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

Civilsdaily

Login

Subject: External Sector

  • India’s goods Trade Deficit at a 42-month low 

    Why in the News?

    India’s goods trade deficit has dropped to a 42-month low of $14.05 billion in February 2025, driven by reduced imports of gold, silver, and crude oil, according to the latest data from the Ministry of Commerce and Industry.

    Key Insights from February 2025 Trade Data

    • Exports: Goods exports amounted to $36.9 billion in February 2025.
    • Imports: Merchandise imports fell to a 22-month low of $50.9 billion, primarily due to lower demand for gold, silver, and crude oil.
    • Gold and Silver Imports: The value stood at $2.7 billion, the lowest since June 2024.
    • Crude and Petroleum Imports: Reduced to $11.89 billion, marking the lowest level since July 2023.
    • On a year-on-year basis, exports dipped by 10.84% in February 2025, partially due to the base year effect of a leap month.
      • However, imports shrank by 16.3% compared to February 2024.

    Impact of Lower Trade Deficit on India’s Economy

    • Stronger Currency: A lower trade deficit reduces demand for foreign currencies, leading to an appreciation of the Indian Rupee. This makes imports cheaper, benefiting consumers and businesses.
    • Improved Current Account Balance: The lower trade deficit positively impacts India’s balance of payments, reducing dependence on external borrowing or foreign investments, and contributing to financial stability.
    • Boost to Domestic Production: A decrease in imports encourages local manufacturing and reduces reliance on foreign products, stimulating economic growth and creating jobs.
    • Growth in Exports: The reduced deficit reflects a higher level of exports, improving India’s foreign exchange reserves and supporting industrial output.
    • Reduced Inflation: With fewer imports, particularly of essential goods like crude oil and gold, prices of imported goods stabilize, helping reduce inflationary pressures in the economy.
    • Better Fiscal Health: A lower trade deficit leads to less reliance on external financing, helping the government maintain fiscal stability and potentially improve credit ratings.
    • Positive Investor Sentiment: A smaller trade deficit enhances investor confidence, attracting Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), boosting economic development.
    • Focus on Self-Reliance: Reduced imports drive self-reliance, encouraging domestic production, and decreasing dependency on imports for essential goods and services.

    PYQ:

    [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, fertilisers and machinery have decreased in recent years.

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

    Select the correct answer using the code given below:

    (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

     

  • [pib] What is Geo-Economic Fragmentation?

    Why in the News?

    The Economic Survey 2024-25 highlights the shift from globalization to geo-economic fragmentation (GEF). Countries are now forming economic blocs, with concepts like “friend-shoring” gaining prominence.

    What is Geo-Economic Fragmentation (GEF)?

    • GEF refers to the breakdown of global economic integration, caused by strategic national policies.
    • It involves disruptions in trade, capital flows, foreign direct investment (FDI), and migration.
    • The shift resembles the Cold War era, with countries aligning into economic blocs.
    • Western nations’ imposition of uniform environmental, labor, and social standards has fueled economic divisions.
    • The World Trade Organization (WTO) Trade Monitoring Report (October 2024) recorded:
      • 169 new trade-restrictive measures, affecting $887.7 billion worth of trade.
      • A sharp rise from $337.1 billion in 2023, reflecting escalating protectionism.
    • The IMF notes that trade fragmentation today is costlier than during the Cold War, when global trade was just 16% of GDP.
      • Today, it is 45%, making economic isolation riskier.

    Significance and Impacts of GEF:

    • Decline of Global Trade: WTO reported 169 new trade restrictions covering $887.7 billion in 2023-24, making trade costlier.
    • FDI Relocation: Friend-shoring is concentrating FDI among geopolitically aligned nations, reducing capital for emerging economies.
    • China’s Economic Dominance: Controls 80% of solar panels, 80% of batteries, and 60% of wind energy, reshaping supply chains.
    • Supply Chain Disruptions: Firms are shifting from China to India, Vietnam, and Mexico to diversify risks.
    • Emerging Market Challenges: Increased trade barriers, inflation, and tech restrictions slow down growth.
    • Rise in Economic Nationalism: Nations are prioritizing domestic industries, energy security, and localized production over global collaboration.

