Description
PROJECT ON FOREIGN TRADE
Foreign Trade
Composition of Exports
• Agricultural Products
•
• • • •
Textile Fabrics
Leather Products Gems & Jewellery Machinery & Transport Equipments Minerals
Composition of Imports
• • • Oil / Petroleum products Capital goods Pearls & Precious stones
•
Iron
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
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 specific period of time.
Purpose Of BOP
• Provides data for economic analysis • Reveals changes in the composition & magnitude of foreign trade • Provides indications of future repercussions of country’s past trade performances • Reveals the weak and strong points of a country’s foreign trade relations
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 receipts equals total payments total
• Unrequited receipts – Receipts for which nothing has to be paid in return. • Unrequited payments – Payments for which nothing is received in return.
Balance of Trade
Definition: Difference between value of exports and imports of visible items only
BOT • Records only transactions BOP merchandise •Records transactions relating to both goods and services
• Does not record transactions of • Records transaction of capital capital nature nature
• A part of current account of BOP • Includes BOT , Balance of services , Balance Of Unrequited Transfers and Balance Of Capital Transactions.
BALANCE OF PAYMENT ACCOUNTS
CURRENT ACCOUNT
• All transactions relating to goods, services and unrequited transfers constitute current account • Flow of items pertaining to specific period of time • Visible items include goods • Invisible items include services
Structure of current account
Transactions • Merchandise 2. Foreign Travel 3. Transportation 4. Insurance (Premium) 5. Investment Income 6.Government (purchase of goods & services) CURRENT A/C Balance Credit Export Earning Earning Receipt Dividend Receipt Receipt Debit Import Payment Payment Payment Dividend Payment Payment Net Balance -
-
-
Surplus (+) Deficit (-)
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
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
DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT
CURRENT ACCOUNT
CAPITAL ACCOUNT
• Indicates flow aspect of • Indicates changes in country’s national stock magnitudes transactions • Relates to all • Relates to goods , transactions constituting services and unrequited debts and transfer of transfers ownership
STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT
CREDITS 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 from abroad , capital repayments by , or sale of assets to foreigners, increase in stock of gold and reserves of foreign currency etc.) Current A/c: •Imports of •Imports of •Unrequited remittance, foreigners) goods(Visible items) services(Invisibles) payments( gifts, indemnities etc. to DEBITS
Capital A/c: •Capital payments (lending to , capital repayments to , or purchase of assets from foreigners, reduction in stock of gold and reserves of foreign currency etc.)
Total Receipts
Total Payments
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.
Balance Of Payment 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 Total receipts Debits • Current A/c: 1) Import of goods 650 2) Import of services 70 3) Unrequited payments 80 • Capital A/c: 1) Capital payments Total payments
200 1000
200 1000
EQUILIBRIUM IN BOP ACCOUNTS
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 capital flows
• 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 or accommodating transactions
• 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 induced transactions.
Example of Autonomous and Accommodating transactions
Credits • Current A/c
Autonomous transactions
Debits
• Current A/c
Autonomous transactions
1. Export of goods 550 2. Export of services 150 3. Unrequited receipts Gifts 75 Indemnity 25 • Capital A/c
Accommodating transactions
1. Import of goods 800 2. Import of services 50 3. Unrequited payments Gifts 20 Remittance 60 • Capital A/c
Accommodating transactions
1. Borrowings Receipts
200 1000
1. Lending Payments
70
1000
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 the balance of payments • If payments>receipts, BOP shows Deficit • If payments<receipts, BOP shows Surplus
CAUSES OF DISEQUILIBRIUM
• Increase in imports
• Slow progress in exports
• Burden of interest payments • International developments • Deficit in capital account
Corrective Measures
• • • • • • • • • • 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
BOP Adjustments
• INDIRECT MEASURES Income measures
Fiscal Policy Monetary Policy
Price measures
• DIRECT MEASURE Exchange control
Variations in India’s deficit position
• 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
India’s current BOP position
• Remained comfortable during 2007-08 • Increase in net inflows by FIIs • Increase in FDI inflows • Increase in net surplus
Capital Account Convertibility
In India, Foreign exchange transactions in foreign currencies are broadly classified into two accounts :Current Account Transactions
?Transactions which gives rise or spends national income. ?Merchandise /Invisible export & Imports .
Capital Account Transactions
?Short Term Capital transactions ?Long Term Capital transactions
Components
Examples
?Import of refrigerator ?Export Of Software ?Export of steel ?Sending money to a child studying in United States .
Capital Inflows : ?Indian company taking loan from US bank . ?Foreign investment in India (FDI) Capital Outflows: ?Indian Companies buying assets abroad. Ex- Tata for Corus Steel
Convertibility
Convertibility Aspect of Current Account India has “Current Account convertibility” which means that we are free to buy foreign exchange for importing goods, in other words rupee is fully convertible on current account . Convertibility Aspect of Capital Account Today the rupee is not fully convertible on capital account as there exists restriction 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 of Capital. ?Diversify Portfolios Internationally. ?Induces Competition against Indian Finance
?Reduce size of black economy
Dangers of CAC
Huge Inflow and Enormous Outflow. Misallocation of Capital inflows. Export of domestic savings. Creation of an unequal playing field.
doc_887372497.ppt
PROJECT ON FOREIGN TRADE
Foreign Trade
Composition of Exports
• Agricultural Products
•
• • • •
Textile Fabrics
Leather Products Gems & Jewellery Machinery & Transport Equipments Minerals
Composition of Imports
• • • Oil / Petroleum products Capital goods Pearls & Precious stones
•
Iron
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
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 specific period of time.
