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  • Writer's pictureThe Financial Literacy Cell

State Of India's External Sector

The External Sector of economy is that a part of economy that involves interaction with other country’s economy. External sector involves import and export between different countries.

COVID-19 pandemic has triggered the worst international recession in 2020 since the Great Depression; the adverse economic impact is, however, expected to be lesser than its initial impacts. The trade balance has been continuously reduced to a greater extent compared to the earlier performance. As the origin of the virus was in China and it stands to be one of the major exporters of India in terms of various goods, it has directly created a huge impact on trade activities. Also, countries which were impacted and have witnessed a huge loss in capital and human resource, reduced their trade activities with other countries which has indirectly also impacted India’s external sector performance in some sense. During COVID-19 the monetary performance has declined as there was a huge loss in fiscal activities by the Government as it was trapped in one of the biggest economic crisis ever happened in name of Corona virus which has drastically changed the things and according to new guidelines and regulations of government, lockdown was imposed and interaction between different economies were reduced to a greater extent. COVID-19 has affected almost every spheres of the global economy with the spread catalyzed by the enhanced interconnectedness of global value chains.

The image shows that the weakness on the trade front continues, with exports witnessing a slouch in March and April thenceforth however still in Gregorian calendar month 2020 remaining below the degree of the previous year. Moreover, imports additionally slouched, mostly being reflective of the contraction of the domestic economy and therefore the collapse of demand, at the side of declining world costs for a few major imports like oil.

As a result the deficit contracted well within the amount April to Gregorian calendar month, with a minor increase in Gregorian calendar month 2020 as imports grew once more whereas exports fell. The decline within the deficit helped this account to maneuver from deficit to minor surplus within the January-March 2020 quarter, and this accounting surplus really grew in April-June 2020 to almost $20 billion. This was additionally as a result of remittances from overseas migrant staff and exports of software package services remained high enough to balance alternative outflows of profits and dividends and outward remittances of resident Indians.

Performance of External Sector before Pandemic

Since 2008, India’s performance in external sector is not efficient enough compared to other countries and it is continuously moving towards vulnerable situation. One of the major reason before the arrival of global pandemic was due to plunge in value of rupee. India has been a victim of external debt (The amount of debt which is borrowed from another country’s financial institution). According to the data provided by Reserve bank of India, India’s external debt has seen a growth from $344 billion in 2012 to $570 billion in 2021. The External debt to GDP ratio has been rose to 21.1 percent in 2021 from 20.6 percent in 2020. One of the reasons considered is the short-term trade credit which signifies that businesses instead of buying from within the country are borrowing from outside the country at nearly lower interest rates compared to the Interest rate of India. Also, we have noticed that the trade deficit i.e. the difference between import and export has widely affected the increase in external debt of our country. A plus effect has also occurred due to the depreciation of rupee as it has made debt costlier.

Major factors contributing to lowering of External Sector Performance

There have been several reasons that have contributed for the present state of the economy’s external sector, like due to COVID-19, the external sector has seen a negative slam because the imports of Oil has declined significantly. As there was reduction in travel and transport activities as well as the production process was fallen up to a greater extent. The other factors which involve non-oil imports have seen an inclination only after the unlocking process was taken into charge by the Government. But it still has not contributed to a macro growth. During the un-locking period there was subsequently a minor enhancement in the external sectors performance due to exchange in foreign portfolio capital. Despite the global pandemic; FDI has seen a surge in in foreign direct investment in 2020. One of the examples is of Google investment of $4.5 billion in the telecommunication industry by investing in the Jio-Reliance platform. Reliance also sold its 10 percent shares to foreign investors. As most of the sectors are moving towards oligopolistic approach, the FDI surge has not much contributed towards country’s economy. Despite there was shift from Current account deficit to surge, the capital inflows revival during period of COVID-19 has been continuously detoriated as the value of rupee depreciated. This has resulted into weak performance of economy and due to depreciation in rupee value, it has been considered as the worst performing currency in Asia during the period of COVID-19. The nominal exchange rate was continuously declining since 2019 and saw a sharp decline during the pandemic. To come out of such situation, government focused on excising more duties and taxes and in increasing inflation rate but still there was not much effective change in performance of External sector.

Thus, we can say that the External sector is not at the verge of any development at present; also the task seems a bit difficult in future however still a ray of hope exists if required changes are taken into consideration by the Government. Also low performance of External sector does not create any effect on the constraint on significantly increased expenditure. The oil sector has seen the least growth during COVID times and even FDI surge has not been able to contribute towards the economy due to the oligopolistic approach and Rupee depreciation has negatively impacted even a lot since 1991 till today’s times. The slowdown of global economy and the imposition of lockdown have contributed towards slope down of Country’s external sector. After the situation will be normalized, we can move towards developing a better trade balance and also if we work on reducing external debt, we can improve this sector’s performance for good.

By - Ritika

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