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Quick recap: External sector on one page
Both parts of External sector condensed for quick revision: the balance of payments and its accounts, the current account deficit and its financing, the 1991 crisis and convertibility, exchange rates and regimes, India's exchange rate history, NEER and REER, foreign exchange reserves, FDI, FPI, ECBs and NRI deposits, with a one-table overview and eight mixed questions.
நாடு வெளியுலகத்துடன் செய்யும் கொடுக்கல் வாங்கல்களின் நோட்டுதான் செலுத்துகைச் சமநிலை. முதல் பகுதி அந்த நோட்டின் கணக்குகள், பற்றாக்குறை, 1991 நெருக்கடி பற்றியது; இரண்டாம் பகுதி டாலர் விலை, இருப்பு, வெளிநாட்டு முதலீடு பற்றியது. இங்கே இரண்டும் ஒரே பக்கத்தில். (→ English: balance of payments · हिन्दी: भुगतान संतुलन)
ஒவ்வொரு கொடுக்கல் வாங்கலும் வரவு, செலவு இரண்டு பக்கமும் எழுதப்படுவதால் முழு நோட்டும் சமமாகும். நடப்புக் கணக்கில் பொருட்களும் புலனாகா இனங்களும் — சேவைகள், வட்டி-ஈவுத்தொகை, வளைகுடாவிலிருந்து வரும் பணம். பொருட்களில் பற்றாக்குறை, சேவைகளில் உபரி — இதுதான் நம் வழக்கமான படம். கடன், முதலீடு மூலதனப் பக்கம். எல்லாம் சேர்ந்து உபரி என்றால் இருப்பு கூடும், பற்றாக்குறை என்றால் குறையும். (→ English: current account, invisibles · हिन्दी: चालू खाता, अदृश्य मदें)
நடப்புக் கணக்குப் பற்றாக்குறை என்றால் நம் முதலீடு நம் சேமிப்பைவிட அதிகம், வேறுபாட்டை வெளிநாட்டுப் பணம் நிரப்புகிறது. அந்தப் பணம் நிலையானதா (தொழிற்சாலைகள்) அல்லது பறந்துவிடுவதா (பங்குகள், குறுகியகாலக் கடன்) என்பதே முக்கியம் — 2013உம் 1991உம் இதைத்தான் கற்றுத் தந்தன. 1991க்குப் பிறகு 1994இல் நடப்புக் கணக்கு மாற்றுத்தன்மை வந்தது; மூலதனக் கணக்கை மட்டும் மெதுவாகத் திறக்கிறார்கள். (→ English: current account deficit, current account convertibility · हिन्दी: चालू खाता घाटा, चालू खाता परिवर्तनीयता)
டாலரின் விலை — மாற்று விகிதம் — சந்தையைப் போல வாங்குபவர், விற்பவரைப் பொறுத்தது. டாலருக்கு அதிக ரூபாய் கொடுக்க வேண்டியிருந்தால் அது ரூபாயின் நாணய மதிப்புச் சரிவு. அரசு வேண்டுமென்றே குறைத்தால் அது மதிப்புக் குறைப்பு. இந்தியா இப்போது நிர்வகிக்கப்பட்ட மிதக்கும் மாற்று விகிதம் பின்பற்றுகிறது — விலை சந்தையுடையது, அளவுக்கு மீறிய அதிர்வு வந்தால்தான் ரிசர்வ் வங்கி தலையிடும். (→ English: exchange rate, managed float · हिन्दी: विनिमय दर, प्रबंधित अस्थिर विनिमय दर)
ஒரு டாலருடன் மட்டுமல்லாமல் பல நாணயங்களுடன் ரூபாயை ஒப்பிட்டு, விலைவாசி ஏற்றத்தையும் கணக்கில் எடுத்தால் கிடைப்பது உண்மை பயனுறு மாற்று விகிதம்; 100ஐ நன்கு தாண்டினால் நம் பொருட்கள் விலை கூடுகின்றன. அந்நியச் செலாவணி இருப்புப் பெட்டியில் நான்கு அறைகள்: வெளிநாட்டு நாணயச் சொத்துகள், தங்கம், சிறப்புப் பணம் பெறும் உரிமைகள், ஐஎம்எஃப்பில் பங்கு. (→ English: real effective exchange rate, foreign exchange reserves · हिन्दी: वास्तविक प्रभावी विनिमय दर, विदेशी मुद्रा भंडार)
வெளிநாட்டுப் பணத்தை நிலைத்தன்மை பார்த்து அணுகுகிறார்கள். அந்நிய நேரடி முதலீடு — வீடு கட்டிக் குடியிருப்பவர்; பட்டியலிடப்பட்ட நிறுவனத்தில் 10 சதவீதம் அல்லது அதிகம். அந்நியப் போர்ட்ஃபோலியோ முதலீடு — வாடகைக்கு இருப்பவர்; 10 சதவீதத்துக்குக் கீழ், வேகமாகப் போய்விடலாம். வெளிநாட்டு வணிகக் கடன், வெளிநாடுவாழ் இந்தியர் வைப்புகள் கடன் பக்கம்; ஓராண்டுக்குள் அடைக்க வேண்டிய கடன் அதிகமானால் ஆபத்து. (→ English: foreign direct investment, foreign portfolio investment, external commercial borrowing · हिन्दी: प्रत्यक्ष विदेशी निवेश, विदेशी पोर्टफोलियो निवेश, बाह्य वाणिज्यिक उधार)
| Item | What it is | Key fact |
|---|---|---|
