External Sector of Economy Archives

1. Which one of the following terms refers to the difference between a co

Which one of the following terms refers to the difference between a country’s total exports and total imports ?

Fiscal deficit

Current account deficit

Trade deficit

Budget deficit

This question was previously asked in

UPSC Combined Section Officer – 2021-22

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The difference between a country’s total exports and total imports of goods is known as the Trade Balance. When imports exceed exports, it results in a Trade Deficit. The question specifically asks for the difference, which, when imports are greater than exports, is called a trade deficit.

Trade Balance = Value of Exports – Value of Imports. A Trade Deficit occurs when Imports > Exports.

Fiscal Deficit is the difference between the government’s total expenditure and its total revenue (excluding borrowings). Current Account Deficit is a broader measure that includes the balance of trade in goods and services, as well as net income and net transfers. Budget Deficit is the difference between government expenditure and government receipts.

2. Which one of the following international organizations provides financ

Which one of the following international organizations provides financial assistance and technical expertise to developing countries, including India, to support various developmental projects?

The World Trade Organization

The World Bank

The International Monetary Fund

The Asian Development Bank

This question was previously asked in

UPSC Combined Section Officer – 2019-20

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The World Bank is an international organization that provides financial assistance and technical expertise to developing countries, including India, to support various developmental projects.

The World Bank Group is a family of five international organizations that make leveraged loans to developing countries. The two most prominent components are the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The World Bank’s primary focus is poverty reduction and promoting shared prosperity by providing financial support, policy advice, and technical assistance for development projects in areas like infrastructure, education, health, and environmental sustainability.

While the IMF focuses on macroeconomic stability and balance of payments issues, and the WTO deals with global trade rules, the World Bank is specifically geared towards long-term economic development through project finance and technical expertise. The Asian Development Bank (ADB) serves a similar function but is focused on the Asian region. Among the given options covering global reach, the World Bank is the most appropriate answer for providing general financial and technical assistance for developmental projects to developing countries like India.

3. The ‘Foreign Direct Investment’ policy in India is regulated by

The ‘Foreign Direct Investment’ policy in India is regulated by

the Ministry of Commerce and Industry

the Reserve Bank of India

the Ministry of External Affairs

the Securities and Exchange Board of India

This question was previously asked in

UPSC Combined Section Officer – 2019-20

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The correct option is A. The Foreign Direct Investment (FDI) policy in India is primarily regulated by the Ministry of Commerce and Industry.

– Foreign Direct Investment (FDI) policy in India is framed and reviewed by the Government of India.
– The Department for Promotion of Industry and Internal Trade (DPIIT), under the Ministry of Commerce and Industry, is the nodal department for formulating FDI policy. It is responsible for the calculation, announcement, and implementation of FDI policies, including permissible sectors, entry routes (automatic or government approval), and caps.
– While the Reserve Bank of India (RBI) is the administrator of the Foreign Exchange Management Act (FEMA), 1999, and handles the operational aspects related to FDI inflow and outflow (like prescribing procedures, reporting requirements, etc.), the overarching policy framework is laid down by the government, specifically DPIIT.
– The Ministry of External Affairs deals with foreign relations and diplomacy, not domestic economic policies like FDI regulation.
– The Securities and Exchange Board of India (SEBI) regulates the securities markets and portfolio investments (like Foreign Portfolio Investment – FPI), but not the core FDI policy.

FDI can come through two routes: Automatic Route (where no prior government approval is needed) and Government Route (where prior approval from the concerned ministry/department is required, routed through the Foreign Investment Facilitation Portal).

4. What is the minimum percentage of export value required for an industr

What is the minimum percentage of export value required for an industrial unit to be eligible for the ‘Export Oriented Unit’ status in India?

25%

33%

50%

75%

This question was previously asked in

UPSC Combined Section Officer – 2019-20

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Export Oriented Units (EOUs) in India undertake to export their entire production (100%), but they are allowed to sell a certain portion in the Domestic Tariff Area (DTA). The maximum permissible DTA sale for EOUs is generally limited to 50% of the FOB value of exports achieved during the year, subject to the unit achieving positive Net Foreign Exchange (NFE). While the eligibility is based on the undertaking to export 100%, the operational framework involving a 50% DTA sales limit relative to exports makes 50% a key percentage associated with EOU operations, implying a strong export focus. Given the options and common references, 50% is the most plausible answer linked to EOU policy percentages, likely referring indirectly to the DTA limit that mandates significant exports.

EOUs are designed for maximum export, with limited permissible domestic sales.

EOUs enjoy certain benefits and are required to meet performance criteria, including achieving positive Net Foreign Exchange earnings over a specified block period.

5. The Headquarters of the Bay of Bengal Initiative for Multi-Sectoral Te

The Headquarters of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is located in

Colombo

Bangkok

New Delhi

Dhaka

This question was previously asked in

UPSC CBI DSP LDCE – 2023

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The correct option is D) Dhaka. The permanent Secretariat of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is located in Dhaka, Bangladesh. It was established in 2014.

– BIMSTEC stands for Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation.
– Its Headquarters/Secretariat is located in Dhaka, Bangladesh.

