💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Subject: External Sector

  • [8th September 2025] The Hindu Op-ed: A complex turn in India’s FDI story

    PYQ Relevance

    [UPSC 2016] Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIS? Suggest remedial steps to be taken for increasing actual FDIs in India.

    Linkage: The article highlights that although India records high gross inflows ($81 bn in FY 2024–25), massive repatriations and outward FDI reduce net retained capital, weakening industrial growth, directly reflecting the gap between headline FDI figures and actual developmental impact, just like the MOU–FDI gap in the question. Structural barriers such as regulatory opacity, policy unpredictability, and weak infrastructure explain why capital commitments don’t translate into long-term projects. The remedial steps suggested, simplified regulations, policy consistency, and infrastructure upgrades, align with the measures demanded in the UPSC 2016 question.

    Mentor’s Comment

    Foreign Direct Investment (FDI) has long been celebrated as one of the most powerful engines of India’s growth since the reforms of 1991. It brought in capital, technology, and global linkages. Yet, beneath the shining surface of record inflows lies a disquieting reality, unprecedented outflows, disinvestments, and a shift away from long-term industrial commitments. This article explores the nuanced challenges in India’s FDI ecosystem, the divergence between inflows and outflows, and the urgent need for reforms.

    Introduction

    FDI has been central to India’s growth story, particularly after liberalisation in 1991, modernising industries and integrating India into global markets. While e-commerce and IT saw transformative capital inflows, recent years mark a complex shift. Despite India recording $81 billion in gross FDI inflows in FY 2024–25, net retained capital fell drastically due to massive repatriations and rising outward investments by Indian firms. This has profound implications for industrial growth, job creation, and long-term economic resilience.

    Divergence Between Inflows and Outflows

    1. Gross inflows: $81 billion in FY 2024–25, up 13.7% from last year.
    2. Sharp withdrawals: Disinvestments surged by 51% in FY 2023–24 to $44.4 billion and further to $51.4 billion in FY 2024–25.
    3. Net retained capital: Fell to just $0.4 billion after accounting for outflows, a stark erosion of confidence.
    4. Investor behaviour shift: From long-term commitments to short-term tax arbitrage and profit-seeking.

    The Decline of Manufacturing in FDI Trends

    1. Declining share: Manufacturing’s share in FDI dropped to a mere 12% of total inflows.
    2. Short-term focus: Preference for rent-seeking sectors such as financial services, hospitality, and energy distribution.
    3. Weak multiplier effects: Unlike manufacturing or infrastructure, these sectors do not create broad-based industrial or technological growth.

    The Surge of Indian Capital Abroad

    1. Outward FDI: Rose from $13 billion in FY 2011–12 to $29.2 billion in FY 2024–25.
    2. Reasons cited: Regulatory inefficiencies, infrastructure gaps, and unpredictable policies.
    3. Destinations: Nearly half of outflows directed toward developed economies with stable tax regimes and strategic resources.

    Structural Barriers in India’s Investment Climate

    1. Regulatory opacity: Complex compliance requirements discourage investors.
    2. Legal unpredictability: Frequent policy shifts undermine confidence.
    3. Governance inconsistencies: Contrast between reforms on paper and actual execution.
    4. Dominance of tax havens: Mauritius and Singapore continue to account for bulk inflows, driven by treaty-based tax strategies.

    Why the Long Term Matters

    1. FDI as stability cushion: Supports balance of payments, currency stability, and external accounts.
    2. Declining net inflows: Curtails India’s monetary policy flexibility.
    3. RBI’s concern: Outflows align with global emerging market trends but pose systemic risks if unchecked.
    4. Need for committed capital: Advanced manufacturing, clean energy, and technology sectors require sustained inflows.

    What Needs to Be Done

    1. Simplify regulations: Reduce compliance burden and procedural delays.
    2. Ensure policy consistency: Long-term clarity to build investor trust.
    3. Upgrade infrastructure: Logistics, energy, and digital backbones to attract manufacturing FDI.
    4. Strengthen institutions: Predictable legal frameworks and efficient governance.
    5. Invest in human capital: Education and skilling to meet industry demands.

    Conclusion

    India’s FDI story is at a crossroads. Gross inflows remain high, but capital is no longer staying long enough to catalyse industrial growth. The rising tide of disinvestment by foreign firms and outward FDI by Indian companies reflects systemic inefficiencies, weak confidence, and policy unpredictability. If India aspires to be a global investment hub, reforms must focus on quality, durability, and alignment of capital with national developmental goals.

    Value Addition

    Official Definition of FDI

    • IMF/UNCTAD definition: A cross-border investment where a resident entity in one economy obtains a lasting interest and a significant degree of influence in the management of an enterprise in another economy.
    • India (RBI): “Investment by a person resident outside India in the capital of an Indian company under Schedule 1 of FEMA Regulations, 2000.”

    Foreign Direct Investment (FDI) Routes in India

    • Automatic Route: No prior approval required; investor only informs RBI after investment.
      • Examples: 100% FDI in e-commerce marketplace model, renewable energy, and computer software.
    • Government Route: Prior approval of the Government of India required.
      • Examples: FDI in multi-brand retail, defence beyond 74%, and print media.

