External Sector of India — BoP, Exchange Rates, Trade Policy, and Capital Flows

1) Why external sector matters

External sector links India to the world through:

• trade in goods and services,
• remittances,
• capital flows (FDI/FPI, debt),
• exchange rate movements.

It affects growth, inflation, and macro stability.

2) Balance of Payments (BoP): structure (high-yield)

BoP is a systematic record of transactions between residents and the rest of the world.

2.1 Current account

Includes:

1. Trade balance (exports − imports of goods)
2. Services (IT, tourism, transport, etc.)
3. Primary income (investment income like interest/dividends)
4. Secondary income (transfers like remittances)

Current Account Balance:

• surplus if receipts > payments, deficit otherwise.

2.2 Capital/financial account (exam often says “capital account” broadly)

Includes:

• Foreign Direct Investment (FDI)
• Foreign Portfolio Investment (FPI)
• External commercial borrowings, loans
• Banking capital flows
• Changes in reserves (often shown separately but linked)

3) Current Account Deficit (CAD): meaning

CAD occurs when:

CAD must be financed by:

• capital inflows (FDI/FPI/debt), and/or
• running down forex reserves.