Roadmap for Answer Writing

Introduction

• Start with a brief overview of India’s external sector, its significance in the broader economy, and the global challenges it faces.
• Mention how the global economic environment has been adverse in recent years due to factors like geopolitical tensions (e.g., Ukraine-Russia conflict), rising commodity prices, and slow global trade growth.

Argument for Resilience and Sustainability

1. Surging Exports:
   • Highlight India’s export growth, with a 14% increase in exports reaching a record $770 billion in FY23, despite global headwinds.
   • Show that India’s export sectors, such as textiles, pharmaceuticals, and services, have been resilient in a tough global environment.
2. Moderate Current Account Deficit (CAD):
   • Explain that India’s CAD was 2% of GDP in 2022-23, slightly higher than the previous year but still manageable when compared to global standards .
   • Stress the importance of managing the CAD while maintaining external sector stability.
3. Foreign Exchange Reserves:
   • India’s forex reserves increased to $595 billion by June 2023, providing a cushion against external shocks. The import cover reached 10.2 months, a significant rise from past decades .
   • This shows that India has a robust buffer to withstand financial volatility.
4. Services Exports and Remittances:
   • Discuss the steady increase in services exports, particularly IT and business services, contributing significantly to the invisible account surplus.
   • Highlight the rise in remittances, which peaked at $111 billion in 2022, accounting for 63% of South Asia’s total remittance flows .
5. External Debt Management:
   • India’s external debt has remained stable at around 20% of GDP, showcasing prudent fiscal management.
   • This indicates that India is not over-relying on external borrowings, enhancing financial stability.
6. Exchange Rate Stability:
   • Despite global currency fluctuations and the strengthening of the US dollar, India’s exchange rate has remained relatively stable.
   • This stability contributes to overall external sector resilience.

Challenges and Potential Risks

• Mention that if global growth does not pick up, there could be risks such as slowing exports, capital flow volatility, and widening of the CAD .
• Highlight the government’s efforts to mitigate these risks, such as Free Trade Agreements (FTAs) with key partners and policies like the National Logistics Policy .

Conclusion

• Summarize that despite global challenges, India’s external sector has demonstrated resilience, supported by strong export growth, manageable CAD, robust forex reserves, and stable exchange rates.
• Conclude that the external sector remains a key driver of India’s economic sustainability, especially if global conditions improve and government policies continue to support growth.

Relevant Facts:

1. Surging Exports:
   • India’s exports increased by 14%, reaching $770 billion in FY23.
2. Current Account Deficit (CAD):
   • CAD was 2% of GDP in 2022-23, compared to 1.2% in 2021-22, which remains within manageable limits.
3. Foreign Exchange Reserves:
   • India’s forex reserves reached $595 billion by June 2023, providing an import cover of 10.2 months.
4. Services Exports and Remittances:
   • Net services receipts increased from $51.4 billion in H1FY22 to $65.5 billion in H1FY23, while remittances rose to $111 billion in 2022.
5. External Debt:
   • India’s external debt levels have been around 20% of GDP, reflecting prudent debt management.
6. Exchange Rate Stability:
   • Despite global volatility, India’s exchange rate has remained stable compared to its peers.
7. Government Initiatives:
   • Free Trade Agreements (FTAs) with UAE and Australia, and National Logistics Policy 2022 to improve external sector competitiveness.