Part 4 — External Sector (Forex, Debt, FTAs) | International Institutions

Chapter 1: External Sector (Continued)

Chapter	Current Affairs	Static Topic
External Sector	Central Banks diversifying forex away from Dollar	Forex Reserves: Components, Adequacy — Import Cover, Greenspan-Guidotti, Broad Money Ratio
	RBI's Gold reserves cross $100 bn	India's ranking in Forex and Gold reserves
	Trends in External Debt of India	External Debt: Components, Denomination, Debt Service Ratio, Valuation Gain/Loss
	India signs FTA with EU, UK, Oman, NZ	Stages of Trade Integration; FTA vs CEPA/CECA; Early Harvest; Mutual Recognition
International Institutions	WTO Developments (E-commerce, Fisheries, MPIA)	WTO: Structure, Decision Making, S&DT, Agreements

1.1 Forex Reserves — Detailed

Component	Value (Feb 2026)	Share
Foreign Currency Assets (FCA)	$573 bn	~79%
Gold	$128 bn	~18%
SDR	$19 bn	~2.6%
Reserve Tranche Position (RTP)	$5 bn	~0.7%
Total	$725 bn	100%

Global Ranking: China ( $3.6T) > Japan ($ 1.4T) > Switzerland ( $1T) > Russia ($ 826B) > **India ( $725B)**. US keeps ~$ 250 bn.

Gold Reserves Ranking: US (8,133 tonnes) > Germany (3,352) > Italy (2,452) > France (2,437) > Russia (2,333) > China (2,264) > Japan (846) > India (~880 tonnes). India = 8th globally by gold reserves.

Why Countries Hold Forex Reserves (Static):

Defend exchange rate during crisis (intervene in forex market)
Finance imports during external shocks
Service external debt obligations
Maintain confidence of foreign investors
Buffer against capital flight / sudden FPI outflows
Enable sovereign credit rating stability

Adequacy Metrics:

Import Cover: 11-12 months (months of imports that can be financed using forex reserves)
Greenspan-Guidotti Rule: Short-term external debt should be ≤ forex reserves (India comfortably meets this)
Broad Money to Forex Ratio: Higher ratio indicates vulnerability to capital flight

Current Affairs:

RBI's gold reserves crossed $100 bn milestone — central banks globally diversifying away from dollar.
Gold price spike triggered massive investment — gold import bill spiked to $14.72 billion in October.
RBI sold net ~$50 billion in forex to stabilise rupee.
Forex reserves fell from $725 bn to$ 693 bn during period of rupee pressure.

SDR (Special Drawing Rights):

International reserve asset created by IMF — NOT a currency.
Value based on basket of 5 currencies: USD (43%) > Euro (29%) > Chinese RMB (12%) > Yen (7.5%) > Pound (7.4%)
Only govts, central banks, and prescribed official entities can hold SDRs. Not individuals or private entities.

1.2 External Debt of India (Sept 2025)

Metric	Value
Total External Debt	$746 bn
Debt-to-GDP	19.2%
Non-govt debt	78%
Govt debt	22%
Long-term	80%
Short-term	20%

By Borrower: Non-financial corporations (36%) > Deposit-taking corps (28%) > General govt (23%) > Other financial corps (8%)

By Instrument: Loans (34%) > Currency & Deposits (22%) > Trade Credit (18%) > Debt Securities (17%)

By Currency: USD (54%) > INR (31%) > Yen (6%) > SDR (5%) > Euro (3%)

Valuation Effect: When the dollar weakens against other currencies, India's non-dollar denominated debt appears larger when converted to USD → valuation loss. Reverse when dollar strengthens.

Debt Service Ratio (Static):


What	= (Principal repayments + Interest payments) / Export earnings × 100
Meaning	Measures what proportion of export income goes to servicing external debt.
India’s DSR	~5-6% — comfortable level. Below 20% is generally considered sustainable.
Significance	High DSR = country earns less from exports than it pays for debt → vulnerable to default.
Related	Interest Service Ratio = Interest payments / Export earnings. Narrower measure.

1.3 Government Debt (Domestic)

Type	Details
Public Debt	Against Consolidated Fund of India. Internal (marketable + non-marketable) + External.
Other Liabilities	Against Public Account of India.
Extra Budgetary Borrowings	By PSUs/SPVs on behalf of govt — NOT shown in fiscal deficit. Now disclosed in Statement 27.

Structure: Internal (95%) >> External. Long-term >> Short-term. Fixed rate >> Variable rate. FRBM target: Debt-to-GDP = 60% (40% Centre + 20% States). Current: Centre: 56%; States: 29%. Centre projects 50±1% by March 2031.