    Regulation of FDI in India

    • Ministry of Commerce and Industry: Frames FDI policy, announced via Consolidated FDI Policy Circular.
    • Department for Promotion of Industry and Internal Trade (DPIIT): Nodal body for policy formulation and coordination.
    • RBI: Governs reporting, inflows, and compliance under FEMA, 1999.
    • Sectoral Regulators: Defence, Insurance, Banking, Telecom, etc. may impose additional conditions.

    Barriers to FDI in India

    • Regulatory opacity: Complex rules and compliance increase transaction costs.
    • Policy unpredictability: Frequent changes in taxation (e.g., retrospective tax) weaken investor trust.
    • Infrastructure gaps: Logistics bottlenecks, power shortages, and urban congestion raise costs.
    • Legal uncertainties: Contract enforcement and dispute resolution remain weak.
    • Governance challenges: Land acquisition, bureaucratic delays, and inconsistent state-level policies.

    Global Comparative Analysis

    • China: Strong manufacturing-centric FDI policies, large SEZs, predictable incentives, and world-class infrastructure helped it emerge as the world’s largest FDI recipient.
    • Vietnam: Stable policy frameworks, competitive labour costs, and integration into global supply chains (electronics, textiles) made it a hub for relocated investments.
    • Singapore & Mauritius: Dominant sources of FDI into India, largely due to tax treaty advantages rather than productive investment.
    • India: Despite being among the top FDI destinations (UNCTAD report), outflows and repatriations remain high, reflecting weak long-term retention.

  • Balancing code and commerce in U.K. trade compact

    India–U.K. Comprehensive Economic and Trade Agreement (CETA), especially its Chapter 12 on Digital Trade, marks a shift from cautious digital policy to strategic global engagement. It brings major trade gains, but also sparks debate on data sovereignty and oversight. Chapter 12 of India–U.K. CETA exchanges some regulatory control for greater digital market access. Gains include mutual recognition of e-signatures, duty-free digital exports, and innovation-friendly provisions, while concerns focus on limited source-code checks and voluntary data sharing.

    Digital Gains from the Agreement

    1. Recognition of Electronic Signatures and Contracts: Both nations commit to mutual recognition, reducing paperwork for SaaS firms and lowering entry barriers for SMEs.
    2. Paperless Trade & E-Invoicing: Eases cross-border documentation and payments, enhancing trade efficiency.
    3. Zero Customs Duties on Electronic Transmissions: Preserves a Commerce Ministry–estimated $30 billion software export pipeline.
    4. Regulatory Sandboxes for Data Innovation: Encourages pilot projects that allow payments and data-driven firms to test tools under supervision, boosting credibility abroad.
    5. Duty-Free Access for Indian Merchandise: Nearly 99% of exports could enter the U.K. duty-free; textile tariffs dropping from 12% to zero will aid hubs like Tiruppur and Ludhiana.
    6. Openings in British Public Procurement: Expands market opportunities for Indian IT suppliers.
    7. Social Security Waivers: Reduces payroll costs for short-term assignments abroad by about 20%.

    Digital Costs and Concerns

    1. Source-Code Inspection Restrictions: Ban on routine checks; regulators can only demand access in investigations or court cases.
    2. Voluntary Government Data Sharing: No binding obligation; India decides what data to release, and in what format.
    3. No Automatic MFN for Data Flows: Only a forward review mechanism exists if stricter data rules appear in other agreements.
    4. Review Timelines: First formal review in 5 years; critics suggest 3-year reviews to match rapid AI developments.
    5. Domestic Readiness Gap: Digital Personal Data Protection Act, 2023 rules are pending notification; absence of clear internal processes could weaken negotiation leverage.

    Balancing Sovereignty and Openness

    1. Security Exceptions Preserved: National supervision over critical infrastructure like power grids and payment systems remains intact.
    2. Good Governance Safeguards: Prevents disguised restrictions on trade under the guise of regulation.
    3. Trusted Labs Proposal: Accrediting secure labs to review sensitive code could bridge the trust gap.
    4. Audit Trails for Cross-Border Data Flows: Ensures accountability follows the data.
    5. Institutionalised Consultations: Open, pre-negotiation dialogue to anticipate and address stakeholder concerns.

    Steps for Future Digital Treaties

    1. Integrate market openness with regulatory oversight
    2. Set three-year review cycles to adapt to technological change
    3. Develop domestic readiness before external commitments
    4. Maintain a balance between security and trade facilitation

    Conclusion

    The India–U.K. digital trade compact is both a leap and a litmus test. It affirms India’s readiness to engage strategically in global digital commerce while underscoring the necessity of robust domestic regulation. The real challenge is not in signing such pacts but in ensuring that sovereignty, security, and innovation move forward together.

    Value Addition

    Reports / Data

    1. Commerce Ministry (2024): India’s software exports via electronic transmissions valued at $30 billion annually.
    2. UNCTAD Report on Digital Economy (2023): India among top 5 global economies in digital services exports.
    3. NASSCOM 2023: Digital public infrastructure (UPI, Aadhaar, DigiLocker) key enablers of India’s digital leap.

