2 Foreign Trade

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Foreign Trade


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Composition of Exports

Agricultural Products

Textile Fabrics

Leather Products

Gems & Jewellery

Machinery & Transport Equipments

Minerals


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Composition of Imports

Oil / Petroleum products

Capital goods

Pearls & Precious stones

Iron


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Problems of India's Export

Poor quality image - Made in India

Infrastructural bottlenecks

High cost

Technology

Political instability

Unreliability Going back on contract Inability to provide prompt after sale service

Delivery on time


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Definition - Balance of Payment

A Balance of Payment account is a statement of double

entry system of record of all economic transactions

(involving foreign payments) between residents of a

country and the rest of the world carried out in specificperiod of time.


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Purpose Of BOP

Provides data for economic analysis

Reveals changes in the composition & magnitude

of foreign trade Provides indications of future repercussions of

countrys past trade performances

Reveals the weak and strong points of a countrys

foreign trade relations


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TERMINOLOGIES Favorable Balance Of Payments Value of total

receipts more than total payments

Adverse Balance Of Payments Value of total

receipts less than total payments

Balanced Balance Of Payments Value of total

receipts equals total payments

Unrequited receipts Receipts for which nothing

has to be paid in return.

Unrequited payments Payments for which nothing

is received in return.


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Balance ofTrade

Definition: Difference between value of exports and imports ofvisible items only

BOT BOP

Records only merchandisetransactions

Does not record transactions ofcapital nature

A part of current account ofBOP

Records transactions relating to bothgoods and services

Records transaction of capital nature

Includes BOT , Balance of services ,Balance Of Unrequited Transfers and

Balance Of Capital Transactions.


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BALANCEOFPAYMENTACCOUNTS


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CURRENTACCOUNT

All transactions relating to goods, services and

unrequited transfers constitute current account

Flow of items pertaining to specific period oftime

Visible items include

goods

Invisible items include

services


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Structure of current account

Transactions Credit Debit Net Balance

Merchandise Export Import -

2. Foreign Travel Earning Payment -

3. Transportation Earning Payment -

4. Insurance(Premium)

Receipt Payment -

5. Investment Income Dividend Receipt Dividend Payment -

6.Government

(purchase of goods &services)

Receipt Payment -

CURRENT A/CBalance

- - Surplus (+)Deficit (-)


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CAPITAL ACCOUNT

All transactions indicating changes in stock magnitudes

concerning capital receipts and payments constitute

capital account

Relates to

- Borrowing

- Capital repayment

- Sale of assets- Change in stock of gold

- Change in reserve of foreign currency


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Short term capital movement includes:

Purchase of short term securities

Speculative purchase of foreign currency

Cash balances held by foreigners

Net balance of current account

Long term capital movement includes:

Investments in shares, bonds, physical assets etc.

Amortization of capital


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DIFFERENCEBETWEENCURRENT

ACCOUNTANDCAPITAL ACCOUNT

CURRENT ACCOUNT CAPITAL ACCOUNT

Indicates flow aspect ofcountrys nationaltransactions

Relates to goods , servicesand unrequited transfers

Indicates changes in stockmagnitudes

Relates to all transactionsconstituting debts and transferof ownership


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STRUCTUREOF BALANCEOF

PAYMENTSACCOUNTCREDITS DEBITS

Current A/c:

Exports of goods(Visible items)Exports of services (Invisibles)Unrequited receipts(gifts , remittances,

indemnities,etc. form foreigners)

Capital A/c:Capital receipts (Borrowings fromabroad , capital repayments by , or sale

of assets to foreigners, increase in stockof gold and reserves of foreign currencyetc.)

Current A/c:

Imports of goods(Visible items)Imports of services(Invisibles)Unrequited payments( gifts, remittance,

indemnities etc. to foreigners)

Capital A/c:Capital payments (lending to , capitalrepayments to , or purchase of assetsfrom foreigners, reduction in stock of

gold and reserves of foreign currencyetc.)

TotalR

eceipts

Total Payments


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An Example

Let us consider the following hypothetical situation:

Export of goods Rs. 550 Crore

Import of goods

Rs. 650 Crore

Export of services Rs. 150 Crore

Import of services Rs. 70 Crore

Unrequited receipts Rs. 100 Crore

Unrequited payments Rs. 80 Crore

Capital receipts Rs. 200 Crore

Capital payments Rs. 200 Crore.


