Economic Survey 2021-22: Ch. 3 EXTERNAL SECTOR

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  • Owing to the recovery of global demand coupled with revival in domestic activity, India’s merchandise exports and imports rebounded strongly and surpassed pre-COVID levels during the current financial year.
  • Despite weak tourism revenues, there was a significant pickup in net services receipts during April-December, 2021 on account of robust software and business earnings, with both receipts and payments crossing the pre-pandemic levels.
  • India’s current account balance turned into a deficit of 0.2 per cent of GDP in the first half (H1) of 2021-22, largely led by deficit in the trade account.
  • The robust capital flows were sufficient to finance the modest current account deficit, resulting in an overall balance of payments (BoP) surplus of US$ 63.1 billion in H1 of 2021-22, which led to an augmented foreign exchange reserves crossing the milestone of US$ 600 billion.
  • India’s external sector is resilient to face any unwinding of the global liquidity arising out of the likelihood of faster normalisation of monetary policy by systemically important central banks, including the Fed, in response to elevated inflationary pressures.


  • The first half (H1) of the calendar 2021 witnessed an acceleration in the global economic activity, that lifted the merchandise trade above its pre-pandemic peak
  • The World Trade Organization (WTO) in its October 2021 release upgraded its forecast for global merchandise trade volume growth to 10.8 per cent in 2021, followed by a 4.7 per cent rise in 2022.
  • As regards global financial conditions, in 2021, inflation picked up globally as economic activity revived with the opening up of economies.
    • Inflation in the US touched 6.8 per cent in November 2021, the highest since 1982, driven largely by energy and food prices.
  • The biggest downside risk emanates from the pandemic itself, particularly with the resurgence of new variants such as Omicron.
  • Further, in addition to the surge in global inflation, as outlined above, longer port delays, higher freight rates, shortage of shipping containers, shortage of inputs such as semiconductors, with supply-side disruptions being exacerbated by a recovery in demand, pose significant risks, inter alia, for global trade
  • Against this backdrop, India’s external sector has shown immense resilience during the year, which augurs well for growth revival in the economy.



  • Following the global trend, India’s merchandise exports recovered strongly from the pandemic-induced collapse and registered positive growth in the current financial year.
  • Out of an ambitious export target of US$ 400 billion set for 2021-22, India has already attained more than 75 per cent of it by exporting goods worth US$ 301.4 billion, which is actually higher than the export target of US$ 300 billion set for the April-December period of 2021-22.
    • Sharp recovery in key markets; increased consumer spending; pent up savings and disposable income due to the announcement of fiscal stimulus by major economies; global commodity price rise and an aggressive export push by the government have bolstered exports in 2021-22
  • Owing to the rise in global crude oil prices, petroleum products continued to be the most exported commodity in April-November 2021.
    • Exports of pearls, precious, semi-precious stones and gold & other precious metal jewellery have shown substantial growth of 88 per cent in April-November, 2021
  • India’s agricultural exports continue to do well in 2021-22, backed by an effective agriculture export policy.
    • Pro-active support of export promotion agencies including Export Inspection Council (EIC), Agricultural & Processed Food Products Export Development Authority (APEDA)
    • Transport and Marketing Assistance (TMA): Under the TMA, the government reimburses a certain portion of freight charges and provides assistance for the marketing of agricultural produce.
    • Krishi UDAN
  • United States of America (USA) remained the top export destination in April-November, 2021 followed by United Arab Emirates (UAE) and China

  • India has diversified its export destinations in the last 25 years, yet more than 40 per cent of India’s exports is still accounted for by only seven countries.
    • India has been negotiating free trade agreements (FTAs) with several partners – both bilateral and regional – over the past many years with a view to promoting India’s exports.


