Indian Economy Quiz: Balance of Payments and Foreign Trade

The balance of payments is the statement that records every economic transaction between the residents of a country and the rest of the world in a given period, which is precisely what the external sector of an economy means; it covers merchandise trade, services, income, transfers and capital flows.

Export security is not a recognised category of trade barrier; it is not a device that restricts the movement of goods across a border.

An inward-looking trade strategy, better known as import substitution, was the policy India followed from the Second Five Year Plan until 1991, and it rested on two instruments.

Self-reliance, the goal set out in India's early plans, means building the capacity to produce at home what the country would otherwise have to buy abroad, so the true indicator is that imports of such goods are avoided.

The balance of trade, also called the merchandise or visible balance, is the difference between the value of goods exported and goods imported; nothing else enters it.

In August 1994 India accepted the obligations of Article VIII of the International Monetary Fund and made the rupee fully convertible on the current account, so that foreign exchange for trade, travel, education and remittances could be obtained freely at the market rate.

GATT was signed in 1947 as a provisional agreement on tariff reduction, and after the Uruguay Round it was replaced on 1 January 1995 by the World Trade Organization, a permanent body with headquarters at Geneva and a binding dispute settlement system.

The DGFT works under the Ministry of Commerce and Industry, and under the Foreign Trade (Development and Regulation) Act of 1992 it frames and administers the Foreign Trade Policy, issues the importer-exporter code without which no one may trade across the border, and runs the export promotion schemes.

The capital account records transactions that change the ownership of assets and liabilities between residents and non-residents, and foreign direct investment, along with portfolio investment, external commercial borrowings and deposits of non-resident Indians, falls squarely in that group.

By the middle of 1991 India's foreign exchange reserves had fallen to roughly a fortnight of imports, gold was pledged abroad to raise funds, the country borrowed from the International Monetary Fund and the rupee was devalued in two steps in July.