| Current account | Goods, services, primary and secondary income | Remittances are secondary income |
| Capital / financial account | Flows that create claims or liabilities | FDI, FPI, loans, NRI deposits, reserves |
| Overall balance | Current + capital account + errors and omissions | Surplus adds to reserves |
| 1991 crisis | Reserves for only weeks of imports | Gold pledged; devaluation in July 1991 |
| Convertibility | Current account full; capital account partial | IMF Article VIII, 20 August 1994; Tarapore 1997, 2006 |
| Exchange rate regime | Managed float | LERMS March 1992; unified rate March 1993 |
| REER | NEER adjusted for relative inflation | Above 100 = real appreciation |
| Forex reserves | FCA, gold, SDRs, reserve tranche | Foreign currency assets are the largest part |
| FDI vs FPI | Lasting interest vs portfolio returns | 10% of a listed company's equity is the line |
Exam traps
- The balance of payments as a whole always balances; deficits and surpluses refer to its parts.
- Remittances are current account (secondary income); NRI deposits are capital account.
- Interest and dividends paid abroad are current account (primary income), not capital account.
- A trade deficit can coexist with an overall balance of payments surplus and rising reserves.
- Current account convertibility: 20 August 1994; full capital account convertibility has not been adopted.
- A falling rupee under a managed float is a depreciation, not a devaluation; more rupees per dollar means the rupee has weakened.
- REER above 100 = real appreciation (loss of competitiveness), not undervaluation.
- Any foreign investment in an unlisted company is FDI; the automatic route needs no prior approval; the FIPB was abolished in 2017.
Recap
- Balance of payments: all resident–non-resident transactions, double entry, compiled quarterly by the RBI broadly on BPM6.
- Current account = goods + invisibles (services, primary income, secondary income); India: goods deficit, services and remittance surplus.
- Overall balance = current + capital account + errors and omissions; it moves the reserves.
- A current account deficit is safe or risky depending on its financing; 2013 and 1991 are the warning cases.
- 1991: reserves for weeks of imports, gold pledged, IMF help, devaluation in July; Rangarajan committee 1993.
- Current account convertibility 1994; capital account opened in stages (Tarapore 1997, 2006; LRS USD 250,000).
- Managed float since March 1993 after the 1975 basket peg and LERMS (1992); NEER and REER track the rupee against many currencies.
- Reserves: FCA, gold, SDRs, reserve tranche; FDI (10%+ listed, any unlisted) is preferred to FPI, ECBs and short-term debt.
Practice questions
Q1. In India's balance of payments, money sent home by Indians working abroad is recorded under:
- Primary income in the current account
- Secondary income in the current account
- Other investment in the financial account
- Reserve assets
Show answer
Answer: B. Secondary income in the current account
Remittances are transfers for which nothing is given in return, so they are secondary income in the current account. Primary income is interest, dividends and short-term wages; other investment and reserve assets are financial account items that create claims or liabilities, so the other options are wrong.
