External Sector | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
03
External Sector
The air that blows off a small lamp becomes the friend of a jungle fire!  
Power garners support!
– Subhashita
COVID-19 pandemic has triggered the worst global recession in 2020 since the Great 
Depression; the adverse economic impact is, however, expected to be lesser than 
initially feared. The resulting economic crisis has led to a sharp decline in global 
trade, lower commodity prices and tighter external financing conditions with varying 
implications for current account balances and currencies of different countries. 
Global merchandise trade is expected to contract by 9.2 per cent in 2020. Trade 
balance with China and the US improved as imports contracted. The changing nature 
of India’s global trade manifested in terms of sliding exports of gems and jewellery, 
engineering goods, textile and allied products and improving exports of drugs and 
pharma, software and agriculture and allied products. Pharma exports, in particular, 
used this opportunity to enhance their share in total India’s exports and indicate 
India’s potential to be the pharmacy of the world. Supported by resilient software 
service exports, India is expected to witness a current account surplus during the 
current financial year after a gap of 17 years. Balance on the capital account, on the 
other hand, is buttressed by robust FDI and FPI inflows. These developments have led 
to accretion of foreign exchange reserves that rose to an all-time high of US$ 586.1 
billion as on January 8, 2021. RBI’s interventions in forex market have been largely 
successful in controlling the volatility and one-sided appreciation of the rupee. High 
levels of headline inflation, however, posits the classical trilemma before RBI to 
maintain a fine balance between tightening of monetary policy to control inflation 
on the one hand and stimulate growth on the other hand. Against the aforesaid 
backdrop, various initiatives undertaken to promote exports, including Production 
Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products 
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of 
digital initiatives would go a long way in enabling ‘ease of doing exports’.
oukfu ngrks oÉs% l[kk Hkofr ek#r%A
l ,o nhiuk'kk; o`Q'ks dL;fLr lkSâne~AA
Page 2


CHAPTER
03
External Sector
The air that blows off a small lamp becomes the friend of a jungle fire!  
Power garners support!
– Subhashita
COVID-19 pandemic has triggered the worst global recession in 2020 since the Great 
Depression; the adverse economic impact is, however, expected to be lesser than 
initially feared. The resulting economic crisis has led to a sharp decline in global 
trade, lower commodity prices and tighter external financing conditions with varying 
implications for current account balances and currencies of different countries. 
Global merchandise trade is expected to contract by 9.2 per cent in 2020. Trade 
balance with China and the US improved as imports contracted. The changing nature 
of India’s global trade manifested in terms of sliding exports of gems and jewellery, 
engineering goods, textile and allied products and improving exports of drugs and 
pharma, software and agriculture and allied products. Pharma exports, in particular, 
used this opportunity to enhance their share in total India’s exports and indicate 
India’s potential to be the pharmacy of the world. Supported by resilient software 
service exports, India is expected to witness a current account surplus during the 
current financial year after a gap of 17 years. Balance on the capital account, on the 
other hand, is buttressed by robust FDI and FPI inflows. These developments have led 
to accretion of foreign exchange reserves that rose to an all-time high of US$ 586.1 
billion as on January 8, 2021. RBI’s interventions in forex market have been largely 
successful in controlling the volatility and one-sided appreciation of the rupee. High 
levels of headline inflation, however, posits the classical trilemma before RBI to 
maintain a fine balance between tightening of monetary policy to control inflation 
on the one hand and stimulate growth on the other hand. Against the aforesaid 
backdrop, various initiatives undertaken to promote exports, including Production 
Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products 
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of 
digital initiatives would go a long way in enabling ‘ease of doing exports’.
oukfu ngrks oÉs% l[kk Hkofr ek#r%A
l ,o nhiuk'kk; o`Q'ks dL;fLr lkSâne~AA
91 External Sector
3.1 COVID-19 has affected nearly all spheres of the global economy with the spread catalyzed 
by the increasing interconnectedness of global value chains. The resulting crisis has constituted 
an intense shock, with a sharp decline in global trade, lower commodity prices, tighter external 
financing conditions and with varying implications for current account balances and currencies. 
The global volume of goods trade in the first five months of 2020 was about 20 per cent lower than 
in 2019—a more abrupt contraction than in the first five months of the global financial crisis.
