Transcript Now - Techshristi

Concepts of Foreign Trade
External Sector
• India’s external sector consists of our
•
Foreign trade
•
Trade – in – services
•
Foreign capital flows like FDI, FII
•
Balance of Payments
•
Exchange rate management
2 of 38
Foreign Trade
• Foreign trade, also called as international trade
is as old as history.
• Trade among countries is normal & desirable
and exists for different reasons.
• One country has product A in surplus and lacks
in respect of Product B.
•
One country produces a particular commodity
at less cost than it is done in another country.
• Foreign trade is significant for the economic
development of all countries, particularly
developing countries
3 of 38
Extent of foreign trade
( Amount in Rs. Crores )
Year
Exports
Imports
Total trade
Balance of trade
85 – 86
10895
19658
30553
-8763
90 – 91
32553
43198
75751
-10645
95 – 96
106353
122678
229031
-16325
02 – 03
255137
297206
552343
-42069
06 – 07
563800
820568
1384368
-246768
4 of 38
Foreign Trade
• Volume of foreign trade has been increasing
• Trade to GDP ratio has gone up from 13% in
1980 to about 20% as of now.
• Composition of our foreign trade has been changing
• India is exporting manufactured goods like Gems &
Jewellery, Pharma drugs, software , Engg. Goods
• Fastest growing export destinations include EU, USA, UAE,
China, Singapore.
• Value of imports has been on the increase due to increase
in domestic consumption.
5 of 38
Significance of exports
• Export earnings are required to finance our imports
• Require to spend more foreign exchange earnings
on the import of crude oil, machinery.
• India has huge debts and we need foreign exchange
earnings to service the debts.
• Exports would make our economy highly vibrant.
• It calls for quality products produced at reasonable
costs
• India’s exports increased @ 5.9% during 1980-97
whereas for countries like China, Singapore it is @
11%
6 of 38
Reasons for our exports lagging behind
• Problem with quality of our goods.
• Lack of competitive advantage when compared to
other countries due to higher cost of production.
• Our exports are pitted against tariff barriers
imposed by the developing countries
• Supply is not adequate to meet demands of home
market, thus hampering exports.
7 of 38
EXIM Policy
• Government announces EXIM policy once
in every five years
• Policy can be changed through annual
policy statements.
• New EXIM policy was announced in Aug
2009 and valid upto March 2014
8 of 38
New EXIM Policy
•
The new policy seeks to assign a major role to
foreign trade, helping India to further integrate with
world economy
• Achieving annual export growth rate of 15% with
an annual export target of US$200 bn by March
2011, and export growth of 25% per annum during
2011 – 2014.
• By 2014, to double India’s exports of goods and
services.
• To act as an effective instrument of economic
growth by giving a thrust to employment
generation.
9 of 38
Strategy of new EXIM Policy
• Removing controls and creating an
atmosphere of trust and transparency to
encourage Indian entrepreneurs.
• Facilitating development of India as a
global hub of manufacturing, trading and
services.
• Facilitating technological and infrastructural
up gradation of all sectors of the economy
• Activating India’s Embassies as key
players in our export strategy
10 of 38
Trade in Services
• Services include telecom, banking, tourism,
insurance, transportation, software services
and professional services.
• Receipts from travel depend on tourist facilities
in the country
• Transportation receipts depend on
merchandise exports originating from country
• Receipts of repatriation of international
investment income of India depend growth of
world economy.
11 of 38
Balance of payments
• BoP is a systematic and summary record of
a country’s economic and financial
transactions with the rest of the world over
a period of time
• All transactions between the citizens of a
nation and those of other nations are
recorded in the balance of payments for a
given period of time.
12 of 38
Balance of payments
• Balance of trade takes into account only the
transactions arising out of exports and imports of
merchandise goods ie. visible items
• Balance of trade does not consider the exchange
of invisible items such as services rendered by
shipping, insurance,banking, tourism
• Balance of payments takes into account the
exchange of both visible and invisible items
• Balance of payments presents a better picture of
a country’s transactions with the rest of the world
than the balance of trade.
13 of 38
Recording International Payments
• The basic technique is standard, double-entry
accounting.
• A flow of funds statement that shows changes in
assets, liabilities and net worth over time.
• The balance of payments statement is to inform
government authorities of the international position
of the country to assist them with monetary-fiscal
questions as well as trade and payments policies.