1.4 NRI Accounts

Account	NRE	NRO	FCNR(B)
Purpose	Foreign earnings parked in India	India-earned income (rent, pension)	Foreign earnings in foreign currency
Currency	INR	INR	Foreign currency
Repatriability	Fully repatriable	Restricted	Fully repatriable
Interest	Tax-free in India	Taxable in India	Tax-free in India

Current: Record surge in NRI deposits into India — driven by rupee depreciation (higher returns on conversion) and attractive interest rates.

Cross-border Interbank Accounts:

Nostro ("our account with you") — Indian bank's account in foreign bank (in foreign currency)
Vostro ("your account with us") — Foreign bank's account in Indian bank (usually INR)
Special Rupee Vostro Accounts — for INR-based trade settlements (key to rupee internationalisation)

1.5 Steps to Promote Exports

Scheme	Detail
Foreign Trade Policy 2023	Goal: Exports to $2 trillion by 2030. 4 pillars: Incentive to Remission, Export promotion through collaboration, Ease of doing business, Emerging areas.
RoDTEP	Refunds embedded unreimbursed taxes (electricity duties, mandi tax, fuel). Transferable electronic scrip on ICEGATE. WTO-compliant. Administered by DGFT.
Advance Authorisation	Duty-free import of inputs for export production. Upfront exemption from BCD, IGST.
AEO	Trusted trader status — quicker customs clearance. Under WCO SAFE Framework / CBIC in India.
EPCG	Duty-free import of capital goods for export production.
Exports Promotion Mission	Budget 2025-26. Niryat Protsahan (finance) + Niryat Disha (market access, branding).

Remittances:

India = world's highest recipient ($130 bn).
Top sources: US > UAE > UK > Singapore > Saudi.
Top outward remittance countries: US > Saudi.

1.6 Crude Oil & Energy


India's oil import dependence	>85% of needs. Cost: $137 bn (FY25).
Every $1 drop in oil price	Improves CAD by $1.6 billion
Russia's share in imports	<2% (2021-22) → 35.8% (2024-25)
West Asia share	Now under 45% (diversification strategy)
Special Petroleum Reserve	India has stocks for 50 days (25 days crude + 25 days petrol/diesel). Two underground LPG caverns (Mangaluru, Visakhapatnam).
LPG imports	60% of needs imported. 90% through Strait of Hormuz. Total LPG consumption: ~31 MT.
Ethanol blending	Rose from 1.5% (2014) to 20% (2025). India planning E27 by 2030.

Chapter 2: International Institutions

2.1 WTO


Established	1995 (replaced GATT 1947). HQ: Geneva, Switzerland.
Structure	Ministerial Conference (highest, meets every 2 years) → General Council (day-to-day) → 3 Councils (Goods, Services, IPR) + DSB + TPRB
Principles	MFN: Any advantage to one member = to all (exception: FTAs). National Treatment: Imported = domestic goods. S&DT: Flexibilities for developing countries.

Key Agreements:

Tariff: GATT (goods), GATS (services — Modes 1-4)
Non-tariff: SPS (food quality), TBT (non-food), AoA (agriculture — Green/Blue/Amber box + Peace Clause), SCM (subsidies)
IPR: TRIPS | Investment: TRIMS

GATS — 4 Modes of Service Supply (Static):

Mode	Name	Example
Mode 1	Cross-border supply	Indian IT firm provides software services to US client remotely
Mode 2	Consumption abroad	Foreign patient comes to India for medical tourism
Mode 3	Commercial presence	Foreign bank opens branch in India
Mode 4	Movement of natural persons	Indian IT professional goes to US on work visa

India pushes for Mode 1 and Mode 4 liberalisation (IT services, skilled workers).
Developed countries push for Mode 3 (investment access).

Agreement on Agriculture (AoA) — Subsidy Boxes (Static):

Box	Allowed?	Examples
Green Box	✅ Permitted (no/minimal trade distortion)	Research, pest control, infrastructure, environmental programmes, decoupled income support
Blue Box	✅ Permitted (production-limiting)	Direct payments tied to acreage/head of livestock (used by EU)
Amber Box	⚠️ Capped (trade-distorting)	MSP, input subsidies, price support. Subject to de minimis limit (10% of value of production for developing countries). India’s concern: MSP+procurement may exceed limit.
Red Box	❌ Prohibited	Export subsidies (being phased out under Nairobi 2015 decision)

Peace Clause (Bali 2013): Developing countries that breach Amber Box limits for public stockholding for food security purposes shall not be challenged at WTO until a permanent solution is found. India’s key achievement.
India’s position: MSP + NFSA procurement is for food security, not trade distortion. Demands permanent solution.