Purpose Of BOP
• Provides data for economic analysis • Reveals changes in the composition & magnitude of foreign trade • Provides indications of future repercussions of country’s past trade performances • Reveals the weak and strong points of a country’s foreign trade relations
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 receipts equals total payments total
• Unrequited receipts – Receipts for which nothing has to be paid in return. • Unrequited payments – Payments for which nothing is received in return.
Balance of Trade
Definition: Difference between value of exports and imports of visible items only
BOT • Records only transactions BOP merchandise •Records transactions relating to both goods and services
• Does not record transactions of • Records transaction of capital capital nature nature
• A part of current account of BOP • Includes BOT , Balance of services , Balance Of Unrequited Transfers and Balance Of Capital Transactions.
BALANCE OF PAYMENT ACCOUNTS
CURRENT ACCOUNT
• All transactions relating to goods, services and unrequited transfers constitute current account • Flow of items pertaining to specific period of time • Visible items include goods • Invisible items include services
Structure of current account
Transactions • Merchandise 2. Foreign Travel 3. Transportation 4. Insurance (Premium) 5. Investment Income 6.Government (purchase of goods & services) CURRENT A/C Balance Credit Export Earning Earning Receipt Dividend Receipt Receipt Debit Import Payment Payment Payment Dividend Payment Payment Net Balance -
-
-
Surplus (+) Deficit (-)
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
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
DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT
CURRENT ACCOUNT
CAPITAL ACCOUNT
• Indicates flow aspect of • Indicates changes in country’s national stock magnitudes transactions • Relates to all • Relates to goods , transactions constituting services and unrequited debts and transfer of transfers ownership
STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT
CREDITS 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 from abroad , capital repayments by , or sale of assets to foreigners, increase in stock of gold and reserves of foreign currency etc.) Current A/c: •Imports of •Imports of •Unrequited remittance, foreigners) goods(Visible items) services(Invisibles) payments( gifts, indemnities etc. to DEBITS
Capital A/c: •Capital payments (lending to , capital repayments to , or purchase of assets from foreigners, reduction in stock of gold and reserves of foreign currency etc.)
Total Receipts
Total Payments
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.
Balance Of Payment 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 Total receipts Debits • Current A/c: 1) Import of goods 650 2) Import of services 70 3) Unrequited payments 80 • Capital A/c: 1) Capital payments Total payments
200 1000
200 1000
EQUILIBRIUM IN BOP ACCOUNTS
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 capital flows
• 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 or accommodating transactions
• 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 induced transactions.
Example of Autonomous and Accommodating transactions
Credits • Current A/c
Autonomous transactions
Debits
• Current A/c
Autonomous transactions
1. Export of goods 550 2. Export of services 150 3. Unrequited receipts Gifts 75 Indemnity 25 • Capital A/c
Accommodating transactions
1. Import of goods 800 2. Import of services 50 3. Unrequited payments Gifts 20 Remittance 60 • Capital A/c
Accommodating transactions
1. Borrowings Receipts
200 1000
1. Lending Payments
70
1000
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 the balance of payments • If payments>receipts, BOP shows Deficit • If payments<receipts, BOP shows Surplus
CAUSES OF DISEQUILIBRIUM
• Increase in imports
• Slow progress in exports
• Burden of interest payments • International developments • Deficit in capital account
Corrective Measures
• • • • • • • • • • 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
BOP Adjustments
• INDIRECT MEASURES Income measures
Fiscal Policy Monetary Policy
Price measures
• DIRECT MEASURE Exchange control
Variations in India’s deficit position
• 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
India’s current BOP position
• Remained comfortable during 2007-08 • Increase in net inflows by FIIs • Increase in FDI inflows • Increase in net surplus
Capital Account Convertibility
In India, Foreign exchange transactions in foreign currencies are broadly classified into two accounts :Current Account Transactions
?Transactions which gives rise or spends national income. ?Merchandise /Invisible export & Imports .
Capital Account Transactions
?Short Term Capital transactions ?Long Term Capital transactions
Components
Examples
?Import of refrigerator ?Export Of Software ?Export of steel ?Sending money to a child studying in United States .
Capital Inflows : ?Indian company taking loan from US bank . ?Foreign investment in India (FDI) Capital Outflows: ?Indian Companies buying assets abroad. Ex- Tata for Corus Steel
Convertibility
Convertibility Aspect of Current Account India has “Current Account convertibility” which means that we are free to buy foreign exchange for importing goods, in other words rupee is fully convertible on current account . Convertibility Aspect of Capital Account Today the rupee is not fully convertible on capital account as there exists restriction 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 of Capital. ?Diversify Portfolios Internationally. ?Induces Competition against Indian Finance
?Reduce size of black economy
Dangers of CAC
Huge Inflow and Enormous Outflow. Misallocation of Capital inflows. Export of domestic savings. Creation of an unequal playing field.
doc_887372497.ppt