14 of 38
Components of balance of payments
• BoP is generally grouped under the heads
• Current account
• Capital account
• Unilateral payments account
• Official settlement account
15 of 38
Current account
• Current account consists of 2 major items
• Merchandise exports and imports
• Invisible exports and imports ( Services )
• Merchandise exports ie., the sale of goods abroad,
are the credit entries in the BoP of India
• All transactions giving rise to monetary claims on
foreigners represent credit entry in the BoP of India
• Merchandise imports ie., the purchase of goods
from abroad are debit entries in the BoP of India
• All transactions giving rise to foreign money claims
on the home country ( India ) represent a debit entry
in the BoP of India
16 of 38
Current account
• Merchandise exports and imports form the most
important international transactions of many
countries.
• Invisible exports ie., sales of services are credit
entries in the BoP of India and debit entries in the
BoP of other nation ( USA )
• Invisible imports ie., purchase of services are debit
entries in the BoP of India and credit entries in the
BoP of other nation ( USA )
17 of 38
Capital account
• Capital account consists of short term and long term
capital transactions.
• A capital outflow represents a debit entry in the BoP
of India.
• A capital inflow represents a credit entry in the BoP
of India.
• For example, if an Amercian company invests
Rs.100 Mn in India, this transaction will be
represented as a credit entry in the BoP of India and
a debit entry in the BoP of USA.
18 of 38
Capital account
• Payment of interest on loans and dividend
payments are recorded in the current account since
they are really payments for the services of capital.
• Interest paid on loans given by foreigners, dividend
payments to foreigners are debit entries in the BoP
of India ( Home country )
• Interest received and dividends received on foreign
investment are credit entries in the BoP of India
19 of 38
Unilateral transfers account
• These unilateral transfers include private remittances,
government grants, disaster reliefs
• Unilateral transfers is another term for gifts received or
gifts donated
• Unilateral payments received from abroad are credit
entries in the BoP of India
• Unilateral payments made abroad are debit entries in the
BoP of India
20 of 38
Official settlement accounts
Official reserves represent holdings by the government
or official agencies
It is a means of payment that are generally accepted
for settlement of internatonal claims
Balance of Payments Items
Credits
Debits.
Current Account
Current Account
1. Merchandise Exports
1.Merchandise Imports
(Sale of Goods)
(Purchaseof Goods)
2. Invisible Exports
(Sale of Services)
2.Invisible Imports
(Purchase of Services)
(a)
Transport Services sold
abroad
(b)
Insurance services sold abroad
abroad
(c) Foreign tourist expenditure in country
(d) Incomes received on
loans and Investment in
Home country
Transport Services purchased from
Insurance Services purchased from
Tourist Expenditure abroad
Income paid on loans and investments abroad.
Credits
Capital Account
Foreign long-term investments in the home
Direct investments in the home country
Foreign investments in domestic securities
Other investments of foreigners
Foreign short-term invest. In home country
Debits.
Capital Account
Long-term investments abroad.
Direct investments in abroad country.
Investments in foreign securities
Other investments abroad
Short-term investments abroad
Credits
Unilateral Transfers
Debits.
Account
Private remittances received from aborad
Pension Payments received from aborad
Government grants received from aborad
Credits
Official Settlements Accounts
Official sales of foreign currencies
abroad
Unilateral Transfers Account
Private remittances abroad
Pension payments abroad.
Government grants abroad
Debits.
Official Settlements Accounts
Official purchases of foreign currencies
abroad
Balance of Payments Equilibirum
The balance of payments of a country is said to be in
equilibrium when the demand for foreign exchange is
exactly equivalent to the supply of it.
The balance of payments is in disequilibrium when
there is either a surplus or a deficit in the balance
of payments.
When there is a deficit in the balance of payments,
the demand for foreign exchange exceeds the
supply for it.
Exchange Rate Management
Countries make use of their respective exchange rates while
dealing with other countries
Every country wants to maintain an equilibrium exchange rate.
The objectives of our exchange rate policy are
• Reduce excess volatility in exchange rates
• Maintain an adequate level of foreign exchange reserves
Exchange Rate Management
The United Exchange Rate system ( UERS) brought into force in
March 1992, has the following features
• The rates of exchange are determined in the market
• RBI intervention in the market to modulate the volatility and
sharp depreciation of the rupee
• The US dollar is the principal currency for the RBI transactions