    Case Studies / Examples

    1. UPI in G20 (2023): India pushing UPI internationalisation – similar to how digital trade pacts expand India’s reach.
    2. Singapore & Australia FTAs: Precedent for including digital trade rules, but U.K. CETA is India’s first binding digital chapter.
    3. Textile exports from Tiruppur/Ludhiana: Example of how tariff elimination + digital facilitation = trade gains.

    Concepts & Theories

    1. WTO-plus Agreements: Regional/bilateral pacts that go beyond WTO commitments (like CETA’s Chapter 12).
    2. Data Sovereignty vs Digital Openness: Core tension between national control over data and global free flows.
    3. Regulatory Sandboxes: Innovation-friendly regulatory spaces balancing innovation & oversight.

    Quotes for Enrichment

    1. Nandan Nilekani: “India has built digital public goods at population scale, something no other democracy has attempted.”
    2. UNCTAD: “The digital economy is now the fastest growing trade frontier, but also the most contested.”

    PYQ Relevance

    Though there is no direct PYQ, the digital trade compact can be used in many questions like

    [UPSC 2023] What is the status of digitalization in the Indian Economy? Examine the problems faced in this regard and suggest improvement.

    Linkage: The India–U.K. CETA’s digital trade provisions—like e-signatures, paperless trade, and zero customs duty—highlight India’s progress in integrating digitalization into global commerce. At the same time, issues like restricted source-code access, weak data protection readiness, and voluntary data sharing mirror the broader problems of digitalization in India. Thus, the pact underlines both India’s digital gains and the urgent need for domestic reforms and safeguards to fully leverage such agreements.

    Mapping Micro Themes

    1. GS-2: Trade diplomacy, sovereignty.
    2. GS-3: Digital trade, AI regulation, cybersecurity.
    3. GS-4: Transparency, public trust.

  • [9th August 2025] OPED With tariffs, India’s growth rate needs a careful watch

    The recent U.S. decision to impose a 25% reciprocal tariff and an additional 25% penal levy on India’s exports marks a sharp turn in bilateral trade relations. While aimed at narrowing the U.S. trade deficit and influencing India’s crude sourcing from Russia, these measures risk slowing India’s GDP growth, widening the Current Account Deficit, and adding pressure on the rupee, making it a key test for India’s economic resilience in an era of rising protectionism.

     

    Context:

    The United States has imposed two major trade measures against India in August 2025:

    1. 25% Reciprocal Tariff (effective August 7) — in response to U.S. trade imbalance with India.
    2. 25% Penal Levy (effective August 29) — as a consequence of India’s continued oil imports from Russia.

    Both actions together could significantly affect India’s exports, GDP growth, and the Current Account Deficit (CAD).

    India–U.S.A Trade Snapshot:

    1. Merchandise trade surplus in 2024–25: $41.18 billion in India’s favour.
    2. The U.S. is targeting both exports and imports to narrow this gap.
    3. The penal levy also acts as a non-tariff barrier pushing India to source crude from costlier markets like the U.S. itself.

    Potential Economic Implications for India

    The combined effect of these tariffs and the penal levy could have severe consequences for India’s economic health.

    • Impact on Trade Balance and Current Account Deficit (CAD):
      1. Export Decline: The immediate and most direct impact will be a sharp decline in India’s exports to the US. Assuming a high import elasticity of -1, the article suggests that exports could fall by 25%.
      2. Widening Trade Deficit: Even with this decline, the overall trade deficit for India is estimated to widen by about 0.56% of GDP.
      3. Current Account Deficit: It is projected to increase from 0.6% to 1.15% of GDP due to the US reciprocal tariffs alone.
    • Effect on GDP Growth Rate:
      1. The decline in exports and the widening of the trade and current account deficits will have a ripple effect on the overall economy.
      2. When both the reciprocal tariffs and the penal levy are taken into account, the total reduction in the growth rate could be even more significant, exceeding 0.6 percentage points.
    • Currency and Inflationary Pressures
      1. Currency Depreciation: This can happen due to the uncertainty and trade deficit. The rupee-dollar exchange rate has already seen pressure, hovering over ₹87.5 since the tariffs were announced.
      2. Inflation: A shift away from Russian oil towards potentially more expensive crude sources, coupled with rising global oil prices, could put significant pressure on domestic inflation.

    India’s Strategic Response and Mitigating Factors:

    • Diplomatic and Trade Negotiations:
      1. Negotiating with the US: There is still room for negotiation with the US, especially since a comprehensive trade deal has not been finalized.
      2. Highlighting Unilateralism: India needs to work with other nations to draw global attention to the discriminatory and inequitable nature of the US’s actions, particularly the penal levy imposed over oil imports.
    • Domestic Policy Adjustments:
      1. Diversification of Export Markets: In the long term, reducing dependence on a single large market like the US is crucial.
      2. Review of Import Tariffs: India’s own import tariffs negatively affect its exports. A strategic review and reduction of these tariffs could boost export competitiveness by lowering input costs for Indian producers.
    • Role of Other Factors:
      1. New Trade Agreements: India’s recent Comprehensive Economic and Trade Agreement with the UK and ongoing negotiations with the European Union could help moderate the adverse impact on the CAD by opening up new markets.
      2. Exchange Rate: The depreciation of the rupee, while a sign of pressure, can also act as a natural buffer by making Indian exports cheaper and more competitive in global markets.