BIMSTEC is an international organisation of seven member states in the littoral and adjacent areas of the Bay of Bengal constituting a contiguous regional unity. The member states are Bangladesh, Bhutan, India, Myanmar, Nepal, Sri Lanka, and Thailand.

6. Which one of the following international organizations considers its c

Which one of the following international organizations considers its core responsibility as providing financial help to member countries which are experiencing balance of payments problems?

IFC

IDA

IMF

IBRD

This question was previously asked in

UPSC CBI DSP LDCE – 2023

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The correct option is C) IMF. The International Monetary Fund (IMF) is a global organization whose primary mission is to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. A core responsibility of the IMF is to provide financial assistance to member countries experiencing balance of payments problems to help them stabilize their economies and restore sustainable growth.

– IMF provides financial help for balance of payments problems.
– IFC supports private sector development.
– IDA provides concessional financing to the poorest countries.
– IBRD provides loans to middle-income and creditworthy poorer countries.

IFC, IDA, and IBRD are all part of the World Bank Group, which focuses more on long-term economic development and poverty reduction projects. The IMF focuses on the stability of the international monetary system and short-to-medium-term balance of payments support.

7. Which one of the following countries is not a founding member of the N

Which one of the following countries is not a founding member of the New Development Bank (NDB)?

India

China

Russia

Bangladesh

This question was previously asked in

UPSC CBI DSP LDCE – 2023

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The correct option is D) Bangladesh. The New Development Bank (NDB) was established by the BRICS group of countries (Brazil, Russia, India, China, and South Africa). These five countries are the founding members of the NDB. Bangladesh joined the NDB later, in September 2021, becoming the fourth new member admitted by the bank (after UAE, Uruguay, and Egypt).

– NDB was founded by BRICS countries.
– Founding members are Brazil, Russia, India, China, South Africa.
– Bangladesh joined NDB in 2021.

The NDB is headquartered in Shanghai, China. It aims to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.

8. Consider the following statements : 1. India is a member of the Int

Consider the following statements :

1. India is a member of the International Grains Council.
2. A country needs to be a member of the International Grains Council for exporting or importing rice and wheat.

Which of the statements given above is/are correct ?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

This question was previously asked in

UPSC IAS – 2024

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The correct option is A.

Statement 1 is correct. India is a member country of the International Grains Council (IGC), an intergovernmental organization that seeks to promote international co-operation in grain trade and collects market information.
Statement 2 is incorrect. Membership in the International Grains Council is not a mandatory requirement for a country to export or import rice and wheat. Countries engage in international trade of these commodities based on bilateral agreements, WTO regulations, and other trade arrangements, irrespective of IGC membership.

The IGC was established in 1949 as the International Wheat Council and was renamed in 1998 to include coarse grains and rice. Its mission includes furthering international co-operation in grains trade and encouraging expansion of trade.

9. Consider, the following statements : Statement-I: India accounts for 3

Consider, the following statements :
Statement-I: India accounts for 3.2% of global export of goods.
Statement-II: Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.
Which one of the following is correct in respect of the above statements?

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

Statement-I is correct but Statement-II is incorrect

Statement-I is incorrect but Statement-II is correct

This question was previously asked in

UPSC IAS – 2023

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Statement-I is incorrect but Statement-II is correct.

India’s share in global goods exports is significantly lower than 3.2%. According to recent WTO data, India’s share in world merchandise exports is around 1.8%. Statement-I is therefore incorrect. Statement-II is correct, as the Production-linked Incentive (PLI) scheme in India has been designed to attract both domestic and foreign investments into key manufacturing sectors and has seen participation from numerous companies operating in India.

The PLI scheme aims to boost domestic manufacturing and reduce import dependence. It offers incentives on increased sales of manufactured goods from target segments. It covers a wide range of sectors including electronics, pharmaceuticals, automobiles, textiles, food products, etc. Both Indian and foreign companies with manufacturing bases in India are eligible for these incentives, and many have indeed availed them to expand production.

10. Which one of the following situations best reflects “Indirect Transfer

Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?

An Indian company investing in a foreign enterprise and paying taxes to the foreign country arising out of its investment

A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment

An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India

A foreign company transfers shares and their substantial value derive from assets located in India

This question was previously asked in

UPSC IAS – 2022

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Option D is correct.

“Indirect Transfer” refers to the transfer of ownership of shares or interests in a foreign entity, where the value of that foreign entity is primarily derived from assets located in India. This allows for taxing gains arising from such transfers within India.

This concept became prominent in India, particularly in the context of the Vodafone tax dispute. In that case, a foreign company (Vodafone) acquired shares of another foreign company (Hutchison), which indirectly controlled an Indian telecommunications company. The Indian government amended tax laws to clarify that gains from the transfer of shares of a foreign company would be taxable in India if those shares derived their value substantially from assets located in India.
Options A, B, and C describe direct investments or transfers of tangible assets or profits in a straightforward manner, which are taxed based on source rules or residency rules but do not fit the definition of an ‘indirect transfer’ involving a foreign entity whose value is intrinsically linked to underlying Indian assets.