GLOBAL ECONOMIC ENVIRONMENT
3.2 The spread of the pandemic led to associated suspension of economic activities, supply-chain 
disruptions, travel restrictions and volatility in international commodity prices. As a result, there 
was a wave of downward revisions to global output growth and trade volume.The contraction in 
GDP has been much stronger in the current recession when compared to the fall in trade which 
has been more moderate. World Trade Organization (WTO), in April 2020, predicted a fall in 
world merchandise trade by 13-32 per cent in 2020. However, with easing of lockdowns and 
acceleration in economic activity, a surge in trade was recorded in the months of June and July. 
WTO, accordingly, revised its forecast in October 2020 to a decline of 9.2 per cent in the volume 
of world merchandise trade in 2020, followed by a 7.2 per cent rise in 2021 (Figure 1). In the 
October 2020 edition of the World Economic Outlook, the IMF expected a sharper fall in world 
output of 4.4 per cent in 2020, but lower contraction in world trade volume of 10.4 per cent in 
2020 as against 3.0 per cent and 11.0 per cent respectively predicted in April 2020 (Figure 1). In 
advanced economies (AEs), the contraction for GDP as well as trade volume is projected to be 
more severe than for the emerging markets and developing economies (EMDEs).
Figure 1:Trends in Growth of World Output and Trade Volume
-4.4
-10.4
8.3
-9.2
7.2
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual Per cent Change
Annual Per cent Change
World Output (IMF)
World Trade Volume in Goods and Services (IMF)
World Merchandise Trade Volume (WTO)-RhS
Source: International Monetary Fund and World Trade Organization (WTO)
Note: Figures for 2020 and 2021 are projections indicated as shaded portion.
3.3 Global merchandise trade, as per data available from WTO, recorded its sharpest ever one-
period decline in Q2-2020. The WTO’s goods trade barometer index for the said quarter was 
at 84.5 – the lowest on record since 2007 – i.e., 15.5 points below the baseline value of 100 for 
Page 3


CHAPTER
03
External Sector
The air that blows off a small lamp becomes the friend of a jungle fire!  
Power garners support!
– Subhashita
COVID-19 pandemic has triggered the worst global recession in 2020 since the Great 
Depression; the adverse economic impact is, however, expected to be lesser than 
initially feared. The resulting economic crisis has led to a sharp decline in global 
trade, lower commodity prices and tighter external financing conditions with varying 
implications for current account balances and currencies of different countries. 
Global merchandise trade is expected to contract by 9.2 per cent in 2020. Trade 
balance with China and the US improved as imports contracted. The changing nature 
of India’s global trade manifested in terms of sliding exports of gems and jewellery, 
engineering goods, textile and allied products and improving exports of drugs and 
pharma, software and agriculture and allied products. Pharma exports, in particular, 
used this opportunity to enhance their share in total India’s exports and indicate 
India’s potential to be the pharmacy of the world. Supported by resilient software 
service exports, India is expected to witness a current account surplus during the 
current financial year after a gap of 17 years. Balance on the capital account, on the 
other hand, is buttressed by robust FDI and FPI inflows. These developments have led 
to accretion of foreign exchange reserves that rose to an all-time high of US$ 586.1 
billion as on January 8, 2021. RBI’s interventions in forex market have been largely 
successful in controlling the volatility and one-sided appreciation of the rupee. High 
levels of headline inflation, however, posits the classical trilemma before RBI to 
maintain a fine balance between tightening of monetary policy to control inflation 
on the one hand and stimulate growth on the other hand. Against the aforesaid 
backdrop, various initiatives undertaken to promote exports, including Production 
Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products 
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of 
digital initiatives would go a long way in enabling ‘ease of doing exports’.
oukfu ngrks oÉs% l[kk Hkofr ek#r%A
l ,o nhiuk'kk; o`Q'ks dL;fLr lkSâne~AA
91 External Sector
3.1 COVID-19 has affected nearly all spheres of the global economy with the spread catalyzed 
by the increasing interconnectedness of global value chains. The resulting crisis has constituted 
an intense shock, with a sharp decline in global trade, lower commodity prices, tighter external 
financing conditions and with varying implications for current account balances and currencies. 
The global volume of goods trade in the first five months of 2020 was about 20 per cent lower than 
in 2019—a more abrupt contraction than in the first five months of the global financial crisis.