    To counter the economic impact of US tariffs, India’s path forward must be two-fold: proactive diplomatic engagement to challenge protectionism, and focused domestic policy reforms to boost export competitiveness. By diversifying its trade partners and refining its own tariff policies, India can fortify its economic resilience against external shocks.

     

    Value Addition:

    Key Economic Terms

    1. Current Account Deficit (CAD) – when a country imports more goods, services, and capital than it exports.
    2. Import elasticity with respect to tariffs – percentage change in imports in response to a percentage change in tariffs.
    3. Non-tariff barriers – policy measures other than tariffs that restrict imports/exports (e.g., quotas, licensing).
    4. Merchandise trade surplus – when export value exceeds import value for goods.
    5. Exchange rate depreciation – decline in the value of a currency relative to others.

    Mains Practice Question:

    “Unilateral trade measures by major powers pose a significant challenge to the principles of free and fair trade. In light of recent US tariffs on India, discuss the potential economic consequences for India and critically evaluate the policy options available to mitigate these risks.” (Answer in 250 words)

  • Invisible Exports of India

    Why in the News?

    As of 2024–25, India’s “invisibles” trade—comprising services exports and private money transfers—has not only surpassed its merchandise exports but also emerged as a key stabiliser of the current account deficit.

    What are Invisible Exports (in India’s context)?

    • What is it: Invisible exports refer to international trade in services and income flows that do not involve physical goods crossing borders. These transactions are digital or financial, rather than visible at ports or airports.
    • Types of Services Included: They comprise a wide range of service-based exports such as IT services, financial consulting, legal and accounting services, R&D, and BPO operations.
    • Inclusion of Remittances: Private remittances—money sent home by Indians working abroad—are counted as part of invisibles in India’s Balance of Payments (BoP).
    • BoP Classification: These transactions are recorded under the “Current Account” of the BoP, specifically in the sub-categories of services, primary income, and secondary income.
    • Characteristics: Unlike physical exports, invisible exports do not require shipping, face fewer trade barriers, and rely heavily on skilled human capital.
    • Leading Examples: India’s key invisible exports include software and IT-enabled services (by firms like Infosys, TCS, Wipro), Global Capability Centers, financial and legal services, and education, tourism, and medical services.
    • Role of Migrant Remittances: Remittances from NRIs and migrant workers play a crucial role and are one of the largest components of India’s invisible receipts.

    Their Contribution in Trade

    • Higher Value than Goods Exports: In 2024–25, India’s gross invisible receipts reached $576.5 billion, surpassing merchandise exports of $441.8 billion. Services alone brought in $387.5 billion, a major leap from $26.9 billion in 2003–04, while remittances added $135.4 billion.
    • Buffer Against Trade Deficits: While the merchandise trade deficit stood at $287.2 billion, a net invisible surplus of $263.8 billion helped reduce the overall current account deficit to just $23.4 billion, providing crucial stability.
    • Resilience Across Global Crises: Invisible exports remained strong during major disruptions like the 2008 financial crisis, COVID-19 pandemic, and ongoing geopolitical tensions, showcasing greater resilience than merchandise trade.
    • Human Capital-Driven Growth: Services exports are powered by India’s skilled workforce, not physical infrastructure. India thrives as the “office of the world”, moving beyond the traditional “back office” label.
    • Less Policy Dependence: Growth in invisible exports occurred largely without heavy government incentives or trade agreements. India still lacks strong service-sector provisions in its major trade deals.
    [UPSC 2006] Assertion (A): Balance of Payments represents a better picture of a country’s economic transactions with the rest of the world than the Balance of Trade.

    Reason (R): Balance of Payments takes into account the exchange of both visible and invisible items whereas Balance of Trade does not.

    Options: (a) Both A and R are individually true and R is the correct explanation of A **  (b) Both A and R are individually true and R is not the correct explanation of A (c) A is true but R is false (d) A is false but R is true

     

  • WTO Agreement on Safeguards (AoS)

    Why in the News?

    Invoking the Agreement on Safeguards (AoS), India has notified the WTO of its plan to impose $724 million in retaliatory tariffs on the U.S. for breaching trade commitments through unilateral auto import duties.

    What is the Agreement on Safeguards (AoS)?

    • Overview: It is a World Trade Organization (WTO) treaty that allows countries to apply temporary trade barriers—called safeguard measures—when a domestic industry is harmed by a surge in imports.
    • Purpose in Practice: The agreement maintains global trade discipline, offering legal protection tools but with checks to avoid abuse.
    • Conditions for Use: Safeguards can only be used when there is clear evidence of serious injury or threat to domestic producers due to increased imports.
    • Rules-Based System: The agreement ensures safeguard actions are transparent, time-bound, and non-discriminatory, preventing misuse for permanent protectionism.
    • Key Rules:
      • Article 12.3: Before acting, a country must notify and consult with other WTO members who may be affected by the safeguard.
      • Article 8: If consultation fails, the affected country can retaliate by suspending trade benefits equal to the loss it suffered.
      • Ban on Informal Restrictions: AoS strictly prohibits voluntary export restraints or informal quotas that evade WTO rules, ensuring fairness.

