External Sector: FDI, FPI & BoP — Set 6

Correct Answer: B. B. Provide duty incentives to boost merchandise exports from India

The Merchandise Exports from India Scheme (MEIS), introduced in India's Foreign Trade Policy 2015-20, provided duty credit scrips to exporters as incentives for merchandise exports. However, WTO ruled that MEIS was an export subsidy inconsistent with WTO rules. India replaced MEIS with RoDTEP (Remission of Duties and Taxes on Exported Products) scheme from January 2021, which refunds taxes and duties embedded in export production costs — a WTO-compliant approach.

Correct Answer: B. B. A country formally adopting the USD as its legal tender instead of its own currency

Dollarization refers to the formal adoption of the US Dollar (or another foreign currency) as legal tender by another country, replacing or supplementing its own currency. Examples include Ecuador, El Salvador, and Panama. Some economies also experience 'informal dollarization' where USD is widely used for transactions even if not formally adopted. Dollarization eliminates currency risk and inflation risk but removes the ability to conduct independent monetary policy.

Correct Answer: B. B. Mix of USD, SDR, EUR, JPY, and other foreign currencies

India's external debt is denominated in multiple currencies — primarily US Dollar (dominant share), followed by SDRs (IMF loans), Euro, Japanese Yen, and others. External debt includes government external borrowings, NRI deposits (FCNR, NRE), ECBs, trade credits, and multilateral/bilateral loans. The foreign currency composition creates currency risk — if the Rupee depreciates, the Rupee-equivalent of external debt rises. India's total external debt was approximately $620-640 billion as of 2023-24.

Correct Answer: B. B. Trade deficit worsening after ASEAN-India FTA due to imports rising more than exports

India's goods trade deficit with ASEAN widened significantly after the ASEAN-India Free Trade Agreement (AIFTA) in 2010. Imports from ASEAN (especially electronics from Vietnam, Thailand, Malaysia) rose sharply while Indian exports grew more slowly, leading to criticism that the FTA benefited ASEAN more than India. This experience influenced India's decision to not join RCEP in 2019 and to negotiate future FTAs more carefully on goods tariff concessions.

Correct Answer: B. B. Setting prices for goods/services transacted between related entities in different countries to minimize tax

Transfer Pricing refers to the price set for transactions (goods, services, intellectual property, loans) between related entities of a multinational corporation (MNC) in different countries. MNCs can manipulate transfer prices to shift profits to low-tax jurisdictions and reduce global tax liability. Indian tax law (Section 92 of Income Tax Act) and the Income Tax Department's Transfer Pricing unit actively examine such transactions to prevent tax base erosion and prevent profit shifting out of India.

Correct Answer: B. B. Integration into GVCs enables India to boost exports of intermediate goods and become part of international manufacturing networks

Global Value Chains (GVCs) are international production networks where different stages of a product's manufacture (design, components, assembly, distribution) occur in different countries. GVC integration allows developing countries like India to specialize in specific segments, boosting exports of intermediate goods and services. However, India's GVC participation has been relatively low compared to East Asian economies. Improving manufacturing competitiveness, logistics, and trade facilitation is key to deeper GVC integration.

Correct Answer: B. B. Provide liquidity insurance — access to foreign currency in times of stress without depleting forex reserves

Currency Swap Agreements (bilateral) allow two central banks to exchange their currencies up to an agreed limit during times of financial stress or liquidity need, without requiring one to use forex reserves. India has swap agreements with SAARC countries, Japan, and others. These provide a safety net — if India faces a sudden shortage of a particular currency (e.g., USD), it can draw on the swap line. Swaps enhance financial stability and reduce vulnerability to external shocks.

Correct Answer: B. B. It sets the rules for international trade, including tariffs, non-tariff barriers, dispute settlement, and anti-dumping

The WTO (World Trade Organization) sets multilateral rules for international trade — tariff bindings, non-tariff barriers, anti-dumping measures, subsidies, intellectual property (TRIPS), and dispute settlement. India as a WTO member is bound by these rules. WTO cases have affected India's export incentive schemes (MEIS), pharmaceutical patent policies, and agricultural subsidies. India actively participates in WTO negotiations to protect its interests in agriculture, services (Mode 4 — movement of natural persons), and developing country flexibilities.

Correct Answer: B. B. Directorate General of Trade Remedies (DGTR) under Ministry of Commerce

In India, anti-dumping investigations are conducted and anti-dumping duties recommended by the Directorate General of Trade Remedies (DGTR), formerly Directorate General of Anti-Dumping and Allied Duties (DGAD), under the Ministry of Commerce and Industry. After DGTR recommends duties, the Ministry of Finance officially imposes them through a customs notification. India is one of the world's most active users of anti-dumping measures to protect domestic industries from unfair foreign competition.

Correct Answer: B. B. Incentivising domestic manufacturing to boost exports and reduce import dependence

The Production Linked Incentive (PLI) scheme, launched in 2020-21 for 14 key sectors (mobile phones, pharma, medical devices, food processing, textiles, auto, advanced chemistry cells, white goods, telecom, specialty steel, solar PV, IT hardware), provides financial incentives to manufacturers for incremental production above a base year. PLI aims to attract domestic and foreign investment, scale up manufacturing, boost exports, and reduce import dependence — thereby improving India's trade balance over time.