Trade, FDI, FPI & Capital Account Convertibility for UPSC: FTAs, US Tariffs, PLI & FEMA Rules (2025-26)

India's Trade Performance and Export Promotion

🎯 Exam priority: High-yield. Trade and investment policy is the other half of the external sector: how much India sells and buys, who it trades with, how foreign money is allowed in, and how free capital movement is. 2023 asked India's share of world exports; 2022 the FDI rules for foreign e-commerce; 2024 US apples and GM food.

India's trade story in 2025-26 is a paradox: record services exports and non-oil exports, a widening goods deficit, and a tariff shock from the United States. This note gives you the numbers, the policy tools and the 2026 developments.

Trade performance

• FY25 merchandise trade: exports USD 437.7 billion (flat), imports USD 721.2 billion (+6.3%), so the merchandise deficit reached USD 283.5 billion (+17.6%). Non-petroleum, non-gems-and-jewellery exports (78.7% of the total) grew 7.5% and non-petroleum exports hit a record USD 374.3 billion; telecom instruments rose 51.2%, drug formulations 11.2%. Petroleum product exports fell 24.7% with softer crude.

• Services: exports a record USD 387.5 billion (+13.6%), imports USD 198.7 billion, giving a record services surplus of USD 188.8 billion — enough to cover two-thirds of the merchandise deficit. Total (goods + services) exports reached USD 825.3 billion and the overall trade deficit was just USD 94.7 billion.

• April–December 2025: merchandise exports +2.4% (non-petroleum, non-gems +6.0%; electronics +35.1%), imports USD 578.6 billion (+5.9%), merchandise deficit USD 248.3 billion (against USD 224.0 billion).

• India in world trade: between 2005 and 2024 India's share of global merchandise exports nearly doubled from 1% to 1.8% and of commercial services exports rose from 2% to 4.3% — the fact behind the 2023 PYQ (the claim that India has 3.2% of world goods exports is wrong).

• Agriculture: exports grew from USD 34.5 billion (FY20) to USD 51.1 billion (FY25) — 11–14% of merchandise exports — but have stagnated since FY23; India's share of global agricultural exports is only 2.2% (2024), despite being the world's second-largest producer. India imports mainly vegetable oils (the largest agricultural import) and pulses, and is the world's largest rice exporter.

Tools to boost exports

• PLI (Production-Linked Incentive) — introduced April 2020, now covering 14 sectors (mobile phones, electronic components, APIs, medical devices …): incentives on incremental sales to build scale and exports. The Survey credits it for a surge in sectoral exports (mobile phones, pharmaceuticals).

• Export Promotion Mission (EPM) (November 2025) — consolidates many schemes into one outcome-oriented framework; a Credit Guarantee Scheme for Exporters; and RBI relief (moratorium, longer export credit up to 450 days, and a rise in the time to realise export proceeds from 9 to 15 months).

• Also: SEZs, RoDTEP/RoSCTL (refund of embedded taxes), Advance Authorisation, and the Trade Connect e-Platform's tariff explorer for FTA concessions.

Tariffs, the WTO and the New Wave of FTAs

Trade policy now means tariff diplomacy. The US tariff shock and a burst of new FTAs define 2025-26.

Tariffs, WTO and trade agreements

• WTO basics: the WTO (1995) administers trade rules — GATT (goods), GATS (services), TRIPS (IP: India's Geographical Indications Act, 1999 was passed to comply with it) and the Agreement on Agriculture with its amber, blue and green boxes for subsidies (amber = trade-distorting and capped at a de minimis 10% for developing countries; green = permitted). MFN, national treatment and bound tariffs are the core principles.

• US tariffs: by the time of the Survey (January 2026), India faced an effective tariff of 50% on goods exported to the US (a 25% reciprocal tariff plus a 25% penalty linked to Russian oil), among the highest on any country; exports to the US fell year-on-year in April–November 2025 while overall exports grew through diversification. On 6 February 2026 the two governments announced a framework for an interim trade agreement: the US reciprocal tariff on a broad range of Indian goods to be cut from 25% to 18% and the 25% Russian-oil tariff rescinded (from 7 February); India to cut tariffs on US industrial goods and many farm and food products, address non-tariff barriers and raise purchases of US energy, aircraft, technology and coking coal (a stated US$500 billion over time). (Reported by law-firm and news summaries; the Interim Agreement's formal signing and the legal status of US tariffs have been moving — check the Commerce Ministry for the latest.)

