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03

External Sector

CHAPTER

External trade recovered strongly in 2021-22 after the pandemic-induced slump of the
previous year, with strong capital flows into India, leading to a rapid accumulation of
foreign exchange reserves. The resilience of India’s external sector during the current
year augurs well for growth revival in the economy. However, the downside risks of global
liquidity tightening and continued volatility of global commodity prices, high freight costs,
coupled with the fresh resurgence of COVID-19 with new variants may pose a challenge
for India during 2022-23.

Owing to the recovery of global demand coupled with revival in domestic activity,
India’s merchandise exports and imports rebounded strongly and surpassed pre-COVID
levels during the current financial year. The revival in exports was also helped by timely
initiatives taken by Government. USA followed by UAE and China remained the top
export destinations in April-November, 2021, while China, UAE and USA were the largest
import sources for India. Despite weak tourism revenues, there was significant pickup
in net services receipts during April-December, 2021 on account of robust software and
business earnings, with both receipts and payments crossing the pre-pandemic levels.

India’s current account balance turned into deficit of 0.2 percent of GDP in the first half
(H1) of 2021-22, largely led by deficit in trade account. Net capital flows were higher at
US$ 65.6 billion in H1: 2021-22, on account of continued inflow of foreign investment,
revival in net external commercial borrowings (ECBs), higher banking capital and
additional special drawing rights (SDR) allocation. India’s external debt rose to US$
593.1 billion as at end-September 2021, from US$ 556.8 billion a year earlier, reflecting
additional SDR allocation by IMF, coupled with higher commercial borrowings.

The robust capital flows were sufficient to finance the modest current account deficit,
resulting in an overall balance of payments (BoP) surplus of US$ 63.1 billion in H1 of
2021-22, that led to an augmented foreign exchange reserves crossing the milestone of
US$ 600 billion and touched US$ 633.6 billion as of December 31, 2021. As of end-
November 2021, India was the fourth largest forex reserves holder in the world after
China, Japan, and Switzerland.

A sizeable accretion in reserves led to an improvement in external vulnerability indicators
such as foreign exchange reserves to total external debt, short-term debt to foreign
exchange reserves, etc. India’s external sector is resilient to face any unwinding of the
global liquidity arising out of the likelihood of faster normalisation of monetary policy
by systemically important central banks, including the Fed, in response to elevated
inflationary pressures.