8.  External Sector/Foreign Trade


  • India’s Foreign Policy – recent initiatives taken
  • Balance of Payment (BoP)
    • What constitutes BoP?
    • What do you understand by ‘Invisibles’? How does it affect BoP?
  • External Commercial Borrowings (ECB)
    • What does it constitute, what is it meant for?
    • Who regulates it?
    • Who borrows from it? Example: Corporate sector , Government
  • Capital and Current Account Convertibility– India has full Current Account Convertibility but when it comes to Capital Account Convertibility, it is only partial. Why?
  • A general idea about MRTP Act, 1969; FERA, 1973; FEMA, 1999 – this will help you in understanding the changes made to capital account convertibility and why India is yet to go for full convertibility and what is the present status
  • Current Account Deficit (CAD)
    • What is CAD?
    • Who reports CAD?
    • Why India has huge CAD? Is a minimum CAD necessary? What are the measures taken by India to reduce CAD?
  • Rupee appreciation, depreciation
    • How is Rupee value determined?
    • How and why does Rupee appreciate or depreciate?
    • Its impact on domestic and external market? On imports and exports.
    • What measures does RBI take when rupee appreciates or depreciates? How does it impact Forex Reserves?
    • Difference between Depreciation and Devaluation of currency (in Indian – rupee) Why does a country devaluate its currency?
  • Currency Exchange rate
    • How is the currency exchange rate determined?
    • Who determines it ?
    • Exchange rate interms of Purchasing power parity (PPP).
    • What is Nominal Effective Exchange Rate (NEER), Real Effective Exchange Rate (REER)?
  • Forex Reserves
    • What does it constitute?
    • What is the use of having Forex Reserve?
    • Why do we need more Forex Reserves?
    • How can we accumulate more Forex reserves?
  • Concepts like Trade deficits, Elasticity of Demand, Savings, Investment, J-curve effect
  • Comprehensive Economic Partnership Agreement (CEPA), Comprehensive Economic Cooperation Agreement (CECA)
    • Differences between the two agreements
    • How is it different from Free Trade Agreement (FTA)?
    • Benefits that Indian will have with these agreements
    • A general awareness on the countries with which India has signed these agreements recently and what are the issues involved and benefits from the same

Note: Issues like GAAR, Euro Zone Crisis, Gold imports or any issue that you come across in the newspaper, make a note of it.


Example: (2014 Prelims Questions Paper):

With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?1.      Balance of trade
2.      Foreign assets
3.      Balance of invisibles
4.      Special Drawing RightSelect the correct answer using the code given below.A.      1 only

B.      2 and 3

C.      1 and 3

D.     1, 2 and 4

Solution (c)

(2013 Prelims Questions Paper):

Which one of the following groups of items is included in India’s foreign-exchange reserves?

(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries
(b) Foreign-currency assets, gold holdings of the RBI and SDRs
(c) Foreign-currency assets, loans from the World Bank and SDRs
(d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

Solution (b)

Which of the following constitute Capital Account? (2013)

1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

Solution (b)

(2012 Prelims Questions Paper):

Consider the following statements:The price of any currency in international market is decided by the
1. World Bank
2. demand for goods/services provided by the country concerned
3. stability of the government of the concerned country
4. economic potential of the country in question

Which of the statements given above are correct?

(a) 1, 2, 3 and 4

(b) 2 and 3 only

(c) 3 and 4 only

(d) 1 and 4 only

Solution (b)

9.  International Economic Organisations


  • Bretton Wood Twins- World Bank, IMF
    • A general awareness on- When was it started? Where is its Headquarters?
    • What is the purpose? To whom do they lend money to?
    • How does It function?
    • Reports published by WB and IMF
    • Recently joined members of WB and IMF
    • World bank and World bank Groups
    • Relevance of IMF and WB to the developing countries (especially India)

Example: IMF was setup in 1944, its HQ- Washington, USA. Purpose- to facilitate balanced growth of International trade, Exchange rate, to overcome Balance of Payment crisis and it lends only to member countries and not for a specific purpose, unlike WB. Functioning- Each member is assigned a quota (based on size of the economy), which indicates the voting power, access to financing, the amount a member is obliged to provide to the IMF

  • What are SDR’s? how does it help member countries?