• FTAs in 2025-26 (Survey + reports): the India–EFTA TEPA (a binding USD 100 billion investment commitment by EFTA states, 1 million jobs); the India–UK CETA (concluded and signed); the India–Oman CEPA signed on 18 December 2025 — duty-free access for 99.38% of India's exports with immediate elimination of tariffs on 97.96% of tariff lines and a professional-mobility framework; the India–New Zealand FTA concluded in December 2025; and the India–EU FTA concluded on 27 January 2026 (the so-called "mother of all trade deals"; formal signing planned for December 2026 and entry into force in 2027, per Commerce Minister statements). Negotiations continue with the US, Chile and Peru.

• FTAs, the Survey notes, give exporters reliable market access, integrate firms into global value chains and push them to compete on productivity — but their benefits depend on state-level infrastructure and regulatory implementation. The Survey's blunt conclusion: "a robust and stable currency can only be achieved through export competitiveness".

FDI and FPI: Routes, Caps and Budget 2026-27

FDI is stable, long-term, and policy-controlled; FPI is flighty and market-driven. The rules for each differ and are heavily examined.

FDI: definition, routes, caps

• FDI is investment bringing a lasting interest and control (generally 10% or more of equity in an unlisted/listed company); FPI is portfolio investment in listed securities below 10% in a company. Governing law: FEMA, 1999 (replacing FERA 1973, shifting from "control" to "management" of forex); rules: the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. The Budget 2026-27 proposes a comprehensive review of these Rules to make a "more contemporary, user-friendly framework".

• Two routes: the automatic route (no government approval — most sectors) and the government approval route (sensitive sectors, via DPIIT/ministries). Prohibited: lotteries, gambling, chit funds, Nidhi companies, real-estate business, tobacco manufacturing and a few others. Sectoral caps exist: e.g., defence 74% automatic (higher with approval), insurance 100% after the Sabka Bima Sabki Raksha (Amendment of Insurance Laws) Act passed by Parliament in December 2025 (from 74%), multi-brand retail 51% with approval, single-brand retail 100% automatic, telecom 100% automatic.

• E-commerce (2022 PYQ): FDI up to 100% is allowed only in the marketplace model; foreign-owned platforms cannot sell their own goods (inventory model barred) and cannot own or control the sellers and inventory on their platforms.

• Numbers (Article 13): gross FDI USD 81.0 billion in FY25 (+13%), USD 64.7 billion in April–November 2025; but net FDI only USD 5.6 billion because of repatriation and outward investment; India ranked 4th globally in greenfield announcements (1,080 projects) in 2024 and was the largest destination of greenfield digital investment 2020–24 (USD 114 billion). FDI is concentrated in services, software and hardware, trading, non-conventional energy, construction and autos.

FPI and foreign investors

• FPIs register with SEBI (through designated depository participants); they invest in equity (aggregate limits tied to sectoral caps) and debt under routes such as the VRR and FAR. FPI flows swing with global conditions — US yields, risk appetite — not just Indian fundamentals (the Survey: six months of net outflows and three of inflows in April–December 2025). Foreign investors without registration use participatory notes (Article 8).

• Budget 2026-27: Individual Persons Resident Outside India (PROI) may invest in listed Indian equities through the Portfolio Investment Scheme; the individual limit rises from 5% to 10% and the aggregate limit for all individual PROIs from 10% to 24%.

Convertibility and Why Stable Financing Matters

Convertibility asks: how freely can rupees be turned into foreign currency, and for what?

Current and capital account convertibility

• Current account convertibility — freedom to buy/sell foreign exchange for trade and other current transactions — was adopted in August 1994 (IMF Article VIII). Capital account convertibility (CAC) — free conversion for investment flows — is partial: freer for foreign investors in equity/FDI and for individuals under the Liberalised Remittance Scheme (LRS, US$250,000 per person per year), more regulated for debt (external commercial borrowing, FPI debt limits) and for residents' outward investment.