    PYQ:

    [2022] Elucidate the relationship between globalization and new technology in a world of scarce resources, with special reference to India.

    [2017] Which of the following has/have occurred in India after its liberalization of economic policies in 1991?

    1. Share of agriculture in GDP increased enormously.

    2. Share of India’s exports in world trade increased.

    3. FDI inflows increased.

    4. India’s foreign exchange reserves increased enormously.

    Select the correct answer using the codes given below:

    (a) 1 and 4 only

    (b) 2, 3 and 4 only

    (c) 2 and 3 only

    (d) 1, 2, 3 and 4

  • [pib] DGFT launches enhanced eCoO 2.0 System

    Why in the News?

    The Directorate General of Foreign Trade (DGFT) has launched the enhanced Certificate of Origin (eCoO) 2.0 system, a major upgrade aimed at simplifying export certification and improving trade efficiency.

    What is eCoO 2.0 System?

    • The eCoO 2.0 system is a digital platform launched by the Directorate General of Foreign Trade (DGFT) to simplify and streamline the issuance of Non-Preferential Certificates of Origin (CoO).
    • Effective January 1, 2025, exporters must electronically file CoO applications through this platform.
    • It aligns with India’s Ease of Doing Business initiative by improving trade facilitation, digital authentication, and document processing.

    Key Features of the eCoO 2.0 System

    • Exporters must submit Non-Preferential Certificates of Origin (CoO) online.
    • Allows exporters to authorize multiple users under a single Importer Exporter Code (IEC).
    • Aadhaar-based e-Signing provides an alternative to Digital Signature Tokens, enhancing security and ease of use.
    • Offers real-time access to eCoO services, Free Trade Agreement (FTA) details, trade events, and notifications.
    • Exporters can request In-lieu CoO for rectifications on previously issued CoOs.
    • The system handles 7,000+ eCoOs daily, integrating 125 issuing agencies, 110 chambers of commerce, and 650+ issuing officers.

    Significance of the eCoO 2.0 System

    • Reduces manual paperwork and speeds up export documentation.
    • Digitally signed CoOs prevent fraudulent certifications and ensure traceability.
    • Facilitates smoother re-exports, trans-shipments, and intermediary trade, boosting India’s position in global supply chains.
    • Faster approvals help exporters comply with international trade agreements, enhancing competitiveness.
    • Aligns with India’s push for paperless trade, reinforcing DGFT’s trade facilitation efforts.

    PYQ:

    [2011]  A “closed economy” is an economy in which:

    (a) the money supply is fully controlled

    (b) deficit financing takes place

    (c) only exports take place

    (d) neither exports or imports take place

  • Why is rupee weakening against dollar?

    Why in the News?

    In the last week of December 2024, the rupee dropped below 85 against the U.S. dollar, hitting a new low of 85.81. The rupee fell by about 3% in 2024, continuing its long-term decline against the dollar.

    What has caused the currency to depreciate? 

    • Exit of Foreign Investors: A significant driver of the rupee’s depreciation has been the exit of foreign portfolio investors (FPIs) from Indian markets. In 2024, FPIs pulled out substantial amounts from equities, leading to increased selling pressure on the rupee.
    • Widening Trade Deficit: India’s trade deficit has widened due to high imports, particularly of crude oil and gold, compared to its exports. This increased demand for foreign currencies (like the U.S. dollar) to pay for these imports has contributed to the rupee’s weakening.
    • Monetary Policy Differences: The Reserve Bank of India’s relatively looser monetary policy compared to the U.S. Federal Reserve has resulted in higher inflation rates in India. This inflation differential makes Indian assets less attractive to foreign investors, further reducing demand for the rupee.
    • Global Economic Factors: Geopolitical tensions, such as the Russia-Ukraine war and rising global crude oil prices, have created volatility in the markets, leading to capital outflows from emerging markets like India.
      • The other reason is that the strengthening U.S. dollar amid higher U.S. bond yields has made investments in the U.S. more attractive compared to India.