    India’s Use of the AoS – The 2025 U.S. Tariff Case:

    • Trigger: The U.S. had imposed 25% tariffs on Indian-origin vehicles and parts in March 2025, which India claims are safeguard measures disguised as unilateral tariffs.
    • Violation of Rules: India alleges that the U.S. did not follow Article 12.3 (mandatory consultations) and thus violated both AoS and GATT 1994 rules.
    • Impact on Indian Exports: India estimates that $2.89 billion worth of exports have been affected and that the U.S. collected nearly $723.75 million in duties, matching India’s proposed retaliation.
    • India’s Justification: India asserts that this move is legal under WTO rules, not protectionist, and aims to defend its export interests while continuing trade talks with the U.S.

    India’s Changing Role in WTO Safeguard Policy:

    • Early Strategy (1995–2010): India was initially cautious at the WTO, accepting tough terms under TRIPS, GATS, and AoA, and rarely used legal tools like retaliation, focusing more on diplomatic solutions.
    • Recent Assertiveness (Post-2010): India now actively invokes WTO rules like AoS to protect its interests and has won key disputes—such as:
      • The solar panel case against the U.S.
      • Legal challenges to EU’s export restrictions on food.
    • Global Leadership Role: India has taken the lead among developing countries to protect food security rights and push for fairer global trade terms, especially at Bali (2013) and Nairobi (2015) WTO summits.

    Back2Basics: 

    TRIPS (Trade-Related Aspects of Intellectual Property Rights)

    • WTO agreement (1995) setting minimum standards for IPR protection (patents, copyrights, etc.).
    • Enforced 20-year patent protection; India amended its Patent Act in 2005 to comply.
    • Allows compulsory licensing in emergencies (e.g., for medicines).

    GATS (General Agreement on Trade in Services)

    • WTO treaty covering international trade in services like IT, banking, and tourism.
    • Operates through 4 Modes of Supply:
      1. Mode 1 – Cross-border supply (e.g., online consulting)
      2. Mode 2 – Consumption abroad (e.g., medical tourism)
      3. Mode 3 – Commercial presence (e.g., foreign bank branch in India)
      4. Mode 4 – Movement of natural persons (e.g., Indian professionals working overseas)
    • India strongly supports Mode 4 for its skilled labour force.

     

    [UPSC 2015] The terms ‘Agreement on Agriculture’, ‘Agreement on the application of Sanitary and Phytosanitary Measures’ and ‘Peace Clause’ appear in the news frequently in the context of the affairs of the:

    Options: (a) Food and Agricultural Organization (b) United Nations Framework Conference on Climate Change (c) World Trade Organization* (d) United Nations Environment Programme

     

  • Centre restores RoDTEP Scheme

    Why in the News?

    To boost India’s export strength, the government has restored Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme benefits for eligible exports starting June 1, 2025.

    Details of the Latest Update:

    • RoDTEP benefits have now been restored for Advance Authorization (AA) holders, Export-Oriented Units (EOUs), and Special Economic Zones (SEZs).
    • These categories were previously excluded from February 5, 2025, but are now eligible again from June 1, 2025.
    • The move ensures a level playing field for all exporters and encourages broad-based export growth.

    About the RoDTEP Scheme:

    • Launch: It started on January 1, 2021, as part of the Foreign Trade Policy 2015–20.
    • Objective: It helps exporters get refunds for hidden taxes and duties that are not refunded under other schemes.
      • Examples of Hidden Taxes: These include taxes like electricity duty, mandi tax, and fuel charges during transport.
    • Why it was introduced: RoDTEP replaced the earlier Merchandise Export Incentive Schemes (MIES) after India lost a case at the World Trade Organisation (WTO).
    • Global Compliance: The scheme is WTO-compliant, following the rule that exported goods should not carry domestic taxes.
    • Administered by: It is managed by the Department of Revenue under the Ministry of Finance.

    Eligibility under RoDTEP:

    • Who can apply: All Indian exporters — whether manufacturers or merchant exporters — are eligible.
    • Eligible exports: Exports from SEZs, EOUs, and e-commerce platforms are also covered.
    • Not Eligible: Re-exported goods are not eligible for benefits.
    • Sector Focus: The scheme gives priority to labour-intensive sectors that earlier benefitted from MEIS.

    How the refund works:

    • Rebate Calculation: The refund is given as a percentage of the export value (Free on Board value).
    • Mode of Refund: The benefit comes in the form of e-scrips, which are stored in a digital ledger by the Central Board of Indirect Taxes and Customs (CBIC).
    • Usage of E-Scrips: These e-scrips can be used to pay basic customs duty or be transferred to other importers.
    [UPSC 2020] With reference to the international trade of India at present, which of the following statements is/are correct?