• Committees: the Tarapore Committee (1997; second committee 2006) laid down pre-conditions for full CAC — a low fiscal deficit, low inflation, a strong financial sector and adequate reserves — and a road-map. The 1997 East Asian crisis made India cautious; today policy follows a gradual, calibrated opening.

• Rupee internationalisation: since 2022 the RBI has allowed trade settlement in rupees through special vostro accounts, and the UPI/CBDC links (Article 7) extend the rupee's reach; the Survey stresses that a stable currency ultimately needs export competitiveness.

• Hot vs cold money: FDI is "cold" (sticky); FPI and short-term external borrowing are "hot". The more a country relies on FDI to finance its deficit, the less vulnerable it is to sudden stops — the Survey's reason for calling FDI "the most stable source" and for urging a better investment climate (state-level reforms, GVC integration, faster approvals).

Why this matters for UPSC

• Memorise: the FY25 trade numbers and the 1.8% / 4.3% world-share figures; the FTA list with dates (Oman CEPA 18 Dec 2025, EU FTA concluded 27 Jan 2026, EFTA TEPA's USD 100 billion); FDI route rules (automatic vs approval, e-commerce marketplace-only, insurance 100%); FPI routes; and the difference between current-account and capital-account convertibility.

Further Reading

• NCERT Economics textbooks (Class 11–12), the Economic Survey, the Union Budget documents and RBI publications cited in this note — the primary sources behind every figure above.

Test Yourself: Practice Questions & PYQs

Ten practice questions on trade numbers, FTAs, FDI/FPI rules and convertibility, followed by real UPSC questions.

Practice Questions

Q1. India's share of global merchandise exports between 2005 and 2024 rose from about

• (a) 2 per cent to 3.2 per cent

• (b) 3 per cent to 5 per cent

• (c) 1 per cent to 1.8 per cent

• (d) 0.5 per cent to 1.0 per cent

Q2. Consider the following statements about India's trade in 2024-25 (FY25):
1. Services exports reached a record of about USD 387.5 billion.
2. The surplus in services trade covered about two-thirds of the merchandise trade deficit.
3. Merchandise exports grew by more than 20 per cent.

• (a) 1 and 3 only

• (b) 1, 2 and 3

• (c) 2 and 3 only

• (d) 1 and 2 only

Q3. India's Production-Linked Incentive (PLI) scheme, launched in April 2020, provides

• (a) tax holidays for exporters in SEZs only

• (b) guaranteed minimum import prices

• (c) subsidised loans for farmers

• (d) incentives on incremental sales of domestically manufactured products in notified sectors

Q4. The India–Oman Comprehensive Economic Partnership Agreement (CEPA) was signed on

• (a) 18 December 2025

• (b) 6 February 2026

• (c) 1 October 2025

• (d) 27 January 2026

Q5. With reference to FDI in e-commerce in India, which of the following is correct?

• (a) Foreign firms can own up to 49 per cent of sellers on their platform

• (b) FDI is allowed in the marketplace model only; the platform cannot own or control the sellers' inventory

• (c) FDI in e-commerce is prohibited

• (d) Foreign-owned platforms may sell their own goods through an inventory model

Q6. Which of the following is a feature of the 'automatic route' of FDI?

• (a) It applies only to the defence sector

• (b) No prior approval of the government or RBI is required — only post-investment reporting

• (c) Prior government approval is required

• (d) It is open only to NRIs

Q7. Consider the following statements about FPI and FDI:
1. FDI generally involves a lasting interest of 10 per cent or more in a company.
2. FPIs are registered with SEBI.
3. FPI flows are generally more volatile than FDI flows.