    What could be the impact of Rupee depreciation?

    • Increased Import Costs: A weaker rupee raises the cost of imports, particularly for essential goods such as crude oil, fertilizers, and edible oils. This increase in import bills can lead to a higher overall trade deficit, which reached an all-time high of $37.8 billion in November 2024, exacerbating economic vulnerabilities.
    • Inflationary Pressures: The rising costs of imported goods contribute to inflation, making everyday goods more expensive for consumers. This can lead to higher living costs and reduced purchasing power, as seen with the increased prices of food and fuel due to higher import expenses.
    • Impact on Economic Growth: The combination of rising inflation and increased costs can dampen economic growth. Higher import bills can create upward pressure on interest rates, making borrowing more expensive and potentially slowing down investment and consumption.

    Why made the central bank to intervene?

    • Stabilizing Currency Value: The Reserve Bank of India (RBI) intervened in the forex market to stabilize the rupee and prevent excessive volatility that could disrupt economic stability. By selling dollars from its reserves, the RBI aimed to support the rupee’s value against the dollar.
    • Preventing Inflationary Pressures: A depreciating rupee increases the cost of imports, particularly essential commodities like crude oil, which can exacerbate inflation domestically. The RBI’s intervention seeks to mitigate these inflationary pressures by maintaining a more stable exchange rate.
    • Maintaining Investor Confidence: By actively managing the currency’s value, the RBI aims to instill confidence among investors regarding India’s economic stability and attractiveness as an investment destination. This is crucial for sustaining foreign investment inflows and supporting economic growth.

    Way forward: 

    • Diversify Export Markets and Reduce Dependence on Imports: India should focus on enhancing its exports to non-traditional markets while exploring alternatives to reduce dependence on high-cost imports, especially crude oil and gold.
    • Monetary Policy Coordination and Strengthening Fundamentals: The RBI should work towards aligning its monetary policy with global trends while ensuring domestic inflation remains under control.

    Mains PYQ:

    Q How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?  (UPSC IAS/2018)

  • India Secures 14.3% of Global Remittances in 2024: World Bank

    Why in the News?

    In 2024, India received a record $129.1 billion in remittances which marked the highest share for any country since 2000 as per the World Bank.

    What are the Trends in Remittances flow?

    • Record Inflows: In 2024, India received an estimated $129.1 billion in remittances, marking the highest amount ever recorded for any country in a single year.
    • Global Share: India accounted for 14.3% of global remittances, the highest share since the turn of the millennium.
    • Growth Rate: The growth rate of remittances in 2024 was approximately 5.8%, a significant increase from 1.2% in 2023.
    • Top Recipients: Following India, Mexico and China received the largest remittances, with Mexico at $68 billion and China at $48 billion.

    What are the Factors Responsible for High Remittances in India?

    • Large Diaspora: India has one of the largest diaspora populations globally, with over 18 million Indians living abroad, contributing significantly to remittance inflows.
    • Shift to High-Income Countries: There has been a trend of Indian migrants moving to high-income economies such as the United States, United Kingdom, and Australia, where job opportunities are more abundant.
    • Diverse Skill Levels: Indian migrants include highly skilled professionals (in sectors like IT and healthcare) as well as semi-skilled and unskilled labourers, broadening the scope for remittance generation.
    • Recovery of Job Markets: The recovery of job markets in high-income countries post-pandemic has driven an increase in remittance flows as employment opportunities have improved.

    What is the significance of high Remittances?