GLOBAL ECONOMIC ENVIRONMENT
3.2 The spread of the pandemic led to associated suspension of economic activities, supply-chain 
disruptions, travel restrictions and volatility in international commodity prices. As a result, there 
was a wave of downward revisions to global output growth and trade volume.The contraction in 
GDP has been much stronger in the current recession when compared to the fall in trade which 
has been more moderate. World Trade Organization (WTO), in April 2020, predicted a fall in 
world merchandise trade by 13-32 per cent in 2020. However, with easing of lockdowns and 
acceleration in economic activity, a surge in trade was recorded in the months of June and July. 
WTO, accordingly, revised its forecast in October 2020 to a decline of 9.2 per cent in the volume 
of world merchandise trade in 2020, followed by a 7.2 per cent rise in 2021 (Figure 1). In the 
October 2020 edition of the World Economic Outlook, the IMF expected a sharper fall in world 
output of 4.4 per cent in 2020, but lower contraction in world trade volume of 10.4 per cent in 
2020 as against 3.0 per cent and 11.0 per cent respectively predicted in April 2020 (Figure 1). In 
advanced economies (AEs), the contraction for GDP as well as trade volume is projected to be 
more severe than for the emerging markets and developing economies (EMDEs).
Figure 1:Trends in Growth of World Output and Trade Volume
-4.4
-10.4
8.3
-9.2
7.2
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual Per cent Change
Annual Per cent Change
World Output (IMF)
World Trade Volume in Goods and Services (IMF)
World Merchandise Trade Volume (WTO)-RhS
Source: International Monetary Fund and World Trade Organization (WTO)
Note: Figures for 2020 and 2021 are projections indicated as shaded portion.
3.3 Global merchandise trade, as per data available from WTO, recorded its sharpest ever one-
period decline in Q2-2020. The WTO’s goods trade barometer index for the said quarter was 
at 84.5 – the lowest on record since 2007 – i.e., 15.5 points below the baseline value of 100 for 
92 Economic Survey 2020-21   V olume 2
the index and 18.6 points down from the same period last year.
1
 However, it improved to 100.7 
in September, 2020, indicating a strong rebound in trade in the third quarter as lockdowns were 
eased, broadly consistent with the WTO's October trade forecast.
3.4 The impact on trade differed significantly across regions. In 2020 (upto Q3), AEs suffered 
the steepest decline in exports by 12.9 per cent and imports by 10.8 per cent, while EMDEs 
witnessed lower contraction in exports by 7.6 per cent and in imports by 10.1 per cent. Among the 
EMDEs, South East Asian export-oriented countries witnessed still lower shrinkage of exports 
by 2.4 per cent and imports by 9.6 per cent.This can be attributed to the impressive export 
performance of few countries such as Vietnam, Taiwan, and Malaysia, and their continuous 
narrowing contraction in imports in subsequent quarters (Figure 2).
Figure 2:Trends in World Merchandise Trade
Exports Imports
-40
-30
-20
-10
0
10
20
30
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
-25
-20
-15
-10
-5
0
5
10
15
20
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
Source: WTO
3.5 The impact on trade also varied significantly across different types of goods. While trade 
in agricultural products fell less than the world average in the second quarter of 2020 (-5 per 
cent versus -21 per cent), it fell precipitously for fuels and mining products (-38 per cent) as 
prices collapsed. Further, the trade in automotive products recorded the biggest decline, though, 
it rose for telecommunication equipment (which includes smartphones), electronics (to facilitate 
working from home), and pharmaceuticals.
3.6 As per IMF’s October Global Financial Stability Report 2020, near-term global financial 
stability risks have been contained for now due to the unprecedented and timely policy responses 
to maintain the flow of credit to the economy and avoided adverse macro-financial feedback 
loops, thereby creating a bridge to recovery. However, vulnerabilities have increased in the non-
financial corporate sector, as firms have taken on more debt to cope with cash shortages and in the 
sovereign sector, as fiscal deficits have widened to support the economy. EMDEs rely primarily 
on commodity exports, remittances and tourism for forex earnings, all of which plummeted as the 
pandemic unfolded. However, its impact on EMDEs so far has been milder than expected as just 
six countries – Argentina, Ecuador, Belize, Lebanon, Suriname and Zambia – have defaulted on 
their sovereign debt and only the first two restructured their debts. Potential debt defaults could 
ensue in 2021 as a large amount of foreign debt is estimated to be due for repayment in that year. 
