UPSC Prelims Practice Questions — India’s trade caught in the middle

Q1. A country's trade surplus with one major partner shrinks while its trade deficit with another major partner widens. Its services earnings and capital inflows stay unchanged. What is the most likely immediate effect on its foreign exchange market?

  • A. Higher supply of foreign currency, leading to appreciation of the domestic currency
  • B. An automatic rise in forex reserves as the central bank absorbs surplus dollars
  • C. Higher demand for foreign currency, putting downward pressure on the domestic currency
  • D. No net effect, since balances with different partners cancel out by definition

Q2. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. A country's bilateral trade deficit with a partner can widen in absolute terms even in a year when its exports to that partner grow faster in percentage terms than its imports from that partner.
  2. When the import base is several times larger than the export base, a smaller percentage rise in imports can exceed a larger percentage rise in exports in absolute value.
  • A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
  • B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
  • C. Statement-I is correct, but Statement-II is incorrect
  • D. Statement-I is incorrect, but Statement-II is correct

Q3. Consider the following facts about India's trade in FY26: (I) India's trade surplus with the U.S. fell to about US$34 bn from about US$41 bn in the previous year. (II) India's trade deficit with China rose to about US$112 bn from about US$99 bn. (III) India's total exports of goods and services grew over the previous year. Which of the following inferences can validly be drawn from the above facts alone?

  1. The surplus with the U.S. by itself was not large enough to offset the deficit with China in FY26.
  2. India's overall current account was in deficit in FY26 because of its deficit with China.
  3. India's exports to the U.S. must have declined in FY26.
  • A. 2 and 3 only
  • B. 1 only
  • C. 1, 2 and 3
  • D. 1 and 2 only

Q4. With reference to regional trade arrangements under GATT Article XXIV, consider the following statements: Which of the statements given above is/are correct?

  1. A free-trade area must eliminate duties on all trade between its members, without any exception.
  2. In a customs union, the members apply common import duties to goods from non-members.
  3. Members of a free-trade area are required to harmonise the tariffs they levy on imports from non-members.
  • A. 2 only
  • B. 1, 2 and 3
  • C. 1 and 2 only
  • D. 2 and 3 only

Q5. The India–EFTA Trade and Economic Partnership Agreement (TEPA), in force since 2025, is regarded as distinctive among trade agreements because it includes:

  • A. A mechanism for settling all bilateral trade in the partners' national currencies
  • B. Immediate elimination of every tariff line on both sides on entry into force
  • C. A common external tariff adopted by India and its partners against non-members
  • D. An investment objective by partner states, linked to direct job creation in India

Q6. Consider the following assertion: 'Concentrating exports in a single large market increases an economy's vulnerability to trade-policy shocks.' Which of the following statements support the above assertion?

  1. A depreciating domestic currency makes an economy's exports cheaper in every foreign market at once.
  2. A tariff increase by a dominant buyer hits a large share of the exporter's sales at the same time.
  3. Exporters cannot quickly redirect goods to new markets because of differing standards, buyer networks and market-access costs.
  • A. 1 only
  • B. 1, 2 and 3
  • C. 1 and 2 only
  • D. 2 and 3 only

Q7. An importing country raises tariffs sharply on goods from Country P while competing suppliers keep lower tariffs. With reference to this situation, consider the following statements: Which of the statements given above is/are correct?

  1. Buyers in the importing country may switch to the competing suppliers even if those suppliers are higher-cost producers.
  2. Had the same tariff increase applied uniformly to all suppliers, it would have changed their competitiveness relative to one another just as much.
  3. Country P can partly offset the loss by selling more in markets where it enjoys preferential tariff access.
  • A. 1, 2 and 3
  • B. 1 only
  • C. 1 and 3 only
  • D. 2 and 3 only

Q8. With reference to India's balance of payments, consider the following statements: Which of the statements given above is/are correct?

  1. A decline in India's computer services exports, other things remaining the same, would widen the current account deficit.
  2. Private transfer receipts, mainly remittances by Indians employed overseas, are recorded in the current account.
  3. A fall in international crude oil prices, other things remaining the same, tends to narrow India's merchandise trade deficit.
  • A. 1, 2 and 3
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1 only