External Sector and Trade
Balance of payments, current and capital accounts, exchange rate regimes, rupee depreciation, FDI vs FPI, FEMA and the 1991 crisis for UPSC Prelims and GS III.
SyllabusGS III · Effects of liberalisation on the economy — balance of payments, trade, exchange rates and capital flows
The external sector is how India meets the rest of the world: what it exports and imports, how capital flows in and out, and what the rupee is worth. It began as a crisis story (the balance of payments crisis of 1991 triggered liberalisation) and is now a policy story about the rupee, the current account deficit and foreign capital.
What UPSC asks
- Prelims: which items fall in the current account and which in the capital account; FDI vs FPI; NEER and REER; devaluation vs depreciation; components of forex reserves; current and capital account convertibility; FEMA.
- Mains GS III: effects of liberalisation, managing a current account deficit, the rupee’s volatility, quality of capital inflows, and trade policy.
Key sub-topics
| Sub-topic | Core idea |
|---|---|
| Balance of payments | Current account + capital (financial) account + change in reserves |
| Exchange rates | Fixed, floating and managed float; India’s managed float since 1993 |
| Foreign capital | FDI (lasting interest) vs FPI (portfolio, 10% threshold) |
| Convertibility | Full on current account (1994); partial on capital account |
| Legal frame | FEMA, 1999 replaced FERA, 1973 |
| Trade policy | Foreign Trade Policy, trade remedies, rupee trade settlement |
Start with Balance of Payments and Exchange Rates, then revise with the quick revision sheet.
Balance of Payments and Exchange Rates
Balance of payments for UPSC — current and capital accounts, CAD, forex reserves, FDI vs FPI, convertibility, …
External Sector — Practice Questions
UPSC Prelims-pattern practice questions on the external sector with explanations — FEMA, forex reserves, the …
External Sector — Quick Revision
One-page UPSC revision of the external sector: BoP components, forex reserves, FDI vs FPI, convertibility, …