External Sector: FDI, FPI & BoP — Set 4

Correct Answer: B. B. FDI, FPI inflows, NRI deposits, and external commercial borrowings

India's Current Account Deficit is financed through the Financial Account surplus — mainly FDI inflows (stable), FPI inflows (volatile portfolio equity and debt), NRI deposits (stable), and ECBs (commercial borrowings). If CAD exceeds these inflows, foreign exchange reserves are drawn down. A sustainable CAD requires stable long-term financing. India typically runs a Financial Account surplus that more than covers the CAD, leading to reserve accumulation in good years.

Correct Answer: B. B. Currency appreciation from natural resource booms hurting manufacturing competitiveness

Dutch Disease refers to the phenomenon where a country experiencing a large inflow of foreign currency (from natural resource exports, aid, or remittances) sees its currency appreciate, making other export sectors (especially manufacturing) less competitive in global markets. The term originated from the Netherlands' experience after discovering natural gas in the 1960s. Countries with large commodity exports or remittances can face this macroeconomic challenge.

Correct Answer: B. B. Foreign Exchange Management Act (FEMA) 1999

FDI in India is primarily governed by FEMA (Foreign Exchange Management Act) 1999 — the successor to FERA. Under FEMA, RBI issues regulations for FDI inflows, repatriation of profits, and compliance requirements. SEBI governs the equity market aspects of FDI in listed companies. DPIIT sets the FDI policy (sectoral caps, permitted activities, entry routes). Sectoral regulators (IRDAI for insurance, TRAI for telecom) impose additional conditions.

Correct Answer: B. B. Services sector (financial, banking, insurance, R&D, telecom)

The Services sector (including financial services, banking, insurance, non-financial/business, outsourcing, R&D, courier, tech testing) has historically been the top recipient of cumulative FDI inflows in India. Other major sectors include Computer Software & Hardware, Telecommunications, Trading, and Construction Development. The Services-FDI dominance reflects India's competitive advantage in professional services and technology.

Correct Answer: B. B. Remit up to a specified amount abroad per financial year for permitted current and capital account transactions

The Liberalized Remittance Scheme (LRS), introduced by RBI in 2004, allows resident Indian individuals to remit up to USD 250,000 per financial year abroad for any permitted current or capital account transactions — overseas education, travel, medical treatment, investment in foreign equities/real estate, gifts, and maintenance. LRS does not apply to corporate entities. It has been progressively liberalized since introduction.

Correct Answer: B. B. It monitors money laundering and terror financing, affecting ease of cross-border financial flows

FATF (Financial Action Task Force) is an inter-governmental body that sets international standards for combating money laundering (AML) and terrorist financing (CFT). Countries on FATF's Grey List face enhanced scrutiny and possible restrictions on cross-border transactions. India is a FATF member and compliance with FATF standards is important for maintaining the trust of international financial institutions, investors, and correspondent banks — thereby supporting smooth capital flows and trade finance.

Correct Answer: B. B. FED's signaling of tapering QE caused massive FPI outflows from India, rupee depreciation, and BoP stress

In May 2013, US Federal Reserve Chairman Ben Bernanke signaled a tapering of Quantitative Easing (QE), triggering a 'Taper Tantrum' in emerging markets including India. FPIs (portfolio investors) withdrew billions from Indian equity and debt markets, causing the rupee to depreciate sharply from ~55 to ~68 per USD in months. India's Current Account Deficit was high (~4.8% of GDP) at the time, making it particularly vulnerable. RBI launched several emergency measures to stabilise the rupee.

Correct Answer: B. B. India imports significantly more from China than it exports, creating a large bilateral deficit

India runs a large merchandise trade deficit with China — India imports significant quantities of electronics, machinery, chemicals, API (active pharmaceutical ingredients), and consumer goods from China, while exports to China are relatively low. The India-China bilateral trade deficit has been over $80-100 billion per year in recent years, making China India's largest source of trade deficit. Concerns include dependency on Chinese inputs for critical industries (pharma, electronics, telecoms).

Correct Answer: B. B. Freedom to convert currency for trade and service payments without restrictions

Current Account Convertibility means the domestic currency (Rupee) can be freely converted to foreign currency for all current account transactions — paying for merchandise imports, services (education, travel, medical treatment abroad), income remittances, and transfers. India achieved de facto current account convertibility in 1994. Full Convertibility would additionally include capital account transactions (borrowing, investing abroad without limits), which India has not yet achieved for all categories.

Correct Answer: B. B. Capital Account Convertibility for India

The Tarapore Committee (chaired by former RBI Deputy Governor S.S. Tarapore) was constituted in 1997 to lay out a roadmap for Capital Account Convertibility (CAC) for India. It recommended a gradual move toward CAC subject to preconditions including fiscal consolidation, low inflation, and a strong banking system. A second Tarapore Committee was set up in 2006 with updated recommendations. India has moved toward partial capital account convertibility but has not adopted full CAC.