The future path of defaults will ultimately be shaped by the extent of continued policy support and 
1
WTO’s goods trade barometer index is a leading indicator that signals changes in world trade growth two to three months ahead of 
merchandise trade volume statistics. Its baseline value is 100, a value greater than 100 suggests above-trend growth while a value below 100 
indicates below-trend growth.
Page 4


CHAPTER
03
External Sector
The air that blows off a small lamp becomes the friend of a jungle fire!  
Power garners support!
– Subhashita
COVID-19 pandemic has triggered the worst global recession in 2020 since the Great 
Depression; the adverse economic impact is, however, expected to be lesser than 
initially feared. The resulting economic crisis has led to a sharp decline in global 
trade, lower commodity prices and tighter external financing conditions with varying 
implications for current account balances and currencies of different countries. 
Global merchandise trade is expected to contract by 9.2 per cent in 2020. Trade 
balance with China and the US improved as imports contracted. The changing nature 
of India’s global trade manifested in terms of sliding exports of gems and jewellery, 
engineering goods, textile and allied products and improving exports of drugs and 
pharma, software and agriculture and allied products. Pharma exports, in particular, 
used this opportunity to enhance their share in total India’s exports and indicate 
India’s potential to be the pharmacy of the world. Supported by resilient software 
service exports, India is expected to witness a current account surplus during the 
current financial year after a gap of 17 years. Balance on the capital account, on the 
other hand, is buttressed by robust FDI and FPI inflows. These developments have led 
to accretion of foreign exchange reserves that rose to an all-time high of US$ 586.1 
billion as on January 8, 2021. RBI’s interventions in forex market have been largely 
successful in controlling the volatility and one-sided appreciation of the rupee. High 
levels of headline inflation, however, posits the classical trilemma before RBI to 
maintain a fine balance between tightening of monetary policy to control inflation 
on the one hand and stimulate growth on the other hand. Against the aforesaid 
backdrop, various initiatives undertaken to promote exports, including Production 
Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products 
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of 
digital initiatives would go a long way in enabling ‘ease of doing exports’.
oukfu ngrks oÉs% l[kk Hkofr ek#r%A
l ,o nhiuk'kk; o`Q'ks dL;fLr lkSâne~AA
91 External Sector
3.1 COVID-19 has affected nearly all spheres of the global economy with the spread catalyzed 
by the increasing interconnectedness of global value chains. The resulting crisis has constituted 
an intense shock, with a sharp decline in global trade, lower commodity prices, tighter external 
financing conditions and with varying implications for current account balances and currencies. 
The global volume of goods trade in the first five months of 2020 was about 20 per cent lower than 
in 2019—a more abrupt contraction than in the first five months of the global financial crisis.
GLOBAL ECONOMIC ENVIRONMENT
3.2 The spread of the pandemic led to associated suspension of economic activities, supply-chain 
disruptions, travel restrictions and volatility in international commodity prices. As a result, there 
was a wave of downward revisions to global output growth and trade volume.The contraction in 
GDP has been much stronger in the current recession when compared to the fall in trade which 
has been more moderate. World Trade Organization (WTO), in April 2020, predicted a fall in 
world merchandise trade by 13-32 per cent in 2020. However, with easing of lockdowns and 
acceleration in economic activity, a surge in trade was recorded in the months of June and July. 
WTO, accordingly, revised its forecast in October 2020 to a decline of 9.2 per cent in the volume 
of world merchandise trade in 2020, followed by a 7.2 per cent rise in 2021 (Figure 1). In the 
October 2020 edition of the World Economic Outlook, the IMF expected a sharper fall in world 
output of 4.4 per cent in 2020, but lower contraction in world trade volume of 10.4 per cent in 
2020 as against 3.0 per cent and 11.0 per cent respectively predicted in April 2020 (Figure 1). In 
advanced economies (AEs), the contraction for GDP as well as trade volume is projected to be 
more severe than for the emerging markets and developing economies (EMDEs).
Figure 1:Trends in Growth of World Output and Trade Volume
-4.4
-10.4
8.3
-9.2
7.2
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual Per cent Change
Annual Per cent Change
World Output (IMF)
World Trade Volume in Goods and Services (IMF)
World Merchandise Trade Volume (WTO)-RhS
Source: International Monetary Fund and World Trade Organization (WTO)
Note: Figures for 2020 and 2021 are projections indicated as shaded portion.