• (a) 1, 2 and 3

• (b) 1 and 2 only

• (c) 1 only

• (d) 2 and 3 only

Q8. The Tarapore Committee is associated with

• (a) banking sector reforms

• (b) capital account convertibility

• (c) monetary policy framework

• (d) bad loans resolution

Q9. In Budget 2026-27, the aggregate investment limit for all individual Persons Resident Outside India (PROI) under the Portfolio Investment Scheme was proposed to be raised to

• (a) 49 per cent

• (b) 5 per cent

• (c) 24 per cent

• (d) 10 per cent

Q10. Under the WTO Agreement on Agriculture, which box contains subsidies that are trade-distorting and subject to reduction commitments (with a de minimis exemption)?

• (a) Amber box

• (b) Special box

• (c) Green box

• (d) Blue box

UPSC Previous Year Questions (PYQs)

Real UPSC Prelims questions, checked against the official paper and answer key.

Q1. (2016) In the context of which of the following do you sometimes find the terms 'amber box, blue box and green box' in the news?

• (a) WTO affairs

• (b) India-EU negotiations on FTA

• (c) SAARC affairs

• (d) UNFCCC affairs

Q2. (2018) India enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 in order to comply with the obligations to

• (a) WTO

• (b) ILO

• (c) IMF

• (d) UNCTAD

Q3. (2019) Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

• (a) Pulses

• (b) Vegetable oils

• (c) Fresh fruits

• (d) Spices

Q4. (2019) Among the following which one is the largest exporter of rice in the world in the last five years?

• (a) Myanmar

• (b) Vietnam

• (c) India

• (d) China

Q5. (2022) With reference to foreign-owned e-commerce firms, operating in India, which of the following statements is/are correct?
1. They can sell their own goods in addition to offering their platforms as market-places.
2. The degree to which they can own big sellers on their platforms is limited.
Select the correct answer using the code given below:

• (a) 2 only

• (b) Both 1 and 2

• (c) 1 only

• (d) Neither 1 nor 2

Q6. (2023) 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 advan- tage of India's 'Production-linked Incentive' scheme. Which one of the following is correct in respect of the above statements?

• (a) Statement-I is incorrect but Statement-II is correct

• (b) Statement-I is correct but Statement-II is incorrect

• (c) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

• (d) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for State- ment-I

Q7. (2024) Consider the following statements : Statement-I : India does not import apples from the United States of America. Statement-II : In India, the law prohibits the import of Genetically Modified food without the approval of the competent authority. Which one of the following is correct in respect of the above statements ?

• (a) Statement-I is correct, but Statement-II is incorrect

• (b) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

• (c) Statement-I is incorrect, but Statement-II is correct

• (d) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

Q8. (2021) Consider the following:
1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?

• (a) 1, 2 and 3

• (b) 2 and 4

• (c) 1 and 4

• (d) 3 only

Mains Practice Questions

Use these to frame full-length answers. You don't have to answer one exactly — they show the angles UPSC tests, so let them guide which points you cover.

• Analyse India's trade performance in 2025-26: the goods deficit, the services surplus, and the effect of US tariffs.

• Discuss the significance of India's recent free trade agreements (UK, EFTA, Oman, New Zealand, EU). What challenges remain in implementation?

• Explain the routes and sectoral caps of FDI in India. How has FDI policy been liberalised in sectors like insurance and defence?

• Distinguish between FDI and FPI. Why does India need more stable financing than 'hot money'? Discuss capital account convertibility.

UPSC Mains — Previous Years’ Questions on this topic (last 10 years)

These are the actual GS Mains questions UPSC has asked on this theme — real proof of how, and when, it is tested. Try to write a full answer to each.

• 2026 (GS-III): Discuss the different types of subsidies and supports provided by the Government of India to agricultural sector. Examine the related issues pertaining to Agreement on Agriculture of World Trade Organisation (WTO).

• 2025 (GS-III): What are the challenges before the Indian economy when the world is moving away from free trade and multilateralism to protectionism and bilateralism? How can these challenges be met?

• 2025 (GS-III): Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements? In what way can the functioning and outcomes of the scheme be improved?

• 2023 (GS-III): What are the direct and indirect subsidies provided to farm sector in India? Discuss the issues raised by the World Trade Organization (WTO) in relation to agricultural subsidies.

• 2018 (GS-III): How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?

• 2016 (GS-III): Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.