INSTA PT 2020: Exclusive Economy Part 2

The INSTA PT (Prelims Test) series is a comprehensive resource designed for civil services aspirants to master the core concepts of the Indian Economy. Part 2 of the Exclusive Economy series focuses on critical pillars including External Sector, International Trade, Balance of Payments, and Global Financial Institutions.

External Sector and Trade Policy

The external sector remains a vital engine for India's growth. This section explores the intricacies of Indias trade balance, the role of exports in GDP growth, and the strategic importance of the Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS). Understanding the impact of the WTOs Agreement on Agriculture and Trade Related Intellectual Property Rights (TRIPS) is essential for any serious aspirant.

International Financial Institutions

Part 2 delves into the influence of multilateral organizations on the domestic economy. This includes:

• International Monetary Fund (IMF): Its role in stabilizing exchange rates and providing technical assistance.
• World Bank Group: The focus on development projects and poverty alleviation.
• World Trade Organization (WTO): Addressing issues like the 'Peace Clause' and the Dispute Settlement Mechanism.

Exchange Rate Management

India follows a 'Managed Float' exchange rate regime. The Reserve Bank of India (RBI) intervenes in the forex market to prevent excessive volatility in the Indian Rupee (INR). This section explains the difference between Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) and why REER is a better indicator of international competitiveness.

Capital Account Convertibility

A major topic of debate in India is the transition toward full Capital Account Convertibility. While India has achieved full convertibility on the current account, capital account transactions remain regulated. The Tarapore Committee recommendations remain the benchmark for understanding the phased approach required to mitigate risks associated with sudden capital flight.

Current Trends in Foreign Direct Investment (FDI)

The government's push for "Make in India" has led to significant liberalizations in FDI policy. The document highlights the distinction between the Automatic Route and the Government Route. Furthermore, it touches upon the nuances of Foreign Portfolio Investment (FPI), emphasizing the difference between volatile short-term capital and long-term industrial investment.

Summary for Prelims Preparation

To excel in the Prelims, aspirants must focus on the data trends presented in the Economic Survey concerning the export-import basket. Focus on:

• Major trading partners of India.
• The composition of India's import bill (predominantly oil and gold).
• The importance of Remittances in strengthening the Current Account.

By mastering these segments of the Exclusive Economy series, students can build a solid foundation to handle both static concepts and dynamic current affairs-based questions in the upcoming examinations.