---
title: "External Sector: BoP, Trade, FDI & Exchange Rates"
description: "Understand India's external sector by mastering the balance of payments, current vs capital accounts, trade composition, FDI and FPI routes, exchange rates and"
url: "https://modeldiplomat.com/learn/lessons/upsc-indian-economy-external-sector-trade-bop-fdi"
---

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External sector: trade, BoP, FDI

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# External sector: trade, BoP, FDI

UPSC core on India's external sector: the balance of payments, current vs capital account, trade composition, FDI/FPI routes, exchange rates and external debt.

## The Balance of Payments: structure

The balance of payments (BoP) is the systematic record of all economic transactions between residents of India and the rest of the world over a year, compiled by the **Reserve Bank of India** under the **Foreign Exchange Management Act (FEMA), 1999** and reported in line with the IMF's *Balance of Payments Manual* (6th edition, BPM6). The BoP has two principal accounts.

The **current account** records trade in goods (the merchandise/trade balance), trade in services (software, travel, transport — India's services surplus is structurally large), primary income (investment income, compensation) and secondary income (remittances). India received roughly **US$125 billion in remittances in 2023**, the largest of any country per World Bank data, which substantially finances the merchandise trade deficit. The **current account deficit (CAD)** is the headline metric: it was **1.2% of GDP in FY24**, comfortably below the danger zone, against a crisis-era peak of **4.8% of GDP in FY13** that triggered the 'taper tantrum' rupee slide.

The **capital account** (the capital and financial account in BPM6 terms) records foreign investment (FDI and portfolio/FPI flows), external commercial borrowings (ECBs), banking capital and the change in foreign exchange reserves. A current account deficit must be financed by a capital account surplus or a drawdown of reserves; the two accounts plus **errors and omissions** sum to zero by construction. India's forex reserves crossed **US$700 billion in 2024**, providing import cover of roughly 11 months.

## Trade balance and composition

India runs a persistent merchandise trade deficit — imports exceed exports, dominated by crude petroleum, gold and electronics. **China is India's largest source of imports**, generating a large bilateral deficit. On the export side, petroleum products, gems and jewellery, pharmaceuticals, engineering goods and — within services — software exports are the mainstays. India's total exports (goods plus services) approached **US$770–780 billion in FY24**.

Trade policy is set through the **Foreign Trade Policy (FTP) 2023**, administered by the Directorate General of Foreign Trade (DGFT) under the **Foreign Trade (Development and Regulation) Act, 1992**. Schemes include the **Remission of Duties and Taxes on Exported Products (RoDTEP)** and the **Production-Linked Incentive (PLI)** schemes launched from 2020 to boost manufacturing exports. India is a founding member of the **WTO (1995)** and uses anti-dumping duties via the Directorate General of Trade Remedies. It withdrew from the **RCEP** negotiations in November 2019 over concerns about Chinese import surges and inadequate safeguards — a high-frequency PYQ trigger.

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