    1.  India’s merchandise exports are less than its merchandise imports.

    2. India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.

    3. India’s exports of services are more than its imports of services.

    4. India suffers from an overall trade/current account deficit.

    Select the correct answer using the code given below:

    Options: (a) 1 and 2 only  (b) 2 and 4 only (c) 3 only (d) 1, 3 and 4 only*

     

  • Trade deals will bring opportunities for Indian agriculture. But there will also be challenges

    Why in the News?

    India achieved record exports of $820.93 billion in FY25, rising 6.5%, but faced growing trade deficits as agriculture lagged, growing only 2.3% yearly despite employing half the workforce.

    What was India’s trade performance in FY25?

    • Total exports (goods + services) reached $820.93 billion, marking a 6.5% increase over FY24.
    • Merchandise exports contributed $437.42 billion (53% of total exports), while services exports contributed $383.51 billion (47%).
    • Imports grew by 6.85% to $915.19 billion, with merchandise imports at $720.24 billion (79%) and services imports at $194.95 billion (21%).
    • The trade deficit widened to $94.26 billion from $78.39 billion in FY24.
    • The trade-to-GDP ratio stood at a robust 41.4%, reflecting India’s deeper integration with global markets.

     

     

    How will Trade deals bring opportunities for Indian agriculture? 

    • Reduced Dependence on Price-Sensitive Markets: Trade deals open new and stable markets for Indian agricultural exports, reducing over-reliance on traditional destinations and shielding against price volatility. Eg: The India-UK FTA could boost exports of premium products like Basmati rice, tea, spices, and processed foods to the UK, which is a high-value market with established Indian diaspora demand.
    • Boost Processed Agricultural Exports: Trade agreements typically reduce tariffs and non-tariff barriers, enhancing competitiveness of value-added and processed agri-products, which fetch higher margins. Eg: Under the India-UK FTA, processed foods and marine products can gain better access, enhancing India’s earnings from exports of ready-to-eat meals, seafood, and organic food products.

    Why did agri-export growth slow down over the last decade?

    • Frequent Export Bans and Restrictions: Domestic policies often imposed export bans or curbs on essential commodities like rice, wheat, sugar, and onions to control inflation, disrupting export momentum. Eg: Restrictions on broken rice exports and duties on Basmati rice led to a 27% fall in rice export volume in FY24.
    • Global Price Fluctuations: Agri-exports are heavily influenced by global price trends — when world prices fall, Indian exports lose competitiveness and earnings. Eg: Rice export values declined despite volume recovering after lifting restrictions, due to price volatility.
    • Declining Productivity and Competitiveness: Lack of investment in research, technology, and resource-efficient farming practices lowered growth compared to earlier periods of rapid expansion. Eg: Average annual agri-export growth dropped from 20% (FY05–14) to just 2.3% (FY15–25).

    How did rice export restrictions impact trade and prices?

    • Export Volume Decline: Restrictions like export bans, duties, and minimum export prices caused a sharp drop in rice export volumes. Eg: Rice exports fell by 27% from 22.3 million metric tonnes (MMT) in FY23 to 16.3 MMT in FY24.
    • Global Price Spike: Reduced supply due to restrictions pushed up global rice prices, affecting international markets. Eg: Imposition of export duties and minimum export price (MEP) on Basmati rice led to a spike in global rice prices.
    • Value Impact Less Severe than Volume: Despite the fall in export volume, the value of exports dropped only slightly because of higher prices. Eg: Rice export value fell by only 6% even as volumes dropped 27%, showing price effects cushioned revenue loss.

    What are the environmental risks of rice exports?

    • Water Resource Depletion: Rice cultivation requires large amounts of water, which can strain local water supplies. Eg: In regions like Punjab, intensive rice farming has led to groundwater depletion and lowered water tables.
    • Methane Emissions: Flooded rice paddies emit methane, a potent greenhouse gas contributing to climate change. Eg: In Southeast Asia, vast rice fields are significant sources of methane emissions impacting global warming.
    • Soil Degradation and Pollution: Continuous rice farming with chemical fertilizers and pesticides can degrade soil quality and contaminate water bodies. Eg: Excessive use of agrochemicals in rice fields in Vietnam has caused soil salinization and river pollution.

    What is the status of edible oil imports? 

    • 2022–23 (November–October): India imported approximately 16.5 million metric tons of edible oils, marking a 17% increase from the previous year. This surge was driven by lower import duties on key oils like palm, soybean, and sunflower oils.
    • 2023–24 (November–October): Imports declined by about 3.1%, totaling 15.96 million metric tons, due to higher domestic oilseed production and reduced demand amid rising global prices.

    The recent reduction in edible oil imports is very small. So, we need to take more steps to further cut down these imports.

    How can India cut edible oil import dependence?

    • Increase Domestic Oilseed Production: Boost cultivation of oilseeds like groundnut, mustard, sunflower, and soybean through better seeds, irrigation, and farmer support. Eg: The “Oilseeds Production Mission” aims to raise domestic output and reduce imports.
    • Promote Sustainable Farming Practices: Encourage crop diversification and intercropping to improve yields and soil health, reducing reliance on imported oils. Eg: States like Madhya Pradesh have successfully adopted intercropping mustard with wheat to increase oilseed production.
    • Develop Processing Infrastructure: Invest in modern oil extraction and refining units to enhance local processing capacity and reduce post-harvest losses. Eg: Setting up mega oilseed processing clusters in regions like Rajasthan to strengthen the supply chain and self-reliance.