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Balance OfPayment

Account

Credits

Current A/c:

1) Export of goods 550

2) Export of services 150

3) Unrequited receipts 100

Capital A/c:

1) Capital receipts 200

Total receipts 1000

Debits

Current A/c:

1) Import of goods 650

2) Import of services 70

3) Unrequited payments 80

Capital A/c:

1) Capital payments 200

Total payments 1000


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EQUILIBRIUMIN BOPACCOUNTS

Total receipts equals total payments arising out of

transfer of

Goods and services

Other transactions

These transactions are classified as:-

Autonomous transactions

Induced transactions or Accommodating capitalflows


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In the current account autonomous transactions are

the export and import of goods and services

When export is not equal to import, short run capital

movements such as international borrowing and

lending take place, which are called induced oraccommodating transactions


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In the capital account the export and import of long

term capital are autonomous transactions

The short term capital movements viz. gold

movements and accommodating capital movements

on account of autonomous transactions are inducedtransactions.


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Example of Autonomous and

Accommodating transactions

Credits

Current A/c


1. Export of goods 550

2. Export of services 1503. Unrequited receipts

Gifts 75

Indemnity 25

Capital A/c


1. Borrowings 200

Receipts 1000

Debits

Current A/c


1. Import of goods 800

2. Import of services 503. Unrequited payments

Gifts 20

Remittance 60

Capital A/c


1. Lending 70

Payments 1000


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Disequilibrium

Total receipts and total payments inequality shows

disequilibrium of balance of payments account

Total receipt and payment arising from autonomous

transactions determine the deficit or surplus in thebalance of payments

If payments>receipts, BOP shows Deficit

If payments


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CAUSESOF DISEQUILIBRIUM

Increase in imports

Slow progress in exports

Burden of interest payments

International developments

Deficit in capital account


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CorrectiveMeasures

Devaluation

Export promotion

Import restrictions

Import substitution

Government intervention

Supply of credit

Special treatment to NRIs

Announcement of trade policies

Foreign aid

Improvements in production efficiency


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BOPAdjustments

INDIRECT MEASURES

Income measures

Fiscal PolicyMonetary Policy

Price measures

DIRECT MEASURE

Exchange control


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Variations in India s

d ficitposition

1991-1995:- Equal growth of exports & imports

1995-1999:- Growth of imports & stagnation of

exports(widening of trade deficits)

1999-2000:- Exports recovered while imports

surged(continued rise in trade deficits)

2000-2001:- Rise in exports & stagnation of

imports(normal level of trade deficit)

2001 Onwards Exports rising, but still deficit


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India s current BOPposition

Remained comfortable during 2007-08

Increase in net inflows by FIIs

Increase in FDI inflows

Increase in net surplus


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Capital Account ConvertibilityIn India, Foreign exchange transactions in foreign currencies are

broadly classified into two accounts :-

Current Account Transactions Capital Account Transactions

Components Transactions which gives rise or spends nationalincome.Merchandise /Invisible export & Imports .

Short Term Capital transactionsLong Term Capital transactions

Examples Import of refrigerator

Export Of SoftwareExport of steel

Sending money to a child studying in UnitedStates .

Capital Inflows :Indian company taking loan from US bank.Foreign investment in India (FDI)Capital Outflows:Indian Companies buying assets abroad.Ex- Tata forCorus Steel


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ConvertibilityConvertibility Aspect ofCurrent Account

India has Current Account convertibility which means that we are free to buyforeign exchange for importing goods, in other words rupee is fully convertible oncurrent account .

Convertibility Aspect ofCapital Account Today the rupee is not fully convertible on capital account as there existsrestriction on the money that comes in India or that goes out to buy assets abroad .

CAC is desirable due to following reasons :- Reduction in Cost ofCapital.

Diversify Portfolios Internationally.

Induces Competition against Indian Finance

Reduce size of black economy


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Dangers of CAC

Huge Inflow and Enormous Outflow.

Misallocation ofCapital inflows.

Export of domestic savings.

Creation of an unequal playing field.

2 Foreign Trade

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