    • Economic Support for Households: Remittances serve as a crucial source of income for many families in India, supporting their daily needs and contributing to overall household welfare.
    • Impact on National Economy: In 2024, remittances constituted approximately 3.3% of India’s GDP, highlighting their role in bolstering the economy.
    • Comparison with Other Financial Flows: Remittances have outpaced other forms of external financial flows, such as Foreign Direct Investment (FDI) and Official Development Assistance (ODA), indicating their importance for funding current account deficits and fiscal shortfalls in low- and middle-income countries.
    • Long-Term Growth Trends: Over the past decade, remittances to low-and-middle-income countries have increased by 57%, underscoring their growing significance as a stable source of income compared to declining FDI.

    What are the negative impacts of brain drain?

    Even though remittances are good for the country, they have negative signals for any country like brain drain. 

    • Loss of Skilled Labor: Brain drain leads to a significant depletion of skilled professionals in the home country, resulting in shortages in critical sectors such as healthcare, education, and technology.
      • This loss hampers the country’s ability to innovate and develop, as there are fewer qualified individuals to drive progress and maintain essential services.
    • Economic Consequences: The exodus of skilled workers results in decreased tax revenues for the home country, which can limit public spending on infrastructure and social programs. This financial shortfall can stunt economic growth and development, exacerbating existing challenges within the economy.
    • Impeded National Development: Countries experiencing brain drain may face slower overall development due to the loss of human capital. This can create a cycle of underdevelopment, where the lack of skilled labour leads to reduced investment opportunities and further emigration, perpetuating the cycle of talent loss and economic stagnation.

    Way forward: 

    • Enhance Domestic Opportunities: Strengthen education, healthcare, and innovation ecosystems to retain skilled professionals by providing competitive salaries, career growth, and improved living standards.
    • Engage Diaspora Strategically: Leverage the Indian diaspora for knowledge transfer, investments, and partnerships, creating pathways for their contribution to national development while maintaining ties with homegrown talent.

  • Why India’s trade deficit is not necessarily a weakness?

    Why in the News?

    India’s ongoing trade deficit, where imports exceed exports, is often viewed as a sign of weakness in Indian manufacturing.

    What is the nature of India’s trade deficit?

    • Trade Deficit in Goods: As of October 2024, India recorded a merchandise trade deficit of $27.1 billion, which narrowed from $31.5 billion in the same month the previous year.
    • Net Exporter of Services: India has established itself as a significant player in the global services market, with services exports constituting a substantial portion of its overall trade.
      • In FY 2023-24, India’s services exports amounted to approximately $309 billion, contributing significantly to offsetting the goods trade deficit
    • Foreign Capital Inflows: The trade deficit is often viewed positively as it correlates with India’s ability to attract foreign investment.
      • For instance, India’s current account deficit was about 1.1% of GDP in June 2024, indicating that capital inflows are necessary to balance this outflow.
    • Current Account Balance: The current account deficit (CAD) reached approximately $9.7 billion in the April-June 2024 quarter, reflecting the need for capital inflows to support economic growth and stability.
      • India’s current account deficit has been maintained at around 2% of GDP, which is generally considered manageable within the context of its economic growth and investment strategies.

    Why do we hold reserves?

    • Cushion Against Economic Shocks: Reserves are held as a safeguard against potential economic disruptions, such as sudden spikes in oil prices that could worsen the current account deficit.
    • For Cost Management: While holding reserves incurs costs (e.g., lower returns on reserves compared to returns on foreign investments), they are essential for maintaining economic stability and investor confidence.
    • Optimal Level of Reserves: India aims to maintain adequate reserves without excessive accumulation. This involves balancing the need for emergency funds against the costs associated with holding those reserves.

    What are the Steps taken by the Government? 

    • Make in India Initiative: Launched in 2014, this initiative aims to boost domestic manufacturing by encouraging both foreign and domestic companies to manufacture their products in India.
      • It focuses on sectors such as electronics, automobiles, and pharmaceuticals to increase production capabilities, reduce dependency on imports, and enhance export competitiveness.
    • Production-Linked Incentive (PLI) Scheme: Introduced in 2020, the PLI scheme provides financial incentives to manufacturers across various sectors, including electronics, textiles, and pharmaceuticals.
      • This program is designed to attract investments, promote local manufacturing, and increase exports by enhancing the global competitiveness of Indian products.

