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EXTERNAL SECTOR AND CURRENCY EXCHANGE RATES

Contents 1. Importance of External Sector – Why Imports and Exports Matter 2. Types of Economies- Closed/Inward and Open/Outward 3. Balance of Payments 3.1. Components of Balance of Payments 3.1.1. Balance of Current Account 3.1.2. Balance of Capital Account 3.2. Balance of Payments Disequilibrium a. Causes of Adverse BoP b. Measures to correct disequilibrium in the BoP ♤ Policies focusing on FDI increase.3.3. Indian Balance of Payments Crisis (1991)4. Opening of Indian Economy- Neo Liberal Economic Reforms 1991 ♤ The objective was to abandon the legacy of License Raj, introduce Indian economy to markets and private sector, reduce restrictions and introduce Foreign Direct Investment.o Reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment.4.2. Criticism of Neo-Liberal Economic Reforms / Is the Neo- Liberal Policy of 1991 Sustainable?5. Currency Exchange Rate 5.1. Real Exchange Rate 6. Exchange Rate System – Fixed and Flexible Exchange Rate 7. Currency Exchange Rates – Concepts a. Depreciation, Appreciation and Devaluation of Rupee ♤ Devaluation:fixed exchange rate system.b. NEER and REER c. Role of RBI in maintaining stability of rupee 8. Indian External Debt a. External Commercial Borrowing b. Sovereign Bonds c. India’s External Debt Scenario d. Impact of BREXIT on India’s External Debt e. India’s foreign exchange reserves and comparison with other countries 9. Miscellaneous 9.1. New Model Indian Bilateral Investment Treaty ♤ Rationale for a BIT?Law Commission Recommendations on BIT:9.2. Indian Foreign Trade Policy (FTP) 2015 -2020 Primary objective was to boost Indian exports alongside strengthening schemes like Make in India, Digital India, thereby focusing on manufacturing in India along with Ease of Doing business.9.3. Relevance of WTO in Present Day Order ♤ Agreements like TPP focus on reducing tariffs on industrial goods to zero, and liberalising financial services and investments; ♤ Alongside these regional mega-agreements, there are plurilateral agreements led by industrialized countries.Impact of these agreements on developing countries ♤ These mega-agreements constitute a thinly veiled attack on China, India and South Africa, all countries that, in the WTO framework, oppose the liberalisation of trade in industrial goods, services, government procurement and investments, and are stubbornly insisting on more just global rules in agriculture.WTO is still important Trade Facilitation Agreement Trade Facilitation in Service (TFS) ♤ Aims of TFS 9.4. Important International Trade Agreements and Relevant Regional Global Significant for India Act East Policy.9.5. East Asian Crisis 1997 ♤ The currency markets first failed in Thailand as the result of the government's decision to no longer peg the local currency to the U.S. dollar (USD).9.6. Recession of 2008 and India 9.7. Various Duties 9.8. Masala Bonds ♤ These are rupee-denominated bonds issued to offshore investors settled in dollars and, therefore, the currency risk lies with investor and not the issuer, unlike external commercial borrowings – where Indian companies raise money in foreign currency loans. ♤ Examples: ♤ Benefits of Masala Bonds:9.9. Trade Deficit in India 9.10. Foreign Direct Investment, FII, FPI 9.10.1. Foreign Direct Investment 9.10.2. Foreign Portfolio Investment 9.10.3. Foreign Institutional Investors 9.11. Gaps Between MoUs and FDI 9.12. Reforms in FDI directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. ♤ Foreign Investment in Defence Sector up to 100%:o Impact on Indian economy and its defence sector ♤ Civil Aviation Sector ♤ Other sectors:Current Affairs’ TV Channels, Down-linking of TV Channels 9.14. FDI in Retail – Case in point 10. Previous Years GS Mains Questions 1. Examine the causes of rupee depreciation and its impact on the Indian economy. Also discuss the steps taken by the Government and RBI to stem its slide.Answer:Impact of rupee depreciation:Steps taken up by RBI and Government:2. What are the benefits of Bilateral Investment Promotion and Protection Agreements (BIPA) in a globalized economy and comment on the present status in India with respect to BIPA.Answer: ♤ Related Issues 3. Even though India’s export sector has had bouts of high growth at different stretches of time it is yet to take off in terms of its share in the world exports. Highlight the major issues associated with India’s export sector along with measures that need to be taken to resolve them.Answer:4. What are Offshore Rupee Bonds? Giving examples, discuss their benefits with regards to mobilisation of resources for domestic sector. Also, comment on their role in internationalisation of Indian Rupee.Answer:5. India’s export performance in the recent past has been poor in relation to the needs of the economy and in comparison with some other developing countries. Examine the reasons behind the decline in India’s exports. Highlight the measures proposed in Foreign Trade Policy 2015 to overcome this challenge.Answer:6. Tax treaties intended to avoid double taxation have in many cases become instruments for double non-taxation. Elaborate. List the major amendments in the India-Mauritius DTAA and the advantages that are expected to accrue due to it.Answer:Benefits of the amendments:11. Previous Years UPSC Mains Questions Contents 1. Introduction 2. Development Planning 2.1. Nature and Objectives of Planning 2.2. The Nehru-Mahalanobis Development Strategy 2.3. Agrarian Reconstruction 2.4. Role of the State 2.5. Analysis 3. Economic Crisis – 1960s 3.1. Shifts from Early Development Strategy 4. Economic Crisis – Early 1990s 5. Need for Economic Reforms 5.1. Weaknesses of the Pre-1991 Policies 5.2. Major Foreign Exchange Crisis 5.3. Conditionalities Imposed by IMF and World Bank 5.4. Fall of USSR (Union of Soviet Socialist Republics)6. Economic Reforms a) Macroeconomic stabilization measures b) Structural Reform Measures 7. Liberalisation, Privatisation and Globalisation 7.1. Policy of Liberalisation of Indian Economy 7.1.1. Meaning of Liberalisation 7.1.2. Features of Liberalisation Policy 7.1.3. Significance of Liberalisation Policy 7.2. The Policy of Privatisation 7.2.1. Meaning and Rationale of Privatisation 7.2.2. Arguments Against Privatisation 7.2.3. Features of the Policy of Privatisation in India 7.3. Policy of Globalisation 7.3.1. Meaning of Globalisation 7.3.2. Effects of Globalisation 7.3.3. Globalisation of Indian Economy 7.3.4. Features of the Globalisation Policy 7.3.5. Effects of Globalisation on Indian Industry 8. Effect of Reforms on Indian Economy 9. Assessment of Reforms 10. Previous Years GS Mains Questions 1. "Public debates in India often reflect either an uncritical faith in market (market mania) or a blind opposition to it (market phobia). However, there is a deep complementarity between market efficiency and state action.” Comment on the Answer:2. How has the process of liberalization, which has otherwise led to high economic growth, affected the employment rate and the nature of employment in India?Answer:3. Dismantling of administered price mechanism for fuels is being deemed as a significant piece of economic reform. Analyse. Also, discuss how the recently introduced dynamic fuel pricing can prove to be beneficial for both the OMCs as well as consumers.Answer:Its benefits for consumers 4. While India has taken a number of steps in order to substantially improve its ranking in the World Bank's 'Ease of Doing Business' Index, it needs to take further action in this regard. Elaborate. Also analyse the utility of these rankings vis-a-vis India's objective of facilitating a sound entrepreneurial environment.Answer:Steps taken by India to improve its EODB Index ranking on the 10 parameters:Utility of EODB ranking and entrepreneurial environment in India 11. Previous Years UPSC Mains Questions

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