SSC CGL Economics · Indian Economy
International Trade and the 1991 Crisis
Terms of trade, devaluation and the foreign exchange laws, India's trade agreements and the WTO, and the 1991 balance of payments crisis that led to the reforms.
Why this matters
Twenty-seven questions in the bank: seven from the 2023 shifts, six from the 2024 shifts and 14 from the 2025 shifts, and six of them HARD, the most in this chapter. The hard ones ask a year or a member list for a trade scheme, so learn the agreement table with its years.
Concept 1 of 3: Trade terms and exchange rates
Definition
The terms:
- Terms of trade: the ratio of export prices to import prices. An excess of imports over exports is a trade deficit, a different thing.
- Devaluation: an official cut in the external value of the currency. Depreciation: a fall in the market rate. Deflation: a contraction of money at home. Exchange control: rationing foreign exchange.
- Marshall-Lerner condition: devaluation improves the balance of payments only when the export and import demand elasticities add up to more than one.
- In an open economy, trade widens the choice of consumers and producers.
Laws and history:
- FERA (1973) regulated foreign exchange; FEMA replaced it in 1999.
- Under PL 480 India imported wheat from the USA.
- Under British rule India ran an export surplus, but it was drained to Britain, not used to develop India.
Practise this conceptself-check · 3 quick reps
The same idea in a real exam question:
Example 1 · Indian Economy · International Trade and Finance
The surplus did not build India
Concept 2 of 3: Trade agreements, schemes and the WTO
Definition
Agreements:
- SAFTA: the free trade area of the SAARC countries (signed 2004, in force 2006). Its Article 23 admits no reservations, so Pakistan's 2012 negative list of 1,209 lines drew India's objection.
- Global System of Trade Preferences: 1988. India and the Gulf Cooperation Council: framework agreement 2004. India-Korea CEPA: 2010. India's 7th Trade Policy Review at the WTO: 2021.
Schemes:
- DFTP (2008): duty-free access to India for Least Developed Countries that send a letter of intent (Angola never did).
- TIES (2017): money for export infrastructure.
- IIPDF (2007, Department of Economic Affairs): pays project development costs of PPP projects.
Bodies and ideas:
- The WTO (1995) sets fair trade rules and settles disputes. It does not allow arbitrary restrictions.
- The Washington Consensus (1989): fiscal discipline, tax reform, trade liberalisation; export subsidies are not in it.
Practise this conceptself-check · 3 quick reps
The same idea in a real exam question:
Example 2 · Indian Economy · International Trade and Finance
SAFTA admits no reservations
Concept 3 of 3: The 1991 crisis and globalisation
Definition
The crisis:
- A balance of payments crisis: a shortage of foreign exchange. Reserves fell to about two weeks of imports, so India went to the IMF and World Bank and pledged gold.
The response:
- Stabilisation (short term): restore the balance of payments and control inflation.
- Structural reforms (long term): liberalisation, privatisation, globalisation.
- Globalisation joins India to the world economy: FDI and the entry of MNCs belong to it.
Results: freer trade and capital inflows raised foreign exchange reserves; India became a base for outsourced services because it offers low-cost, skilled workers.
Practise this conceptself-check · 3 quick reps
The same idea in a real exam question:
Example 3 · Indian Economy · International Trade and Finance
Low cost, high skill
Summary — formulas & gotchas at a glance
A revision cheat-sheet for the formulas and gotchas above. Click any concept name to jump back to its full explanation.
Reference tables (3)
Watch out for (3)
- The surplus did not build India→ Trade terms and exchange rates
- SAFTA admits no reservations→ Trade agreements, schemes and the WTO
- Low cost, high skill→ The 1991 crisis and globalisation
Test yourself on Indian Economy
20 past SSC CGL questions from this chapter, timed at 12 minutes and marked the way the exam marks it. You see your score and every answer the moment you finish. Free to start.