3.3 Global merchandise trade, as per data available from WTO, recorded its sharpest ever one-
period decline in Q2-2020. The WTO’s goods trade barometer index for the said quarter was 
at 84.5 – the lowest on record since 2007 – i.e., 15.5 points below the baseline value of 100 for 
92 Economic Survey 2020-21   V olume 2
the index and 18.6 points down from the same period last year.
1
 However, it improved to 100.7 
in September, 2020, indicating a strong rebound in trade in the third quarter as lockdowns were 
eased, broadly consistent with the WTO's October trade forecast.
3.4 The impact on trade differed significantly across regions. In 2020 (upto Q3), AEs suffered 
the steepest decline in exports by 12.9 per cent and imports by 10.8 per cent, while EMDEs 
witnessed lower contraction in exports by 7.6 per cent and in imports by 10.1 per cent. Among the 
EMDEs, South East Asian export-oriented countries witnessed still lower shrinkage of exports 
by 2.4 per cent and imports by 9.6 per cent.This can be attributed to the impressive export 
performance of few countries such as Vietnam, Taiwan, and Malaysia, and their continuous 
narrowing contraction in imports in subsequent quarters (Figure 2).
Figure 2:Trends in World Merchandise Trade
Exports Imports
-40
-30
-20
-10
0
10
20
30
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
-25
-20
-15
-10
-5
0
5
10
15
20
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
Source: WTO
3.5 The impact on trade also varied significantly across different types of goods. While trade 
in agricultural products fell less than the world average in the second quarter of 2020 (-5 per 
cent versus -21 per cent), it fell precipitously for fuels and mining products (-38 per cent) as 
prices collapsed. Further, the trade in automotive products recorded the biggest decline, though, 
it rose for telecommunication equipment (which includes smartphones), electronics (to facilitate 
working from home), and pharmaceuticals.
3.6 As per IMF’s October Global Financial Stability Report 2020, near-term global financial 
stability risks have been contained for now due to the unprecedented and timely policy responses 
to maintain the flow of credit to the economy and avoided adverse macro-financial feedback 
loops, thereby creating a bridge to recovery. However, vulnerabilities have increased in the non-
financial corporate sector, as firms have taken on more debt to cope with cash shortages and in the 
sovereign sector, as fiscal deficits have widened to support the economy. EMDEs rely primarily 
on commodity exports, remittances and tourism for forex earnings, all of which plummeted as the 
pandemic unfolded. However, its impact on EMDEs so far has been milder than expected as just 
six countries – Argentina, Ecuador, Belize, Lebanon, Suriname and Zambia – have defaulted on 
their sovereign debt and only the first two restructured their debts. Potential debt defaults could 
ensue in 2021 as a large amount of foreign debt is estimated to be due for repayment in that year. 
The future path of defaults will ultimately be shaped by the extent of continued policy support and 
1
WTO’s goods trade barometer index is a leading indicator that signals changes in world trade growth two to three months ahead of 
merchandise trade volume statistics. Its baseline value is 100, a value greater than 100 suggests above-trend growth while a value below 100 
indicates below-trend growth.
93 External Sector
the pace of the recovery, which is expected to be uneven across sectors and countries.
3.7 In sum, the global economy is still reeling under the impact of the unprecedented COVID-19 
shock. Amidst this uncertain and shaky global economic environment, India’s external sector has 
emerged as a key cushion for resilience. The comfortable external balance position of India has 
been supported by surplus current account balances over three consecutive quarters, resumption 
of portfolio capital inflows, robust FDI inflows and sustained build-up of foreign exchange 
reserves.
DEVELOPMENTS IN INDIA’S BALANCE OF PAYMENTS (BOP)
Merchandise Trade
3.8 During Q1: FY 2020-21, India’s exports and imports saw a sharp contraction in line with 
the contraction in global trade. The decline in imports outweighed that in exports – leading 
to smaller trade deficit of US$ 9.8 billion as compared to US$ 49.2 billion in Q1 last year. 
India registered a trade surplus in the month of June, 2020 after a gap of 18 years. With the 
unlocking of the economy from June onwards, a gradual revival in India’s merchandise trade 
got underway (Figure 3). The trade deficit during the April-December, 2020-21 was US$ 57.5 
billion as compared to US$ 125.9 billion in the corresponding period last year.
