External Sectors

Global Economic Environment

• International Monetary Fund (IMF) in its World Economic Outlook (WEO) October 2021 edition projected higher growth of global trade volume in goods and services of 9.7 per cent in 2021, moderating to 6.7 per cent in 2022, in line with the projected global recovery.
• World Trade Organization (WTO) in its October 2021 release, also upgraded its forecast for global merchandise trade volume growth to 10.8 per cent in 2021, followed by a 4.7 per cent rise in 2022
• The pandemic due to resurgence of new variants such as Omicron, surge in global inflation, longer port delays, higher freight rates, shortage of shipping containers, shortage of inputs such as semiconductors, with supply-side disruptions being exacerbated by recovery in demand, pose significant risks for global trade.

Merchandise Trade

• Merchandise Exports: India’s merchandise exports recovered strongly from the pandemic-induced collapse and registered positive growth in the current financial year.
  • Sharp recovery in key markets; increased consumer spending; pent up savings and disposable income due to announcement of fiscal stimulus by major economies; global commodity price rise and an aggressive export push by the government have bolstered exports in 2021-22.
• Trade Agreements: India has initiated its trade agreement negotiations and reviewed existing agreements with many countries. This includes negotiations for (i) Comprehensive Economic Cooperation Agreement (CECA) between India and Australia; (ii) FTA with European Union (EU); (iii) Comprehensive Economic Partnership Agreement (CEPA) with Canada and (iv) CEPA with UAE.
• Merchandise Imports: The merchandise imports grew at the rate of 68.9 per cent to US$ 443.8 billion in April-December, 2021 over the corresponding period of last year.
  • Among the top ten countries for import origin, China, UAE and USA were the top import sources for India in April-November, 2021.
• Merchandise Trade Balance: India had the most favourable trade balance with USA followed by Bangladesh and Nepal.

Trade in Services

• Services Exports: India has maintained its impressive performance in world services trade in the post COVID-19 period. Despite pandemic induced global restrictions and weak tourism revenues, India’s services exports recorded growth of 18.4 per cent to US$ 177.7 billion during 2021-22 (April-December).
  • This is mainly on account of top three - computer, business and transportation services - that constitute more than 80 per cent of total services exports.
• Services Imports: Services imports rose by 21.5 per cent to US$ 103.3 billion in 2021-22 (April-December).
  • The surge in services imports is mainly on account of payments for business, transport, travel and computer services, which together constitute more than 75 per cent of services imports.

Private Transfers

• As per the Migration and Development Brief 35, World Bank (November 2021), India continues to be the largest remittance recipient country in the world in 2021 (in current US dollar terms) and has been so since 2008.

Invisibles

• On account of higher net services receipts and private transfers, net invisibles were higher at US$ 72.1 billion in H1: FY 22, compared to US$ 60.1 billion last year.

Current Account Balance

• After witnessing a surplus in H1: FY 21, India’s current account balance flipped into deficit of US$ 3.1 billion (0.2 per cent of GDP) in H1: FY 22, on the back of sharp increase in merchandise trade deficit.
• As far as quarterly movement is concerned, the current account balance switched into a deficit in Q2: FY 22 from surplus in the previous quarter, due to widening of trade deficit and an increase in net outgo of investment income

Capital Account/ Financial Account

• In H1: FY 22, net capital flows more than tripled to US$ 65.6 billion (4.5 per cent of GDP) over those in H1: FY 21.
  • This was due to continued inflow of foreign investment, rise in loans mainly external commercial borrowings (ECBs), banking capital and SDR allocation of US$ 17.9 billion by the IMF.
  • Falling short of the pre- pandemic level, the net foreign investment inflows (FIIs) – primarily driven by FDI – moderated to US$ 25.4 billion in H1: FY 22 compared to corresponding period of FY 21.

BOP Balance and Foreign Exchange Reserves

• India’s balance of payments remained in surplus throughout the last two years.
• There was a massive increase in India’s foreign exchange reserves during 2021-22. Foreign Exchange Reserves crossed US$ 600 billion in the first half of 2021-22 and touched US $ 633.6 billion as of December 31, 2021.
• The import cover of India’s foreign exchange reserves declined to 13.2 months at end-December 2021 from 17.4 months at end-March 2021 as merchandise imports increased with pick-up in domestic economic activity.
• India was the fourth largest foreign exchange reserves holder in the world after China, Japan and Switzerland.

Movement in Exchange Rate

• Indian rupee depreciated by 4.5 per cent (y-o-y basis) against US dollar in 2020-21.
• The depreciation of the rupee, however, was modest as compared with its emerging market peers, such as Turkish lira, Argentine Peso, Thai baht, and Philippine peso.
• The rupee appreciated against euro, Japanese yen and pound sterling in December 2021 over March 2021.

Net International Investment Position (IIP)

• There was a sustained improvement since end-March 2019 in India’s net IIP which stood at (-) 11.3 per cent of GDP (US$ -332 billion) as at end-September 2021.
• This was on account of higher asset-liability ratio, which improved to 73.6 per cent as at end-September 2021 from end-March 2021.
  • The improvement in asset- liability ratio is due to significant build-up of reserve assets, which more than compensated for build-up in liabilities on account of FDI, FPI and other investments.

External Debt

• India’s external debt rose to US $ 593.1 billion at end-September 2021, from US $ 556.8 billion a year earlier, reflecting additional SDR allocation by IMF, coupled with higher commercial borrowings.
  • Commercial borrowings, the largest component of external debt, at US$ 218.8 billion, recorded a quarter-over-quarter (q-o-q) positive growth of 2.5 per cent over the level a quarter ago.
  • The NRI deposits, the second largest component, at US$ 141.6 billion were at the same level as at end of the previous quarter.
  • The short-term trade credit, the third largest component, at US$ 97.4 billion continued to contract.
• As far as currency composition of external debt is concerned, US dollar denominated debt remained the largest component of India’s external debt, with a share of 51 per cent at end-September 2021, followed by the Indian rupee.