External Sector — Quick Revision

A last-week revision sheet for the external sector. Learn the classification rules first; most Prelims questions are about where a transaction goes.

The Balance of Payments at a Glance

Account	Sub-head	Examples
Current	Merchandise	Exports and imports of goods
Current	Services	Software, travel, transport, insurance
Current	Primary income	Interest, dividends, profits, compensation of employees
Current	Secondary income	Private remittances, grants, gifts
Capital / financial	Foreign investment	FDI, FPI
Capital / financial	Loans	External assistance, ECBs, short-term trade credit
Capital / financial	Banking capital	NRI deposits, banks’ foreign assets and liabilities
—	Errors and omissions	Statistical discrepancy
—	Overall balance	Equals the change in forex reserves

Rule of thumb: a transaction that creates a future claim goes to the capital account; the income on that claim goes to the current account.

Year	Event
1973	Foreign Exchange Regulation Act (FERA)
July 1991	Two-step devaluation of the rupee during the BoP crisis
March 1992	LERMS — dual exchange rate
March 1993	Unified, market-determined exchange rate
August 1994	Current account convertibility (IMF Article VIII)
1997	First Tarapore Committee on capital account convertibility
1999	FEMA enacted (replaced FERA)
2004	Liberalised Remittance Scheme; Market Stabilisation Scheme
2006	Second Tarapore Committee on fuller capital account convertibility
2014	Mayaram Committee: 10% line between FDI and FPI
2017	FIPB abolished
April 2020	Press Note 3: approval route for FDI from land-border countries
July 2022	RBI framework for settling trade in rupees
April 2023	Foreign Trade Policy 2023 comes into force

Pair	Difference
FDI vs FPI	Lasting interest (≥10%) vs portfolio (<10%)
Devaluation vs depreciation	Official decision under a peg vs market-driven fall
NEER vs REER	Nominal basket rate vs inflation-adjusted basket rate
Trade deficit vs CAD	Goods only vs goods + invisibles
FERA vs FEMA	Criminal, conserve forex vs civil, facilitate forex
Anti-dumping vs countervailing duty	Against below-normal-value exports vs against foreign subsidies

Measure	Used against	Process in India
Anti-dumping duty	Imports priced below normal value that injure domestic industry	DGTR investigates and recommends; Ministry of Finance imposes
Countervailing duty	Imports benefiting from subsidies in the exporting country	Same route
Safeguard duty	A sudden surge of imports, regardless of fairness	Same route; temporary

The Directorate General of Trade Remedies (DGTR), under the Ministry of Commerce and Industry, was set up in 2018 as a single body for all three.

High-yield facts

Remittances = secondary income (current account); NRI deposits = banking capital (capital account).
Forex reserves: foreign currency assets, gold, SDRs, reserve tranche position.
A rise in REER = real appreciation = weaker export competitiveness.
Impossible trinity: fixed exchange rate + free capital flows + independent monetary policy — pick two.
India’s rupee is fully convertible on the current account, partially on the capital account.

Traps

“BoP always balances” is an accounting statement; a BoP crisis is about financing the overall deficit.
Interest paid on a foreign loan is current account, not capital account.
Since 1993 a falling rupee is depreciation, not devaluation.