    What strategies can mitigate the effects of the trade deficit? (Way forward)

    • Boosting Domestic Demand: Encouraging greater domestic consumption can help increase manufacturing output. Rising domestic demand can lead to higher production levels without necessarily increasing imports.
    • Enhancing Export Competitiveness: Focusing on sectors where India has a comparative advantage, such as pharmaceuticals and automobiles, can help increase export volumes and reduce the trade deficit.
    • Diversifying Import Sources: Reducing reliance on specific countries for imports (e.g., crude oil) by diversifying sources can help stabilize import costs and mitigate fluctuations in global prices.
    • Investing in Manufacturing Capabilities: Strengthening domestic manufacturing through policies supporting local industries can reduce import dependency and enhance export capacity.

    Mains PYQ:

    Q Craze for gold in India has led to a surge in the import of gold in recent years and put pressure on the balance of payments and the external value of the rupee. In view of this, examine the merits of the Gold Monetization scheme. (UPSC IAS/2015)

  • Fair Trade 

    Why in the News?

    In preparation for the 29th edition of the COP in Baku, Azerbaijan, next month, there is renewed momentum within government circles to expedite the transition of Indian industry to carbon markets.

    What is meant by the Carbon Trade Policy?

    • It is a market-based approach to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.
    • It sets a quantitative limit on emissions, by allowing member countries with lower emissions to sell rights to emit carbon to higher-emitting entities, promoting cost-effective carbon reduction.

    Why India must develop a transparent Carbon Trade Policy?

    • A clear and transparent policy will boost investor confidence, attracting both domestic and foreign investments in green technologies and carbon-reduction projects.
    • Establishing robust verification and reporting mechanisms will enhance the integrity of carbon credits, preventing issues like double counting and greenwashing, and fostering trust among stakeholders.
    • A transparent policy will help align India’s efforts with global climate commitments, enabling effective tracking of emissions reductions and promoting sustainable economic growth.

    How effective is ‘Fair Trade’ in achieving its Goals?

    • Promotion of Sustainable Practices: Just as Fair Trade supports environmentally sustainable agriculture practices, carbon markets incentivize companies to adopt greener technologies and reduce emissions. Both aim to create a more sustainable future.
    • Empowerment of Stakeholders: Fair Trade empowers marginalized producers by providing fair prices and market access, similar to how carbon markets can benefit developing countries like India by enabling them to sell carbon credits generated from emissions reductions.
    • Economic Benefits: Fair Trade aims to create economic stability for producers, while carbon markets can generate revenue for countries that invest in carbon-reduction projects, creating a financial incentive for participating in emissions trading.
    • Global Impact Awareness: Both Fair Trade and carbon markets raise awareness about global issues—Fair Trade regarding trade equity and carbon markets regarding climate change, fostering a sense of responsibility among consumers and companies.

    What are the limitations and challenges facing Fair Trade certification?

    • Certification Costs: The financial burden of obtaining Fair Trade certification can be a significant barrier for small producers. Similarly, transitioning to carbon markets may involve high initial costs for companies to implement the necessary technologies and processes.
    • Market Accessibility: Fair Trade products may not have guaranteed market access, mirroring potential challenges in carbon markets where the demand for carbon credits may fluctuate based on regulations and market conditions.
    • Complex Standards: Just as Fair Trade certification has varying standards, the guidelines under Article 6 of the Paris Agreement can also lead to confusion about which carbon-reduction activities are eligible for trading.

    How can consumers effectively support Fair Trade initiatives?

