BALANCE OF PAYMENTS AND BALANCE OF TRADE IN POST BALANCE OF PAYMENTS AND BALANCE OF TRADE IN POST REFORMS IN INDIAREFORMS IN INDIA

PRESENTED BYPRESENTED BY

Vinayak R Sandeep Koyande

Lovekeshkumar Satish C Ayappan

Nandish Doshi Devendra Pendse

Introduction WHY THE POST-1990 REFORMS?

WHAT ARE THE DRIVING FORCES BEHIND THE REFORMS ?

THE FUNDAMENTAL OBJECTIVE OF ECONOMIC REFORMS

MAJOR ECONOMIC REFORMS Economic reforms launched since June 1991 may be

categorized under two broad areas:

Major macro-economic management reforms

Structural and sector-specific economic reforms

BALANCE OF PAYMENTS Systematic record of all economic transactions

during a given period between the country's residents & the rest of the world during a specific time period, usually a year.

Economic transactions include exchanges of goods, services or assets.

Balance of payments comprises Current account, Capital account and Reserve account

Cont… Current account records import of goods and export of

goods. Invisibles like services provided and recd. Transportation, Travels & Tourism receipts and payments, income from investments, and unilateral transfers like gifts, government aid.

Capital account represents all the inflows and outflows of capital of a country

Reserve account is the balancing account of balance of payment countries monetary control authority maintains certain reserves of gold foreign bonds of various countries and foreign exchange.

Balance of trade Trade account of the balance of payments

includes exports and imports of goods in a year

Difference between the value of exports of goods and imports of goods

CURRENT A/C

Merchandise i.e. Tangible Goods – BOT

Invisible i.e. Intangible i) Services ii) Income on Investment iii) Unilateral Transfers

 

Merchandise tradeMerchandise trade

Export of goods (+) Import of goods (-) Merchandise Trade Balance is affected by

exchange rates & income changes, monetary & fiscal growth, unexpected supply shocks & international competitiveness.

All exports & imports must be registered through customs. It is reported on a monthly basis.

Invisible i.e. Intangible Services - Banking, Insurance, services and consultancy services etc. are provided by one country to other countries.

Income on Investment - receive interest on loans given to other countries - Dividends on investments made by its people in other countries

Unilateral Transfers - People of a country receive gifts from their friends and relatives living abroad or sending gifts to their relatives or friends

CAPITAL A/C

Investments Foreign Investment Loans & Fixed Assets Debts

Balancing OR Reserve A/C:- IMF & RBI

Foreign exchange reserve, gold reserve, special drawing rights

Generic Balance of Payments

Factors Affecting balance of Payments Economic factors

Import of new technology new machines from other countries lead to deficit in balance of payment position

High rate of inflation

Developing and exporting of high quality of products which may lead to surplus in balance of payments.

Cont… Political factors

portfolio investment and also industrial production increases which indirectly improves exports.

Populist measures adopted by govt. generally adds deficits to balance of payment.

Social factors

Large Population

Trade Policies Pre-Reform Period

Trade Policies can be divided to following

Import Polices

Export Policies

Import policies Import policies are formulated to control different

facets of business & economy

Pre-reform period had two important parts viz • Import restrictions • Import substitution

Import Restrictions Licenses were issued for import of goods

Items to be imported were divided into three groups a) consumer goods b) intermediate goods C) capital goods

Cont….

Each category further sub-divided into Non permissible or banned Limited Permissible Automatic permissible Open General License

Cont… Import Substitution Govt. gave emphasis for development of products

which could substitute imports

Mainly 2 objectives To save scarce foreign exchange for imports of more important goods

To achieve self reliance in production of as many goods as possible

From 1977 India adopted import liberalization policy, salient features were

Cont… Capital goods were placed under OGL i.e they could

be imported freely.

Large number of raw materials, components & consumables were also placed under OGL.

Import Policy for Registered Exporters

Policy for Registered Trading Houses.

Technology import was made liberal.

Export policies

Export policies can also be divided into 3 periods

Phase 1-1956-73 i.e upto 1st oil shock of 1973

Phase 2- Begun on 1973 to a decade.

Phase 3 -The following years to 1991

Important export policies in Pre-reform Period Cash Compensatory Support.

Duty Drawback System.

Replenishment licenses.

Advanced Licenses And Duty Exemptions.

EPZ and 100% EQUs.

Fiscal Concessions for exports.

Export Credit And Assistance to EPCs.

New trade policies

New trade policies were formulated after liberalization process started in 1991

From 1991 Govt. made efforts to make Indian companies comparative with companies from developed countries

In 1995 India joined WTO as a founder member.

To strike down all quantitative restrictions on imports so as to open Indian market for foreign companies.

Free Imports & Exports – barring few critical items mainly relating to defense & nuclear related items were moved to OGL

Features of New Trade Policy

Rationalization of Tariff Structure- lot of categories merged & import duties drastically cut

Decanalisation- restrictions on who can export/import were removed

Trading Houses- Govt. allowed wide range of items to be imported & 51% foreign equity allowed

Special Economic Zones (SEZs) to generate economic activity promotion of export of goods & services

Cont… investment, employment opportunities

& development of infrastructure facilities

Export Oriented Units (EOUs)- units which export 100% of production

Agriculture Export Zones-clusters are formed such that services of pre & post harvest treatment & operations, plant protection, processing, packaging, storage & related R&D facilities are

Cont… other policies are also formulated Market Access initiative

Focus on service exports

5 thrust exports mainly for agri, handicrafts, handlooms, gems& jewellery & leather & footwear sectors

Served from India to be built as a brand

Reducing transactional costs & simplifying procedures

.

Concessions & exemptions

Balance of payment positions in Pre & Post reform period

In 1972 during 4th plan crude oil prices were increased by OPEC countries which intern added to deficit in balance of payment position.

during first period i.e. 1956-57 to 1975-76 balance of payment positions was deficit.

Period II i.e. 1976 -77 to 1979-80 is called golden period as country has current account surplus and foreign exchange reserves to cover 7 months exports.

Period III is from 1980–81 to 1990*91 is marked with severe balance of payment difficulties.

Balance of payment and balance of trade position of India after post reform period

  India's balance of payments Situation since 1991

Indicator 1992-93 1993-94 1995-96 2000-01 2001-02 2002-03 2004-05 2006-07 2007-08 2008-09Current accunt balance -1.7 -0.4 -1.7 -0.6 0.7 1.3 -0.4 -1.1 -1.5 -2.6(as % of GDP)                    

Import cover of foreign exchange reserves 4.9 8.6 6 8.8 11.5 14.2 14.3 12.5 14.4 10.3(no. of months)                    Imports, dollar values  15.4 10 21.6 4.6 -2.8 14.5 48.6 21.4 35.5 14.3(annual growth rate)                    Export, dollar values 3.3 20.2 20.3 21.1 -1.6 20.3 28.5 22.6 29 3.4(annual growth  rate)                    

   India's balance of payments: 1993-94 to 2008-09 (US $ million)

year   Trade balance  Invisibles Current CapitalReserve use

             1993-94   -4056 2898 -1158 9882 -87241994-95   -9049 5680 -3369 8013 -46441998-99   -13246 9208 -4038 7867 -3829

1999-2000   -17841 13143 -4698 10840 -61422000-01   -12460 9794 -2666 8535 -58422001-02   -11574 14974 3400 8357 -117572002-03   -10690 17035 6345 10640 -169852003-04   -13718 27801 14083 17338 -314212007-08   -91626 74592 -17034 109198 -921642008-09   -119403 89586 -29817 9737 +20080

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