Unit 4: Foreign trade & the balance of payments
Indian Economy notes · PTU syllabus (BCOMGE 301-18)
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Unit summary
India's trade with the world has grown rapidly since 1991, bringing new opportunities and challenges. This unit covers the value, composition and direction of India's foreign trade, the balance of trade vs the balance of payments, disequilibrium in the balance of payments, export promotion and import substitution, and the WTO and India.
After this unit you can
- Describe the value, composition and direction of India's foreign trade
- Distinguish balance of trade and balance of payments
- Explain causes and correction of BoP disequilibrium
- Explain export promotion, import substitution and India's role in the WTO
PTU syllabus topics
- Value
- composition and direction of India's foreign trade
- balance of trade vs. balance of payments
- disequilibrium in the balance of payments
- export promotion and import substitution
- WTO and India
Covers
Export and import of goods only
All transactions with the world
Includes
Visible trade
Goods, services, income, transfers, capital flows
Scope
Narrow
Comprehensive
Always balances?
No
Yes, in accounting terms
Topic 1
Value, composition and direction of foreign trade
- Value: India's merchandise exports crossed US$ 430 billion and total exports of goods and services crossed US$ 800 billion in 2023–24/2024–25; merchandise imports are larger, so India runs a merchandise trade deficit offset partly by a services surplus and remittances.
Composition
| Major exports | Major imports |
|---|---|
| Petroleum products (refined) | Crude oil and petroleum products |
| Engineering goods | Electronic goods |
| Gems and jewellery | Gold and precious stones |
| Pharmaceuticals and drugs | Machinery |
| Electronic goods (mobile phones) | Coal, coke |
| Textiles and readymade garments | Edible oils, chemicals, fertilisers |
| Rice, marine products, spices | Non-ferrous metals |
| Software and IT services (services export) |
Direction
- Top partners: USA (largest export destination), China (largest source of imports), UAE, Saudi Arabia, Russia (oil since 2022), Singapore, Netherlands.
- Shift from Europe and the USSR (before 1991) towards the USA, West Asia and Asia.
- Free trade agreements: India–UAE CEPA (2022), India–Australia ECTA (2022), India–EFTA TEPA (2024), India–UK CETA (2025).
Topic 2
Balance of trade vs balance of payments
- Balance of trade (BoT): difference between the value of merchandise exports and imports.
- Balance of payments (BoP): a systematic record of all economic transactions between residents of a country and the rest of the world during a year.
Current account
Merchandise trade, services (invisibles), primary income, secondary income (remittances)
Capital account
Capital transfers, non-produced non-financial assets
Financial account
FDI, portfolio investment (FPI), loans, banking capital
Errors and omissions
Change in reserves
RBI's foreign exchange reserves
Coverage
Visible goods only
Goods, services, income, transfers, capital
Scope
Narrow, part of BoP
Comprehensive
Balance
May be surplus or deficit
Always balances in the accounting sense
Indicator
Trade competitiveness
Overall external position
Topic 3
Disequilibrium in the balance of payments
BoP always balances in accounting, but disequilibrium occurs when autonomous receipts and payments differ (deficit or surplus).
- Types: cyclical, secular (long-term), structural, short-run.
- Causes: high imports of oil and gold, low export competitiveness, inflation, rupee overvaluation, fall in capital inflows, global recession, high debt servicing.
Monetary
Tight money, higher interest rates to attract capital
Exchange rate
Devaluation or depreciation (1991)
Trade measures
Export promotion, import restrictions, tariffs
Capital account
Attract FDI, NRI deposits
External support
IMF loans, swap lines
Example
In 1991 India devalued the rupee, pledged gold and borrowed from the IMF; in 2013 (taper tantrum) RBI raised FCNR(B) deposits to stabilise the rupee.
Topic 4
Export promotion and import substitution
Strategy
Produce at home what was imported
Produce for world markets
Period in India
1950s–1980s
After 1991
Tools
High tariffs, quotas, licensing
Incentives, SEZs, exchange-rate reforms
Result
Industrial base but inefficiency
Competitiveness, export growth
Export promotion measures
- Foreign Trade Policy 2023: incentives to remission, export target of US$ 2 trillion by 2030, e-commerce exports, Districts as Export Hubs.
- Schemes: RoDTEP (remission of duties and taxes on exported products), Advance Authorisation, EPCG, Export Promotion Councils, SEZs, EOUs, ECGC (export credit insurance), EXIM Bank.
- Make in India, PLI schemes (electronics, pharma) — mobile phone exports grew sharply.
Topic 5
WTO and India
- WTO established on 1 January 1995, replacing GATT (1947); headquarters Geneva; India is a founder member.
GATT 1994
Trade in goods — tariff cuts, MFN
GATS
Trade in services
TRIPS
Intellectual property rights
TRIMS
Trade-related investment measures
Agreement on Agriculture
Market access, domestic support (amber, blue, green boxes), export subsidies
Dispute Settlement Understanding
- Principles: most-favoured nation (non-discrimination), national treatment, transparency, reciprocity, special and differential treatment for developing countries.
- Benefits for India: market access, rules-based system, growth of services exports, dispute settlement.
- Concerns: TRIPS and drug prices (India's product patents from 2005), agricultural subsidies of developed countries, pressure on India's MSP and food stocks (public stockholding), non-tariff barriers, paralysis of the appellate body since 2019.
Key terms
- Balance of trade
- Difference between merchandise exports and imports
- Balance of payments
- Record of all economic transactions with the rest of the world
- Current account
- Trade in goods and services, income and transfers
- Import substitution
- Producing domestically what was imported
- WTO
- World Trade Organization, the body governing international trade rules
Quick revision
- Exports: petroleum products, engineering, gems, pharma, electronics; imports: crude, gold, electronics.
- Top partners: USA (exports), China (imports), UAE.
- BoP: current, capital, financial accounts; BoT is part of the current account.
- BoP deficit corrected by monetary, exchange-rate, trade and capital measures.
- WTO since 1995: GATT, GATS, TRIPS, TRIMS, AoA.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is meant by composition of foreign trade?
- Q2.Distinguish balance of trade and balance of payments.
- Q3.What are the components of the current account?
- Q4.What is BoP disequilibrium?
- Q5.What is import substitution?
- Q6.What is TRIPS?
Long-answer questions
- Q1.Discuss the value, composition and direction of India's foreign trade.
- Q2.Explain the structure of the balance of payments and causes of disequilibrium.
- Q3.Explain measures to correct BoP disequilibrium and export promotion measures in India.
- Q4.Discuss the WTO and its implications for India.
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