICS
4.4 Trade is a key pillar of an economy, spurring investment, job creation, economic growth, 
and raising living standards. Global trade patterns are reconfiguring. In 2023, Mexico became 
the largest goods trade partner of the US, surpassing China and Canada, with a total trade of 
USD 798 billion.
4
 Vietnam’s trade with China and the US has recently seen an increase. US 
imports from Vietnam more than doubled from USD 46 billion in 2017 to USD 114 billion in 
2023. During the same time, Vietnam’s imports from China rose from USD 58 billion to USD 
111 billion.
5
 In another instance, European economies are shifting their energy imports from 
Russia to Norway and the US. EU’s pipeline gas imports from Russia declined from 150.2 billion 
cubic meters in 2021 to 42.9 billion cubic meters in 2023. During the same time, its pipeline 
gas imports from the US rose from 18.9 billion cubic meters to 56.2 billion cubic meters.
6
 
These shifts reflect the emergence of new practices in international trade such as ‘decoupling’, 
‘derisking’, ‘reshoring’, ‘nearshoring’, and ‘friend sharing’ and the growing narrative of de-
globalisation.
7
  
4.5 However, there is an argument that while the growth of trade as a percentage of GDP 
has stalled since the global financial crisis, the slowdown of global trade seems a natural 
development following its earlier fast growth (Chart IV.2).
8
 The de-globalisation trends are 
highly heterogeneous across countries. While the US and China are gradually decreasing their 
reliance on global markets, this does not seem true for the rest of the world.
9
 Research by 
the Bank for International Settlement (BIS) shows that despite its policies, the US remains 
reliant on Chinese inputs. In fact, the rise in trade through Mexico and Vietnam is a result of 
Chinese firms re-routing their supply through these countries (or by locating themselves in 
these countries). Further, China’s overwhelming dominance in the supply of processed critical 
minerals and materials for energy transition renders a true decoupling between the two nations 
neither easy nor likely. 
4.6 As can be seen in Chart IV.1, global trade volume contracted by 1.2 per cent in 2023 after 
recording a 3 per cent expansion in 2022 following the outbreak of the Russia-Ukraine conflict.
10
  The value of world merchandise trade fell by 5 per cent in 2023, indicating the effect of lower 
prices. This decline was offset mainly by a substantial increase in trade in commercial services, 
which rose by 9 per cent to USD 7.5 billion in 2023. Commercial services trade was lifted by 
4 India-Mexico Trade and Commercial Relations, para 3,  https://tinyurl.com/5h4v96jp,
5  Source: Vietnam Customs Office and US Census Bureau, https://www.customs.gov.vn/index.jsp?pageId=4964, https://www.
census.gov/en.html
6  Source: European Commission based on ENTSO-G and Refinitiv, https://www.consilium.europa.eu/en/infographics/eu-gas-
supply/#0
7  As per the World Economic Forum, friend-shoring refers to rerouting supply chains to countries perceived as politically and 
economically safe or low-risk to avoid disruption to the flow of business. Nearshoring refers to a company relocating business 
operations to a nearby country, often with a shared border. Reshoring is when a business transfers operations back to its home 
country.
8  Goldberg, P. K., & Reed, T. (2023). Is the Global Economy Deglobalizing? And if so, why? And what is next? (No. w31115). 
National Bureau of Economic Research, https://www.nber.org/papers/w31115
9  Qiu, H., Shin, H. S., & Zhang, L. S. Y. (2023). Mapping the realignment of global value chains (No. 78). Bank for International 
Settlements
10 WTO Global Trade Outlook and Statistics (April 2024), https://www.wto.org/english/res_e/booksp_e/trade_outlook24_e.pdf