Figure 3: Merchandise Trade Balance, Exports and Imports
-49.2
-9.8
-31.2
-5.0
-8.3
-60
-50
-40
-30
-20
-10
0
10
20
30
-60
-50
-40
-30
-20
-10
0
10
20
30
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2018-19 2019-20 2020-21
Growth rate (Y-o-Y), Per cent 
US$ Billion
Trade Balance Exports (RhS) Imports (RhS)
Lockdown effect Lockdown effect Lockdown effect
Source: Department of Commerce (DoC)
3.9 The details of the major commodities in which India had favourable and 
unfavourable trade balance during 2020-21 (April-November) as compared to 2019-20  
(April-November) are at Table 1 and Table 2 respectively.
Page 5


CHAPTER
03
External Sector
The air that blows off a small lamp becomes the friend of a jungle fire!  
Power garners support!
– Subhashita
COVID-19 pandemic has triggered the worst global recession in 2020 since the Great 
Depression; the adverse economic impact is, however, expected to be lesser than 
initially feared. The resulting economic crisis has led to a sharp decline in global 
trade, lower commodity prices and tighter external financing conditions with varying 
implications for current account balances and currencies of different countries. 
Global merchandise trade is expected to contract by 9.2 per cent in 2020. Trade 
balance with China and the US improved as imports contracted. The changing nature 
of India’s global trade manifested in terms of sliding exports of gems and jewellery, 
engineering goods, textile and allied products and improving exports of drugs and 
pharma, software and agriculture and allied products. Pharma exports, in particular, 
used this opportunity to enhance their share in total India’s exports and indicate 
India’s potential to be the pharmacy of the world. Supported by resilient software 
service exports, India is expected to witness a current account surplus during the 
current financial year after a gap of 17 years. Balance on the capital account, on the 
other hand, is buttressed by robust FDI and FPI inflows. These developments have led 
to accretion of foreign exchange reserves that rose to an all-time high of US$ 586.1 
billion as on January 8, 2021. RBI’s interventions in forex market have been largely 
successful in controlling the volatility and one-sided appreciation of the rupee. High 
levels of headline inflation, however, posits the classical trilemma before RBI to 
maintain a fine balance between tightening of monetary policy to control inflation 
on the one hand and stimulate growth on the other hand. Against the aforesaid 
backdrop, various initiatives undertaken to promote exports, including Production 
Linked Incentive (PLI) Scheme, Remission of Duties and Taxes on Exported Products 
(RoDTEP), emphasis on improvement of trade logistics infrastructure and use of 
digital initiatives would go a long way in enabling ‘ease of doing exports’.
oukfu ngrks oÉs% l[kk Hkofr ek#r%A
l ,o nhiuk'kk; o`Q'ks dL;fLr lkSâne~AA
91 External Sector
3.1 COVID-19 has affected nearly all spheres of the global economy with the spread catalyzed 
by the increasing interconnectedness of global value chains. The resulting crisis has constituted 
an intense shock, with a sharp decline in global trade, lower commodity prices, tighter external 
financing conditions and with varying implications for current account balances and currencies. 
The global volume of goods trade in the first five months of 2020 was about 20 per cent lower than 
in 2019—a more abrupt contraction than in the first five months of the global financial crisis.
GLOBAL ECONOMIC ENVIRONMENT
3.2 The spread of the pandemic led to associated suspension of economic activities, supply-chain 
disruptions, travel restrictions and volatility in international commodity prices. As a result, there 
was a wave of downward revisions to global output growth and trade volume.The contraction in 
GDP has been much stronger in the current recession when compared to the fall in trade which 
has been more moderate. World Trade Organization (WTO), in April 2020, predicted a fall in 
world merchandise trade by 13-32 per cent in 2020. However, with easing of lockdowns and 
acceleration in economic activity, a surge in trade was recorded in the months of June and July. 
WTO, accordingly, revised its forecast in October 2020 to a decline of 9.2 per cent in the volume 
of world merchandise trade in 2020, followed by a 7.2 per cent rise in 2021 (Figure 1). In the 
October 2020 edition of the World Economic Outlook, the IMF expected a sharper fall in world 
output of 4.4 per cent in 2020, but lower contraction in world trade volume of 10.4 per cent in 
2020 as against 3.0 per cent and 11.0 per cent respectively predicted in April 2020 (Figure 1). In 
advanced economies (AEs), the contraction for GDP as well as trade volume is projected to be 
more severe than for the emerging markets and developing economies (EMDEs).