  • During the last few years, India has initiated its trade agreement negotiations and reviewed existing agreements with many countries.
  • This inter alia includes negotiations for
    • (i) Comprehensive Economic Cooperation Agreement (CECA) between India and Australia
    • (ii) FTA with European Union (EU)
    • (iii) Comprehensive Economic Partnership Agreement (CEPA) with Canada and
    • (iv) CEPA with UAE.
  • In addition, India is reviewing its existing trade agreements such as the CECA with Singapore and ASEAN-India Trade in Goods Agreement (AITIGA) with ASEAN, among others. Negotiations are complete for agreement with the UAE and at an advanced stage with Australia.


  • Remission of Duties and Taxes on Exported Products (RoDTEP)
    • This new scheme reimburses currently un-refunded Duties/ taxes/ levies, at the Central, State & local level, borne on the exported product.
  • Developing District as Export Hub:
    • District Export Promotion Committees (DEPCs) have been set up in each district.
    • Products with export potential (including agricultural, geographical indication (GI) & toy clusters) have been identified in all 739 districts across the country
  • Production-Linked Incentive (PLI) scheme
  • EXIM Bank: Government of India infused capital of 750 crore
  • Export Credit Guarantee Corporation of India Ltd. (ECGC):
    • Government approved capital infusion of 4,400 crores to ECGC Ltd. over a period of five years
  • The export promotion schemes such as Trade Infrastructure for Export Scheme (TIES), Market Access Initiatives (MAI), Special Economic Zone (SEZ) scheme, Emergency Credit Line Guarantee Scheme (ECLGS) and Advance Authorization Scheme continue to provide support to trade infrastructure and marketing.
  • Pradhan Mantri Gati Shakti National Master Plan (NMP)


  • The merchandise imports grew at the rate of 68.9 per cent to US$ 443.8 billion in April- December 2021 over the corresponding period of last year and 21.9 per cent over April- December 2019, crossing the pre-pandemic levels
  • Among the top ten countries for import origin, China, UAE and USA were the top import sources for India in April-November, 2021,
    • Indonesia – second biggest source of crude palm oil – remains to be one of the top ten suppliers of India


  • Increase in the merchandise trade deficit.
    • It stood at US$ 142.4 billion in April-December, 2021 compared to a deficit of US$ 61.4 billion in the corresponding period of last year
  • Countries with which India has positive Merchandise Trade Balance (April-Nov 2021)- USA, Bangladesh, Nepal, Turkey, Netherlands, UK, Italy



  • India has maintained its impressive performance in world services trade in the post-COVID-19 period.
    • Despite pandemic induced global restrictions and weak tourism revenues, India’s services exports recorded growth of 18.4 per cent to US$ 177.7 billion during 2021-22 (April-December)
  • This is mainly on account of the top three computers, business and transportation services that constitute more than 80 per cent of total services exports.
  • Computer services exports continue to be the largest exported service in H1: FY 22, constituting about 49 per cent of total services export


  • Services imports rose by 21.5 per cent to US$ 103.3 billion in 2021-22 (April-December) from the corresponding period a year earlier.
  • The surge in services imports is mainly on account of payments for business, transport, travel and computer services, which together constitute more than 75 per cent of services imports.


  • In H1: FY 22, the net private transfers – mainly representing remittances by Indians employed overseas – grew by 7.2 per cent to US$ 38.4 billion, over the corresponding period a year earlier
  • India continues to be the largest remittance recipient country in the world in 2021 (in current US dollar terms) and has been so since 2008.


  • After witnessing a surplus in H1: FY 21, India’s current account balance flipped into a deficit of US$ 3.1 billion (0.2 per cent of GDP) in H1: FY 22, on the back of sharp increase in the merchandise trade deficit.