Q2. Consider the following statements:
1. A country can have a trade deficit and an overall balance of payments surplus in the same year.
2. Current account convertibility of the rupee was introduced along with LERMS in March 1992.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: A. 1 only
Statement 1 is correct: large capital inflows can more than cover a current account gap. Statement 2 is wrong: LERMS (March 1992) was a dual exchange rate system; full current account convertibility came with acceptance of IMF Article VIII on 20 August 1994. So '2 only', 'Both' and 'Neither' are wrong.
Q3. Consider the following pairs (committee chair : subject):
1. C. Rangarajan : Balance of payments (1993)
2. S.S. Tarapore : Capital account convertibility
3. Arvind Mayaram : Distinguishing FDI from FPI
How many of the pairs given above are correctly matched?
- Only one
- Only two
- All three
- None
Show answer
Answer: C. All three
All three pairs are correct: Rangarajan chaired the High Level Committee on Balance of Payments (1993), Tarapore chaired both committees on capital account convertibility (1997, 2006), and the Mayaram committee (2014) recommended the 10 per cent line between FDI and FPI. So 'only one', 'only two' and 'none' are wrong.
Q4. If the rupee's nominal effective exchange rate stays unchanged while inflation in India is higher than in its trading partners, the real effective exchange rate will:
- fall, showing a gain in competitiveness
- rise, showing a loss of price competitiveness
- stay unchanged, because only nominal rates matter
- become equal to the NEER
Show answer
Answer: B. rise, showing a loss of price competitiveness
The REER adjusts the NEER for relative prices; higher Indian inflation with a steady nominal rate makes Indian goods dearer abroad, so the REER rises, a real appreciation. It does not fall, it is not unaffected (that would ignore inflation, which is exactly what the REER adds), and there is no reason for it to equal the NEER, so the other options are wrong.
Q5. Which one of the following is NOT a part of India's foreign exchange reserves?
- Reserve tranche position in the IMF
- Special Drawing Rights
- Gold held by the RBI
- External commercial borrowings raised by Indian companies
Show answer
Answer: D. External commercial borrowings raised by Indian companies
ECBs are debts of Indian companies to foreign lenders, recorded as capital inflows and external debt, not reserve assets of the RBI. The reserve tranche position, SDRs and gold are three of the four components of the reserves (with foreign currency assets), so those options are wrong answers.
Q6. India's present exchange rate regime is best described as:
- a fixed peg to the US dollar
- a peg to a basket of currencies with the rate announced by the RBI
- a managed float
- a free float with no central bank intervention
Show answer
Answer: C. a managed float
Since March 1993 the rupee's rate has been market-determined, with the RBI intervening only to curb excessive volatility: a managed float. India has no dollar peg; the basket peg was the 1975–1992 arrangement; and the RBI does intervene, so a pure free float is also wrong.
Q7. Consider the following statements:
1. Under Press Note 3 (2020), investment from an entity of a country that shares a land border with India can come only through the government route.
2. Proposals under the government route are still approved by the Foreign Investment Promotion Board.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Show answer
Answer: A. 1 only
Statement 1 is correct. Statement 2 is wrong: the FIPB was abolished in 2017, and government-route proposals are now approved by the ministry or department concerned. So '2 only', 'Both' and 'Neither' are wrong.
Q8. Which one of the following forms of foreign capital is generally regarded as the most stable source of financing for a current account deficit?
- Portfolio investment in listed shares
- Short-term trade credit
- Foreign direct investment
- Portfolio investment in government bonds
Show answer
Answer: C. Foreign direct investment
FDI reflects a lasting interest in a business, such as a factory, and is hard to withdraw quickly. Portfolio investment in shares or bonds can be sold and taken out at short notice, and short-term trade credit must be repaid or rolled over within a year, so those options are less stable and wrong.
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- Foreign Exchange Management Act, 1999; Foreign Exchange Management (Non-debt Instruments) Rules, 2019 — https://www.indiacode.nic.in
- Reserve Bank of India, balance of payments releases, Handbook of Statistics on Indian Economy (exchange rates, NEER and REER, reserves) — https://www.rbi.org.in
- Reserve Bank of India, Annual Reports; reports of the High Level Committee on Balance of Payments (1993) and the Committees on Capital Account Convertibility (1997, 2006); master directions on the Liberalised Remittance Scheme, ECBs and non-resident deposits — https://www.rbi.org.in
- Press Information Bureau, DPIIT releases on the Consolidated FDI Policy, abolition of the FIPB (2017) and Press Note 3 (2020) — https://pib.gov.in