Figure 1:Trends in Growth of World Output and Trade Volume
-4.4
-10.4
8.3
-9.2
7.2
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Annual Per cent Change
Annual Per cent Change
World Output (IMF)
World Trade Volume in Goods and Services (IMF)
World Merchandise Trade Volume (WTO)-RhS
Source: International Monetary Fund and World Trade Organization (WTO)
Note: Figures for 2020 and 2021 are projections indicated as shaded portion.
3.3 Global merchandise trade, as per data available from WTO, recorded its sharpest ever one-
period decline in Q2-2020. The WTO’s goods trade barometer index for the said quarter was 
at 84.5 – the lowest on record since 2007 – i.e., 15.5 points below the baseline value of 100 for 
92 Economic Survey 2020-21   V olume 2
the index and 18.6 points down from the same period last year.
1
 However, it improved to 100.7 
in September, 2020, indicating a strong rebound in trade in the third quarter as lockdowns were 
eased, broadly consistent with the WTO's October trade forecast.
3.4 The impact on trade differed significantly across regions. In 2020 (upto Q3), AEs suffered 
the steepest decline in exports by 12.9 per cent and imports by 10.8 per cent, while EMDEs 
witnessed lower contraction in exports by 7.6 per cent and in imports by 10.1 per cent. Among the 
EMDEs, South East Asian export-oriented countries witnessed still lower shrinkage of exports 
by 2.4 per cent and imports by 9.6 per cent.This can be attributed to the impressive export 
performance of few countries such as Vietnam, Taiwan, and Malaysia, and their continuous 
narrowing contraction in imports in subsequent quarters (Figure 2).
Figure 2:Trends in World Merchandise Trade
Exports Imports
-40
-30
-20
-10
0
10
20
30
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
-25
-20
-15
-10
-5
0
5
10
15
20
World Advanced
Economies
EMDEs SE Asia India
Growth rate (Y-o-Y), Per cent
2016 2017 2018 2019 2020 (Upto Q3)
Source: WTO
3.5 The impact on trade also varied significantly across different types of goods. While trade 
in agricultural products fell less than the world average in the second quarter of 2020 (-5 per 
cent versus -21 per cent), it fell precipitously for fuels and mining products (-38 per cent) as 
prices collapsed. Further, the trade in automotive products recorded the biggest decline, though, 
it rose for telecommunication equipment (which includes smartphones), electronics (to facilitate 
working from home), and pharmaceuticals.
3.6 As per IMF’s October Global Financial Stability Report 2020, near-term global financial 
stability risks have been contained for now due to the unprecedented and timely policy responses 
to maintain the flow of credit to the economy and avoided adverse macro-financial feedback 
loops, thereby creating a bridge to recovery. However, vulnerabilities have increased in the non-
financial corporate sector, as firms have taken on more debt to cope with cash shortages and in the 
sovereign sector, as fiscal deficits have widened to support the economy. EMDEs rely primarily 
on commodity exports, remittances and tourism for forex earnings, all of which plummeted as the 
pandemic unfolded. However, its impact on EMDEs so far has been milder than expected as just 
six countries – Argentina, Ecuador, Belize, Lebanon, Suriname and Zambia – have defaulted on 
their sovereign debt and only the first two restructured their debts. Potential debt defaults could 
ensue in 2021 as a large amount of foreign debt is estimated to be due for repayment in that year. 
The future path of defaults will ultimately be shaped by the extent of continued policy support and 
1
WTO’s goods trade barometer index is a leading indicator that signals changes in world trade growth two to three months ahead of 
merchandise trade volume statistics. Its baseline value is 100, a value greater than 100 suggests above-trend growth while a value below 100 
indicates below-trend growth.
93 External Sector
the pace of the recovery, which is expected to be uneven across sectors and countries.
3.7 In sum, the global economy is still reeling under the impact of the unprecedented COVID-19 
shock. Amidst this uncertain and shaky global economic environment, India’s external sector has 
emerged as a key cushion for resilience. The comfortable external balance position of India has 
been supported by surplus current account balances over three consecutive quarters, resumption 
of portfolio capital inflows, robust FDI inflows and sustained build-up of foreign exchange 
reserves.