    • Support Certified Products: Consumers can choose Fair Trade products, which, like carbon credits, require a conscious decision to support ethical and sustainable practices.
    • Educate and Advocate: Just as consumers can promote Fair Trade awareness, they can also advocate for transparent carbon markets and support policies that foster sustainable practices.
    • Engagement with Companies: Consumers can encourage businesses to participate in Fair Trade and carbon markets by demanding accountability and sustainability in their supply chains.
    • Community Participation: Involvement in local Fair Trade events can parallel participation in climate action initiatives, such as local carbon offset programs or sustainability projects, thereby supporting both movements.
    • Utilizing Social Media: Consumers can leverage social media to share information about Fair Trade and carbon markets, helping to amplify their importance and drive consumer engagement.

    Way forward: 

    • Strengthen Certification Accessibility: Lower the cost and simplify the certification process to make Fair Trade more accessible for small-scale producers, boosting their participation and benefits.
    • Enhance Consumer Education: Increase awareness campaigns about the impact of Fair Trade, encouraging more people to support certified products and promoting ethical consumption habits.

  • [pib] SCOMET List

    Why in the News?

    The Directorate General of Foreign Trade (DGFT), under the Ministry of Commerce & Industry, has released the updated SCOMET (Special Chemicals, Organisms, Materials, Equipment, and Technologies) list for the year 2024.

    What is the SCOMET List?

    Details
    Purpose To regulate the export of dual-use items that can be used for both civilian and military applications, particularly those that could contribute to the development of weapons of mass destruction (WMDs) and their delivery systems.
    Regulatory Authority Directorate General of Foreign Trade (DGFT), Ministry of Commerce and Industry, Government of India.
    Notification Notified by DGFT under Appendix 3 to Schedule 2 of the ITC (HS) Classification of Export and Import Items.
    Legal Framework Governed by Chapter IVA of the Foreign Trade (Development & Regulation) Act, 1992, as amended in 2010.

    This chapter provides the legal basis for export control of dual-use items and outlines penalties for non-compliance.
    Policy and Procedures Outlined in Chapter 10 of the Foreign Trade Policy (FTP) and the Handbook of Procedures (HBP) 2023.

    These documents provide the detailed procedure for licensing, application, and compliance for exporting SCOMET items.
    Categories The SCOMET List includes multiple categories:
    1. Category 0: Nuclear materials and nuclear-related dual-use items.
    2. Category 1: Toxic chemical agents and precursors.
    3. Category 2: Materials and materials processing equipment.
    4. Category 3: Electronics.
    5. Category 4: Computers.
    6. Category 5: Telecommunications and information security.
    7. Category 6: Sensors and lasers.
    8. Category 7: Navigation and avionics.
    9. Category 8: Marine.
    10. Category 9: Aerospace and propulsion.
    New Licensing Authority for Category 6 Department of Defence Production (DDP), Ministry of Defence is the new licensing authority for the export of items under Category 6 (Sensors and Lasers).
    Export Licensing Exporters must obtain a specific license from DGFT (or DDP for Category 6) to export SCOMET items.

    The licensing process includes a comprehensive review to ensure that exports do not contribute to the proliferation of WMDs or unauthorized military use.

     

  • Tackling the frictions in cross-border payments  

    Why in the News?

    Despite being worth $181.9 trillion in 2022, cross-border payments still have inefficiencies prompting the G-20 to focus on improving them for economic growth.

    Present Status of the Global Cross-Border Payments Market

    • The cross-border payments market was valued at approximately $181.9 trillion in 2022 and is projected to reach $356.5 trillion by 2032, reflecting a compound annual growth rate (CAGR) of 7.3% from 2023 to 2032.
    • The growth is driven by increasing globalization, the rise of e-commerce, and technological innovations in the financial sector. The demand for faster, more secure, and transparent payment solutions is compelling banks and fintech companies to enhance their offerings.
    • The market includes various channels such as bank transfers, money transfer operators, and card payments, with a significant share coming from business-to-business (B2B) transactions.