WTO Decision Making (Static):


Primary method	Consensus — no member formally objects. All 166 members have equal voice.
Voting	If consensus fails: one country = one vote. Decisions by majority. Waiver of obligations: 3/4th majority. Amendments: 2/3rd majority (some require unanimity).
Key difference from IMF/WB	IMF/WB use weighted voting (based on quotas/shares). WTO uses one country, one vote.

Special & Differential Treatment (S&DT) — Static:

WTO provisions giving developing and LDC members special rights:
- Longer time periods to implement commitments
- Higher subsidy thresholds (de minimis 10% vs 5% for developed)
- Preferential market access (GSP, duty-free for LDCs)
- Technical assistance provisions
- Flexibility in safeguard measures
India’s stance: Opposes graduation from developing status. Self-declaration principle must be preserved.

Multilateral vs Plurilateral Agreements (Static):

	Multilateral	Plurilateral
Binding on	ALL WTO members	Only signatory members
Adoption	Requires consensus of all members	Voluntary — open to willing members
Examples	GATT, GATS, TRIPS, AoA, SPS, TBT	Govt Procurement Agreement (GPA), ITA (Information Technology Agreement), Investment Facilitation
India’s view	Supports multilateral approach	Cautious on plurilaterals — risks marginalising developing countries from rule-making

Current Developments:

E-Commerce Moratorium — customs duties on electronic transmissions. India opposes permanent moratorium as it limits policy space.
Fisheries Subsidies Agreement — WTO members agreed to prohibit subsidies contributing to IUU fishing and overfished stocks.
Dispute Settlement Mechanism — Appellate Body paralysed since 2019. MPIA (Multi-Party Interim Appeal Arbitration Arrangement) is interim solution by 55+ members.
Investment Facilitation for Development — plurilateral agreement to improve investment climate.

2.2 World Bank


Type	Multilateral Development Bank
HQ	Washington, US. Est. 1944 (Bretton Woods).
WB	= IBRD + IDA
WB Group	IBRD + IDA + IFC + MIGA + ICSID (5 institutions, specialised UN agency)
Reports	World Development Report, Remittance & Migration Report, Global Economic Prospects
Income Classification	Low (≤ $1,135), Lower-middle ($ 1,136- $4,495), Upper-middle ($ 4,496- $13,935), High (>$ 13,935). India = Lower-middle income.

2.3 IMF


Purpose	Ensures international monetary stability. Specialised UN agency.
HQ	Washington, US. Est. 1944 (Bretton Woods). 191 members.
Functions	Surveillance, Lending, Capacity Development
Lending	SBA, EFF, RFI, RCF, PRGT
Quota System	Determines voting power, borrowing limits, SDR allocation
SDR Basket	USD (43%) > Euro (29%) > RMB (12%) > Yen (7.5%) > Pound (7.4%)
Reports	World Economic Outlook (WEO), Global Financial Stability Report

2.4 Trade Agreements — India's FTA Architecture

Stages of Integration:

PTA → FTA → CEPA/CECA → Customs Union → Common Market → Economic Union

Type	Coverage
PTA	Tariff reduction on select items
FTA	Zero/near-zero tariffs on substantially all goods
CEPA/CECA	FTA + services, investment, IPR, competition policy
Customs Union	Common external tariff
Common Market	Free movement of goods, services, labour, capital
Economic Union	Common economic policies, single currency

India's 8 deals since 2021: Mauritius CECPA → UAE CEPA → Australia ECTA → EFTA TEPA → UK CETA → Oman CEPA → NZ FTA → EU FTA (2026)

Key Concepts:

Early Harvest Scheme — Immediate tariff cuts on select items while full FTA is negotiated.
Mutual Recognition Agreements — Countries recognise each other's standards/certifications.
GSP — Developed countries give non-reciprocal preferential treatment to developing countries.
Special 301 Report — US annual report on IP protection. India on Priority Watch List.
Pax Silica — US-led initiative for secure semiconductor supply chain. 12 members incl. India.