    Way forward: 

    • Strengthen Oilseed Ecosystem: Enhance productivity through quality seeds, MSP support, and targeted R&D under national missions like the Oil Palm and Oilseeds Mission.
    • Build Agro-Processing Capacity: Invest in decentralized, modern oilseed processing units to reduce wastage, improve value addition, and boost farmer income.

    Mains PYQ:

    [UPSC 2023] What are the direct and indirect subsidies provided to farm sector in India? Discuss the issues raised by the World Trade Organization(WTO) in relation to agricultural subsidies.

    Linkage: Agricultural subsidies are a key area of contention in international trade negotiations, particularly within the WTO. Trade deals often involve discussions around reducing or reforming subsidies, which presents both a challenge (potential reduction of support for farmers) and an opportunity (creating a more level playing field or accessing new markets if other countries also reduce subsidies) for Indian agriculture.

  • FTA with UK: How a stitch in time can boost India’s textile sector

    Why in the News?

    On May 6, India and the UK signed an important Free Trade Agreement (FTA), which was called a historic achievement by Prime Minister Narendra Modi. The FTA creates new opportunities for the textile sector, which now needs to match global styles and standards

    What are the key benefits of the India-UK Free Trade Agreement (FTA)?

    Benefit Description Eg
    1. Enhanced Market Access India gains zero-duty access to UK markets for industrial and agricultural goods; UK exporters get reduced tariffs in India. Indian processed foods earlier faced 10–12% tariffs — now duty-free in the UK. Tariffs on British whiskey reduced from 150% to 40% over 10 years.
    2. Boost to Key Domestic Sectors Labour-intensive Indian sectors like textiles, apparel, toys, and footwear benefit; UK gains in automobiles and spirits. Indian apparel now gets zero-tariff access to UK.

    Tariffs on British cars slashed from 100% to 10%.
    3. Job Creation & Economic Growth Trade expansion leads to employment generation and investment in both countries. India’s textile sector, employing 45+ million people, can boost jobs through increased exports.
    4. Diversification of Trade Partners India reduces dependency on US/EU; UK diversifies beyond EU post-Brexit. India currently holds just 1.8% share in UK imports — FTA targets major increase.
    5. Foundation for Future FTAs Sets a model for India’s trade negotiations with other major economies like the EU and US. Learnings from tariff cuts and ESG compliance can aid future deals with EU/US.

    How can India improve its Textiles and Apparel sector to capitalize on the FTA with the UK?

    • Strengthen the Value Chain and Infrastructure: India must address its fragmented and geographically dispersed T&A value chain. Fast-tracking the operationalization of PM MITRA parks can create integrated textile hubs, reduce logistics costs, and improve delivery timelines. Eg: Bangladesh delivers apparel orders in 50 days compared to India’s 63 days — a more integrated value chain can help India match or exceed this efficiency.
    • Promote Manmade Fibre (MMF) Production: India needs to resolve the inverted GST structure and ease quality norms to boost MMF-based products, which dominate global demand for technical textiles, athleisure, and activewear. Eg: MMF garments are taxed higher at the input stage than at the finished product level, making Indian exports less competitive globally.
    • Focus on Compliance, Design, and Market Relevance: Indian exporters must align with global fashion trends and strengthen ESG (Environmental, Social, Governance) compliance, especially in anticipation of EU and UK sustainability regulations. Eg: The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will require traceable, ethical supply chains by 2029 — Indian exporters must prepare accordingly.

    Why is the operationalisation of PM MITRA parks important for India’s textile industry?

    • Integrated Value Chain and Reduced Costs: PM MITRA parks aim to bring together the entire textile value chain — from spinning, weaving, processing to garmenting — in one location, reducing logistics costs, delays, and inefficiencies. Eg: Currently, cotton is grown in Gujarat, yarn spun in Tamil Nadu, and garments stitched elsewhere, leading to high costs and long lead times. An integrated park would streamline this process.
    • Boost Export Competitiveness: These parks can help scale up production, attract investment, and improve quality standards for global markets like the UK, where India now enjoys zero-duty access under the FTA. Eg: By focusing PM MITRA parks in export-oriented regions like Navsari (Gujarat) and Virudhunagar (Tamil Nadu), India can cater more efficiently to UK and EU demand.

    Where does India lag behind in terms of manmade fibre (MMF) production compared to global competitors?

    • Inverted GST Duty Structure: The GST on raw materials (like MMF yarn at 12%) is higher than on finished products (5%), leading to increased production costs and reduced global competitiveness. Eg: Indian MMF garments are costlier compared to those from Vietnam or Bangladesh, where tax structures are more balanced.
    • Restrictive Quality Norms and Compliance Issues: Outdated or complex quality standards limit innovation and access to high-performance MMF products demanded in global markets. Eg: Indian firms struggle to meet the quality requirements for technical textiles used in athleisure and activewear segments.
    • Lack of Investment in High-End Functional Fabrics: India has limited capacity for producing value-added MMF fabrics such as moisture-wicking, stretchable or anti-bacterial textiles, unlike China or South Korea. Eg: While China leads in exporting performance-based textiles, India still focuses on basic polyester products.