    Difference Between Old and New Systems

     

    Cross-Border Payment 

    		 Features Challenges
    Old System Cross-border payments relied on manual processes involving letters of credit, checks, and extensive documentation. It faced challenges such as high transaction costs, slow processing times, and limited access due to regulatory burdens.
    New System Incorporates technological advancements such as blockchain, digital wallets, and instant payment systems.

    Example:  peer-to-peer transactions and interlinked payment infrastructures

    		 challenges around scalability, security, regulation and standardization.

    Challenges to Cross-Border Payments

    • High Costs: Transaction fees remain a significant barrier, with various financial institutions imposing different charges that complicate cost-effectiveness.
    • Low Speed: Processing times can vary greatly, often taking several days due to intermediary banks and regulatory checks, which can frustrate users seeking rapid transactions.
    • Limited Access: Many individuals and businesses still face obstacles in accessing cross-border payment services, particularly in underbanked regions.
    • Insufficient Transparency: Users often lack clarity regarding fees, processing times, and the overall transaction process, leading to mistrust and reluctance to engage in cross-border transactions.
    • Regulatory Compliance: Navigating diverse legal frameworks across jurisdictions complicates transactions, with anti-money laundering (AML) and counter-terrorist financing (CFT) regulations adding layers of complexity.

    Way forward: 

    • Adoption of Emerging Technologies: Leveraging blockchain, digital currencies, and AI can streamline processes, reduce transaction costs, and enhance transparency, making cross-border payments faster and more accessible.
    • Regulatory Harmonization and Collaboration: Promoting global regulatory alignment and fostering collaboration between financial institutions and governments can simplify compliance, improve transaction efficiency, and broaden access to underbanked regions.

  • [pib] Amendments to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 

    Why in the News?

    The Finance Ministry has issued a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, to simplify Foreign Direct Investment (FDI) rules.

    Key amendments made by the Finance Ministry:

    Details
    Cross-Border Share Swaps Simplifies the process for Indian companies to engage in cross-border share swaps with foreign companies.
    Clarity on Downstream Investments Provides clearer guidelines on the treatment of downstream investments by OCI-owned entities on a non-repatriation basis, aligning them with NRI-owned entities.
    FDI in White Label ATMs (WLAs) Allows FDI in White Label ATMs to increase the geographical spread of ATMs, particularly in semi-urban and rural areas.
    Standardization of ‘Control’ Definition Standardizes the definition of ‘control’ to ensure consistency with other Acts and laws.
    Harmonization of ‘Startup Company’ Definition Aligns the definition of ‘startup company’ with the Government of India’s notification G.S.R. 127 (E) dated February 19, 2019.

    About The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 

    • These rules govern foreign investment in India in non-debt instruments like equity shares, mutual funds, and real estate (excluding agricultural land).
    • These rules, effective from October 17, 2019, were issued under FEMA, 1999 (Foreign Exchange Management Act).

    It covers the following key aspects:

    • FDI Regulation: Specifies guidelines for foreign direct investment (FDI) in various sectors, including sectoral caps and conditions.
    • Investment Vehicles: Allows investment through entities like Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and mutual funds.
    • Repatriation: Provides a framework for repatriation of profits, dividends, and capital by foreign investors.
    • Reporting: Mandates detailed reporting for companies receiving foreign investments.
    • Sectoral Caps and Conditions: Sets sectoral limits and approval requirements for foreign investment, with some sectors requiring government approval.
    • Prohibited Sectors: Prohibits foreign investment in sectors like lottery, gambling, chit funds, and agricultural land.
    • Transfer of Shares: Outlines guidelines for share transfer between residents and non-residents, ensuring compliance with regulatory conditions.

    PYQ:

    [2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

    (a) It is the investment through capital instruments essentially in a listed company.

    (b) It is a largely non-debt creating capital flow.

    (c) It is the investment which involves debt-servicing.

    (d) It is the investment made by foreign institutional investors in the Government securities.