FTA vs CEPA/CECA (Static):

	FTA	CEPA/CECA
Coverage	Primarily goods — tariff reduction/elimination	Goods + services, investment, IPR, competition, govt procurement
Depth	Narrower	Broader and deeper
Services	Usually excluded or limited	Included with specific commitments
Investment	Not covered	Investment protection and promotion chapters
Example	India-NZ FTA, India-Australia ECTA	India-UAE CEPA, India-Japan CEPA
Key	CEPA/CECA = “FTA++” — covers “behind the border” issues beyond tariffs

India’s Membership in Regional Trading Agreements (Static):

Agreement	Detail
SAFTA	South Asian Free Trade Area. SAARC members. India, Pak, BD, SL, Nepal, Bhutan, Maldives, Afghanistan. Operational since 2006.
APTA (Bangkok Agreement)	Asia-Pacific Trade Agreement. India, China, South Korea, Bangladesh, Laos, Sri Lanka, Mongolia. Preferential tariff arrangement.
BIMSTEC FTA	Bay of Bengal Initiative. 7 members: India, BD, Myanmar, SL, Thailand, Nepal, Bhutan. FTA negotiations ongoing.
India-ASEAN FTA	In goods since 2010. Services & investment since 2015. ASEAN = India’s 4th largest trading partner.
RCEP	India walked out in 2019. Concerns: Chinese goods flooding, trade deficit with China, inadequate protection for dairy/agriculture. 15 members without India.
India-Mercosur PTA	Preferential agreement with South American bloc (Brazil, Argentina, Uruguay, Paraguay).
India-EFTA TEPA	With Switzerland, Norway, Iceland, Liechtenstein. Focus: investment commitment of $100 bn from EFTA in India.

2.5 Other Key Bodies

Institution	Key Detail
BIS	Bank for International Settlements. Basel, Switzerland. Est. 1930. 63 central bank members. Issues BASEL norms.
IEA	International Energy Agency. Proposed largest-ever release of oil reserves amid US-Iran conflict.
OPEC+	Oil producing countries cartel. Supply management decisions.
UNCTAD	UN agency. Publishes Trade & Development Report. Hosts ISAR (accounting standards).

🎯 Trap vs. Reality — Part 4

#	Trap	Reality
1	SDR is a currency	SDR is an international reserve asset, NOT a currency. Cannot be held by individuals.
2	India's external debt is mostly govt debt	78% is non-government debt (corporates, banks). Govt = only 22%.
3	India's external debt is mostly in dollars	USD = 54%, but INR = 31% — significant rupee-denominated component.
4	FDI from Singapore means Singaporean investment	Much is round-tripping — capital routed through low-tax jurisdictions. 56% of India's OFDI goes to tax havens.
5	FRBM 3% FD target is regularly achieved	Achieved only once since 2003. Currently at 4.3%.
6	WTO Appellate Body is functional	Paralysed since 2019 due to US blocking judge appointments. MPIA is interim alternative.
7	MFN means giving special treatment to one nation	MFN = equal treatment to ALL WTO members. Any trade advantage to one must extend to all.
8	World Bank only gives loans	WB Group includes IFC (private sector investment), MIGA (investment guarantees), ICSID (dispute settlement).
9	India's forex reserves = RBI's profit	Forex reserves are assets held by RBI, not profits. They are used for exchange rate management.
10	High forex reserves mean no economic vulnerability	Adequacy depends on import cover, short-term debt ratio, and broad money ratio — not absolute number.
11	CEPA/CECA = same as FTA	CEPA/CECA are broader than FTA — include services, investment, IPR, competition policy beyond goods trade.
12	India imports most crude from Middle East	Russia's share rose to 35.8% (from <2% in 2021-22). West Asia share now under 45%.
13	NRE and NRO accounts are the same	NRE = foreign earnings (fully repatriable, tax-free). NRO = Indian income (restricted repatriation, taxable).
14	GSP is a WTO obligation	GSP is voluntary — developed countries offer it unilaterally. Not a WTO requirement.
15	Valuation gains in external debt mean India borrowed more	Valuation changes arise from exchange rate fluctuations — if dollar weakens, non-USD debt appears larger in USD terms. No additional borrowing involved.

Quick Revision Markers:

Forex: $725 bn (Feb 2026); Import cover: 11-12 months

Components: FCA (79%) > Gold (18%) > SDR (2.6%) > RTP (0.7%)

External debt: $746 bn; Debt-GDP: 19.2%

Non-govt (78%); USD (54%); Long-term (80%)

Oil imports: >85% of needs; Russia: 35.8% of crude

LPG: 60% imported; 90% via Strait of Hormuz

Ethanol blending: 20% achieved; target: E27 by 2030

FTP 2023 target: $2 trillion exports by 2030

Remittances: India #1 ($130 bn)

India's FTAs since 2021: 8 (EU FTA = "mother of all deals")

WTO: Est. 1995; Geneva; DSB Appellate Body paralysed since 2019

IMF: 191 members; SDR = 5 currencies (USD 43%)

WB income class: India = Lower-middle ( $1,136–$ 4,495)

Special 301: India on Priority Watch List

Pax Silica: 12 members including India

India 4th largest economy: $4.19 trillion (overtook Japan)