  • In H1: FY 22, net capital flows more than tripled to US$ 65.6 billion (4.5 per cent of GDP) over those in H1: FY 21, on the back of continued inflow of foreign investment, rise in loans mainly external commercial borrowings (ECBs), banking capital and other capital.
  • Components
    • Foreign Investment(FDI and FPI)
    • Loans
    • Banking Capital
    • Rupee Debt Service
  • Foreign Investment, consisting of foreign direct investment (FDI) and foreign portfolio investment (FPI), is the largest component of the capital account.
  • As far as sector-wise FDI inflows are concerned, computer software and hardware attracted the highest FDI equity inflows.
  • Singapore continues to be the top investing country in terms of FDI equity inflow while the USA occupies the second position.
  • FPI flows remained volatile due to global uncertainties relating to US monetary policy normalisation, rising global energy prices, fear of new variants of COVID-19 and strong inflationary pressures.


  • The current account deficit (CAD) was adequately cushioned by robust capital flows, resulting in an overall balance of payments (BoP) surplus of US$ 63.1 billion in H1: FY 22.
  • This led to an augmented foreign exchange reserve crossing the milestone of US$ 600 billion and touching US$ 635.4 billion as of end-September 2021.
  • However, the import cover of India’s foreign exchange reserves declined to 13.2 months at the end-December 2021 from 17.4 months at end-March 2021 as merchandise imports increased with a pick-up in domestic economic activity.
  • The current account deficit in the BoP determines how much net capital inflows into the country can be absorbed or used for growth.
  • It is expected to be within manageable limits during 2021-22.
  • From a historical perspective, India can sustain a current account deficit of 2.5-3.0 per cent of GDP without getting into an external sector crisis.


  • India’s external debt as at end-September 2021, estimated at US$ 593.1 billion, grew by US$ 22.3 billion (3.9 per cent) over the level as at end-June 2021.
  • Commercial borrowings, the largest component of external debt at US$ 218.8 billion, The NRI deposits, the second largest component, at US$ 141.6 billion The short-term trade credit, the third largest component, at US$ 97.4 billion.
  • US dollar-denominated debt remained the largest component of India’s external debt, with a share of 51 per cent at the end-September 2021, followed by the Indian rupee
  • The share of short term debt in total external debt fell marginally to 17.0 per cent at the end- September 2021 from 17.7 per cent at end-March 2021
  • The foreign exchange reserves as a ratio to external debt crossed 100 per cent after 11 years since 2010 and stood at 107.1 per cent as at end-September 2021.


  • Due to the accretion of large foreign exchange reserves in recent months, vulnerability indicators relating to reserves such as reserves to total external debt, reserves to short-term debt (residual maturity), reserve cover of imports, etc., have shown marked improvement in H1: FY 2022, vis-à-vis FY 2014, the taper tantrum year.
  • The external debt to GDP ratio has also declined since the said episode.
    • Besides, India witnessed a current account surplus of 0.9 per cent Q1 of 2021-22 on top of a similar surplus in 2020-21 after a gap of 17 years.
  • On the other hand, India experienced the highest ever current account deficit of 4.8 per cent of GDP in 2012-13 on the back of an equally large deficit of 4.3 per cent during the previous year (2011-12).


  • Current Account:
    • A nation’s Current Account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
    • Current Account = Trade gap + Net current transfers + Net income abroad
  • Capital Account:
    • The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc. It also includes foreign investments and loans.
  • Balance of Payments:
    • The balance of payments (BoP) records all economic transactions in goods, services, and assets of the country with the rest of the world for a specified time period, usually a year.
  • Net International Investment Position (IIP) is the difference between the value of financial assets of residents of an economy that are claims on non-residents and the liabilities of residents of an economy to non-residents at a point in time. It represents either a net claim on or a net liability to the rest of the world.
  • Taper tantrum: 
    • The Federal Reserve embarked on a programme of asset purchases under the Quantitative Easing (QE), as part of a broader policy response to the Global Financial Crisis in 2007-08. As the US economy gained traction, in an attempt to unwind the QE, on May 22, 2013, the Fed announced the intent to start tapering asset purchases at a future date, which triggered a tantrum in the form of a spike in bond yields and resulted in disruptions on the external front for India as well.

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