DEVELOPMENTS IN INDIA’S BALANCE OF PAYMENTS (BOP)
Merchandise Trade
3.8 During Q1: FY 2020-21, India’s exports and imports saw a sharp contraction in line with 
the contraction in global trade. The decline in imports outweighed that in exports – leading 
to smaller trade deficit of US$ 9.8 billion as compared to US$ 49.2 billion in Q1 last year. 
India registered a trade surplus in the month of June, 2020 after a gap of 18 years. With the 
unlocking of the economy from June onwards, a gradual revival in India’s merchandise trade 
got underway (Figure 3). The trade deficit during the April-December, 2020-21 was US$ 57.5 
billion as compared to US$ 125.9 billion in the corresponding period last year.
Figure 3: Merchandise Trade Balance, Exports and Imports
-49.2
-9.8
-31.2
-5.0
-8.3
-60
-50
-40
-30
-20
-10
0
10
20
30
-60
-50
-40
-30
-20
-10
0
10
20
30
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2018-19 2019-20 2020-21
Growth rate (Y-o-Y), Per cent 
US$ Billion
Trade Balance Exports (RhS) Imports (RhS)
Lockdown effect Lockdown effect Lockdown effect
Source: Department of Commerce (DoC)
3.9 The details of the major commodities in which India had favourable and 
unfavourable trade balance during 2020-21 (April-November) as compared to 2019-20  
(April-November) are at Table 1 and Table 2 respectively.
94 Economic Survey 2020-21   V olume 2
Table 1: Commodities in which India's Merchandise Trade Balance is Favourable
(Value in US$ billion)
  Export Import Trade Balance
S.No. Commodity
Apr-
Nov 
2019-
20 (R)
Apr-
Nov 
2020-
21 (P)
Apr-Nov 
2019-20 
(R)
Apr-
Nov 
2020-
21 (P)
Apr-
Nov 
2019-
20 (R)
Apr-
Nov 
2020-21 
(P)
1 Drug formulations, biologicals 10.6 12.4 1.5 1.7 9.0 10.7
2 Marine products 4.8 4.0 0.1 0.1 4.7 3.8
3 Gold and other precious metal 
jewellery
9.6 4.0 0.5 0.2 9.1 3.8
4 RMG cotton incl. accessories 5.6 3.9 0.4 0.2 5.2 3.7
5 Cotton fabrics, made ups etc. 4.0 3.5 0.4 0.2 3.6 3.3
6 Iron and steel 6.4 7.7 8.0 4.7 -1.6 3.0
7 Iron ore 1.7 2.8 0.1 0.1 1.6 2.7
8 Rice -Basmati 2.5 2.7 0.0 0.0 2.5 2.7
9 Rice (other than Basmati) 1.3 2.6 0.0 0.0 1.3 2.6
10 Petroleum products 28.5 15.4 18.0 13.1 10.6 2.3
Source: DoC
Note: R: Revised; P: Provisional.
Table 2: Commodities in which India's Merchandise Trade Balance is Unfavourable
(Value in US$ billion)
  Export Import Trade Balance
S.No. Commodity
Apr-
Nov 
2019-
20 (R)
Apr-
Nov 
2020-
21 (P)
Apr-
Nov 
2019-20 
(R)
Apr-
Nov 
2020-
21 (P)
Apr-
Nov 
2019-
20 (R)
Apr-
Nov 
2020-21 
(P)
1 Petroleum: Crude 0.0 0.0 68.0 31.2 -68.0 -31.2
2 Gold 1.2 0.6 20.6 12.3 -19.4 -11.7
3 Coal,Coke and Briquittes Etc. 0.1 0.0 15.6 9.7 -15.5 -9.7
4 Telecom Instruments 3.1 2.2 10.3 9.8 -7.2 -7.6
5 Electronics Components 1.7 1.5 11.7 8.7 -10.0 -7.2
6 Vegetable Oils 0.1 0.3 6.4 6.8 -6.3 -6.5
7 Computer Hardware, 
Peripherals
0.2 0.2 6.5 6.6 -6.3 -6.4
8 Fertilizers Manufactured 0.1 0.1 5.0 5.5 -5.0 -5.4
9 Plastic Raw Materials 2.4 2.3 7.2 5.2 -4.8 -2.9
10 Aircraft, Spacecraft and Parts 0.9 0.8 7.0 3.6 -6.0 -2.8
Source: DoC
Note: R: Revised; P: Provisional.