    Way forward: 

    • Reform Tax Structure & Boost Incentives: Rationalize the GST structure to eliminate the inverted duty issue and offer production-linked incentives (PLI) for MMF textiles to enhance global competitiveness.
    • Invest in R&D and Modern Manufacturing: Encourage investment in high-performance MMF fabric production, innovation, and compliance infrastructure to meet international standards in technical textiles and sustainability.

    Mains PYQ:

    [UPSC 2017] Account for the failure of the manufacturing sector in achieving the goal of labor-intensive exports. Suggest measures for more labor-intensive rather than capital – intensive exports.

    Linkage: Textiles and Apparel (T&A) sector as a labour-intensive sector that employs over 45 million people and can benefit significantly from the FTA by gaining access to high-end markets. This question directly asks about promoting labour-intensive exports, aligning perfectly with the potential benefits highlighted for the T&A sector through the FTA.

  • UK-India Free Trade Agreement (FTA) signed

    Why in the News?

    India and the United Kingdom signed a Free Trade Agreement (FTA), ending nearly 3 years of negotiations, with an aim to boost trade and investment between the two nations.

    Free Trade Agreement

    What is Free Trade Agreement (FTA)?

    • An FTA is an agreement between two or more countries to reduce or eliminate customs tariffs and non-tariff barriers on trade between them.
    • Objective: To promote trade by making it easier and more cost-effective for businesses to import and export goods and services.
    • FTAs can cover goods, services, investment, and intellectual property rights.
    • By reducing trade barriers, FTAs also benefit consumers by offering a wider range of products at lower prices.
    • FTAs play a key role in boosting economic growth and job creation by facilitating trade between countries.
    • India’s FTAs:
      • India has signed FTAs with 16 countries or regional blocs as of May 2025. 
      • These FTAs cover major partners such as Sri Lanka, Bhutan, Thailand, Singapore, Malaysia, South Korea, Japan, Australia, UAE, Mauritius, ASEAN (10 countries), and EFTA (4 countries).

    Key terms of the UK-India FTA:

    • Trade Growth: Expected to boost bilateral trade by £25.5 billion annually by 2040.
    • Whisky and Gin Tariffs: Tariffs reduced from 150% to 75%, eventually to 40% over 10 years.
    • Automobile Tariffs: India to reduce automotive tariffs from over 100% to 10%.
    • Other Goods: Tariffs reduced on cosmetics, aerospace, medical devices, chocolate, and more.
    • Services and Work Permits: Increased quotas for Indian workers in IT and healthcare, with 100 new visas annually for professionals.
    • Carbon Tax: Dispute over UK’s proposed carbon tax on metal imports.
    • Supply Chain Resilience: FTA aims to reduce reliance on China and improve supply chain security.
    [UPSC 2017] The term ‘Broad-based Trade and Investment Agreement (BTIA)’ is sometimes seen in the news in the context of negotiations held between India and:

    Options: (a) European Union* (b) Gulf Cooperation Council (c) Organization for Economic Cooperation and Development (d) Shanghai Cooperation Organization.

     

  • “China Plus One” Strategy

    Why in the News?

    Japanese companies, along with other global players, are increasingly turning to India under the China Plus One strategy, aiming to diversify supply chains and reduce overdependence on China.

    About China Plus One Strategy:

    • It is a global business model introduced in 2013 to reduce dependence on China by adding another country to the manufacturing or sourcing base.
    • It emerged due to concerns about geopolitical risks, trade tensions, and regulatory unpredictability in China.
    • The strategy gained momentum after the US–China trade war, China’s Zero-Covid policy, and increasing labour and compliance costs.
    • Its goal is to create resilient and diversified supply chains by operating in China and one or more alternative countries.
    • Vietnam, Mexico, and Taiwan have become early beneficiaries in sectors like machinery, electronics, and transport.

    Benefits for India:

    • India offers a large market, skilled labor, and cost advantages, making it an attractive destination for diversification.
    • The growing digital infrastructure and industrial corridors support the relocation of manufacturing, with government schemes like PLI and Make in India aligning with the China Plus One goals.
    • Challenges:
      • India faces limited integration into global value chains, logistics inefficiencies, and regulatory bottlenecks.
      • Historical protectionist trade policies and lack of participation in trade agreements like RCEP hinder its full potential.
      • To compete with nations like Vietnam or Mexico, India needs labour reforms, improved ease of doing business, and better trade facilitation.
    [UPSC 2021] Consider the following:

    1.Foreign currency convertible bonds 2.Foreign institutional investment with certain conditions 3.Global depository receipts 4.Non-resident external deposits Which of the above can be included in Foreign Direct Investments?

    Options: (a) 1, 2 and 3* (b) 3 only (c) 2 and 4 (d) 1 and 4