External Sector: FDI, FPI & BoP — Set 2
Economy Advanced · बाह्य क्षेत्र: FDI, FPI और BoP · Questions 11–20 of 80
India's largest source of Current Account earnings (surplus component) is:
Correct Answer: B. B. Software/IT services exports
India's Services Trade, particularly software and IT-enabled services exports (from companies like TCS, Infosys, Wipro), is the largest surplus component of India's Current Account. India consistently runs a services trade surplus that partially offsets the merchandise trade deficit. In recent years, software services exports exceeded $200 billion annually, making India one of the world's leading IT services exporters.
India is the world's largest recipient of:
Correct Answer: C. C. Remittances from overseas workers
India has been the world's largest recipient of remittances in recent years, receiving over $100 billion annually from the Indian diaspora working abroad (especially in the Gulf countries, USA, UK, and Canada). Remittances are a stable inflow that supports India's Current Account and helps offset the merchandise trade deficit. They are classified under Secondary Income in the Current Account of BoP.
The Capital Account in the Balance of Payments records:
Correct Answer: B. B. Capital transfers (debt forgiveness, migrants' transfers) and acquisition/disposal of non-produced, non-financial assets
The Capital Account (in the IMF's BPM6 framework, which India follows) records capital transfers such as debt forgiveness, migrants' transfers of assets when they move, and transactions involving non-produced, non-financial assets (like patents, copyrights). This is a relatively small account for most countries including India. The large FDI and FPI flows are captured in the Financial Account, not the Capital Account.
The Financial Account in the Balance of Payments records:
Correct Answer: B. B. FDI, FPI, other investments, and changes in reserve assets
The Financial Account records cross-border flows of financial capital: (1) FDI (equity + retained earnings + intercompany loans); (2) FPI/Portfolio Investment (equity and debt); (3) Other Investment (bank loans, trade credit, currency); (4) Reserve Assets (changes in RBI's foreign exchange reserves). A Financial Account surplus helps finance Current Account deficit. For India, FDI and FPI are major Financial Account components.
Foreign Exchange Reserves of India are managed by:
Correct Answer: C. C. Reserve Bank of India (RBI)
India's Foreign Exchange Reserves are managed by the Reserve Bank of India (RBI). The reserves comprise foreign currency assets (held in US Treasury bills, bonds of other sovereign governments), gold, SDRs (Special Drawing Rights from IMF), and India's reserve tranche position with the IMF. RBI intervenes in the forex market using these reserves to manage exchange rate volatility. As of 2024, India's forex reserves are around $600-650 billion.
India's Foreign Exchange Management Act (FEMA) replaced the earlier:
Correct Answer: B. B. Foreign Exchange Regulation Act (FERA)
FEMA (Foreign Exchange Management Act) 1999 replaced FERA (Foreign Exchange Regulation Act) 1973. FERA was a strict, criminal law with draconian provisions for forex violations. FEMA shifted the approach to regulation and management of forex transactions, treating most violations as civil offences rather than criminal offences. FEMA is administered by the Enforcement Directorate (ED) under the Ministry of Finance and RBI.
Under FEMA, which transactions are classified as 'Current Account Transactions'?
Correct Answer: B. B. Payments for trade in goods/services, travel, remittances — generally freely permitted
Under FEMA 1999, Current Account Transactions — payments for merchandise imports, services (travel, education, medical treatment abroad), remittances to family members, etc. — are generally freely permitted for residents without RBI approval (subject to limits). Capital Account Transactions (FDI, FPI, external borrowings) are regulated and require approval or compliance with prescribed limits. This distinction mirrors IMF's BoP classification.
India's merchandise trade deficit is primarily driven by imports of:
Correct Answer: B. B. Crude oil and petroleum products, plus gold
India's merchandise trade deficit is primarily driven by large imports of crude oil and petroleum products (India imports about 85% of its crude oil requirements) and gold (second largest import category). These two commodities together account for a significant share of India's import bill. Fluctuations in global crude oil prices and domestic gold demand therefore have a major impact on India's Current Account Deficit.
The Exchange Rate of the Indian Rupee is currently managed under:
Correct Answer: B. B. Managed floating exchange rate system
India operates a managed floating exchange rate system, where the exchange rate is primarily determined by demand and supply in the foreign exchange market, but RBI intervenes to smoothen excessive volatility without targeting a specific exchange rate level. This is also called a 'dirty float'. India moved away from a fixed exchange rate after the 1991 balance of payments crisis, first to a dual exchange rate, then to a unified market-determined rate.
Purchasing Power Parity (PPP) theory suggests that:
Correct Answer: B. B. Exchange rates should adjust so that identical goods cost the same in different countries
Purchasing Power Parity (PPP) theory, developed by Gustav Cassel, states that in the long run, exchange rates between currencies adjust so that the same basket of goods costs the same amount when expressed in a common currency. The Big Mac Index (The Economist) is a popular application of PPP. In PPP terms, India's GDP is significantly larger than in market exchange rate terms because prices for non-traded goods are lower in India.