  • World Trade Organisation (WTO)
    • A general idea on how WTO came into being and what was the set-up before WTO
    • Difference between General Agreement on tariffs and Trade (GATT) and WTO
    • What is the objective of WTO? How does it function (example- WTO works on the principle ‘one country one vote’, unlike WB or IMF)
    • Recently joined members of WTO
  • Doha round – why is Doha round stalled? Issue’s between developed and developing countries
  • WTO and India – how has it helped India, if so in what way? what are the issues- is it a boon or a bane to India?
  • WTO principles– Most Favoured Nation (MFN)- non-discriminatory Trade, General system of Preference (GSP) for developing countries and Preferential Trade Agreement (PTA), Free Trade Agreement (FTA) for economics integration
  • Stages in economic integration – PTA > FTA > Customs Union > Monetary Union
  • Others Safeguard mechanisms– Safeguard Mechanisms, Sanitary and Phytosanitary agreement (SPS), Technical Barriers to Trade (TBT)


  • WTO agreements
  1. Agreement on Agriculture(AoA) – Domestic support (Green Box, Amber Box, Blue Box), Export subsidies, Market access
  1. Agreement on TRIPS and Patent Issues
      • Make a note of the current issues related to Patent;
      • Copyrights, Trademark, Industrial Design right – for what type of products are each given

Example: Copyrights for creative and artistic work, whereas Patents for inventions

  • TRIPS agreement and Safeguards – Parallel importation, Compulsory Licensing
  • Geographical indicators – significance; to what products and for whom are they granted to? A general awareness on the latest products which have been granted the status
  1. General Agreement on Trade in Services (GATS)
  • Difference between Protectionism and Import Substitution
  • instruments of protectionism- tariffs, import quotas, administrative barriers, anti-dumping duties, direct or export subsidies, exchange rate manipulation
  • A general idea about Anti-Counterfeiting Trade Agreement (ACTA) by World Intellectual Property Organisation (WIPO), Non-Agricultural Market Access (NAMA) group, NAMA 11


  • Regional trade agreements and Regional Groupings like ASEAN FTA, SAFTA, MERCOSUR, BRICS, SAARC, The Asia-Pacific Economic Cooperation (APEC), Trans-Pacific Partnership (TPP), G20 etc.
    • their objectives
    • recent summits especially where India is a major player in the grouping
    • recent initiatives undertaken in the summits
    • how do these initiatives help India?

    Example: BRICS (Brazil, Russia, India, China and South Africa) latest summit (2014) was held in Brazil. Here, they came up with an initiative to create US$100 billion New Development Bank (NDB). NDB is seen as an alternative to the existing US-dominated World Bank and IMF. The bank is set up to foster greater financial and development cooperation among the five emerging markets. Unlike the World Bank, which assigns votes based on capital share, in the New Development Bank each participant country will be assigned one vote, and none of the countries will have veto power.


Note: Make a note of the International Economic organisations to which India is not a member of; and on Asian Development Bank (ADB), G4.


Example (2014 Prelims Questions Paper):
Which of the following organizations brings out the publication known as ‘World Economic Outlook’?A.      The International Monetary FundB.      The United Nations Development Programme

C.      The World Economic Forum

D.     The World Bank

Solution (a)

10.  Economic Survey


Make note of the Key terms and their meaning, especially the new ones. Since UPSC has the knack of picking up specific terms from the Economic Survey in both Prelims and Mains Exam.


2012 Prelims Question

In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37-90%. Which of the following are among those Eight Core Industries?

1. Cement

2. Fertilizers

3. Natural gas

4. Refinery products

5. Textiles

Select the correct answer using the codes given below :

(a) 1 and 5 only

(b) 2, 3 and 4 only

(c) 1, 2, 3 and 4 only

(d) 1, 2, 3, 4 and 5

Solution (c)


Note : Economic Terms– Inflation, Recession, Depression, Balance of Payment, Financial Inclusion, Fiscal Consolidation, Deficit Financing, Overheated Economy, Fiscal drag, Fiscal Neutrality, Giffen goods etc. – Basic understanding of the key terms is important.


11.  Social Development, Poverty and Inclusion:

This is a dynamic area as questions will be mostly related to recent developments and programs and policies of the government to address issues related to poverty, inclusion, growth and development. It has a wider perspective and also is linked with the current events.

Example: Malnutrition- reasons associated with it, Poverty Indexes like Multi-poverty Index, committees set up like Rangarajan committee’s estimate of Poverty, BPL, APL, Income gap, Jan Dan Yojna etc.


12.  Demographics:

This section overlaps with Human geography. Statistical data from Economic Survey will be helpful here like population, working age of the population, sex-ratio, literacy, Maternal Mortality Rate (MMR), Infant Mortality Rate (IMR) etc

  • What are the issues (Ex: low literacy ),
  • Measures taken by the government in this regard.


13.  Social Sector initiatives:

This part is already covered under Public Policy & Right’s issue under ‘Polity’.


                                                                    Previous Years Questions from ‘Economics <-Click Here


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