1. PRESENTATION ON INDIA’S BALANCE OF PAYMENTS 2013
AND EXCHANGE RATES
Submitted By
Group II, Defence Executives Batch 2013
Narsee Monjee Business School,Mumbai
(Shipra Sharma, Ashwini Kumar Y, Raghuram N, Dhirendra Kumar, Mahesh R, Achuthan JK)
14 October 2013
2. INDIA’S BALANCE OF PAYMENTS POSITION 2013
Balance of Payments : Definition
The Balance of Payments of a Country can be defined as the
Statistical Record of a Country’s International Trade over a
certain period of time, presented in the form of double entry
Book-keeping.
Balance of Payments (BoP) accounts, are an accounting
record of all monetary transactions between a Country and
the rest of the world. These transactions include payments
for
the
country's
exports
and
imports
of
goods, services, financial capital, and financial transfers.
The BoP accounts summarize international transactions for a
specific period, usually a year, and are prepared in a single
currency. Sources of funds for a nation, such as exports or
the receipts of loans and investments, are recorded as
positive or surplus items. Uses of funds, such as for imports
or to invest abroad, are recorded as negative or deficit
items.
3. INDIA’S BALANCE OF PAYMENTS POSITION 2013
Balance of Payments : Definition ……….
When all components of the BOP accounts are included
they must sum up to zero with no overall surplus or deficit.
For example, if a country is importing more than it exports, its
trade balance will be in deficit, but the shortfall will have to
be counterbalanced in other ways – such as by funds earned
from its foreign investments inflows, by running down
existing central bank reserves or by accepting loans (with
stringent conditionalities) from outside.
4. INDIA’S BALANCE OF PAYMENTS POSITION 2013
Balance of Payments : Explanation of Disequilbrium
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 BoP is in disequilibrium when there is a deficit. When there is a
deficit in the Balance of Payments, the demand for foreign exchange
exceeds the ACTUAL AVAILABILITY. A number of factors may cause
disequilibrium in the Balance of Payments. These various causes may be
broadly categorized into :
(a) Economic Factors
(b) Political Factors
(c) Sociological Factors
5. INDIA’S BALANCE OF PAYMENTS POSITION 2013
Balance of Payments : Explanation of Disequilbrium ……..
1. Economic Factors : A number of economic factors may cause disequilibrium in the BOP. These are :
(a) ‘Developmental’ Disequilibrium : Large-scale developmental expenditures usually increase the
purchasing power, aggregate demand and prices, resulting in substantially large imports. The development
disequilibrium is common in developing countries, because large-scale capital goods imports give rise to a
deficit in the Balance of Payments.
(b) ‘Capital’ Disequilibrium : Cyclical fluctuations in general business activity are one of the prominent
reasons for the balance of payments disequilibrium. Depression always brings about a drastic shrinkage in
world trade, while prosperity stimulates it. A Country enjoying an economic boom experiences more rapid
growth in its imports than its exports.
(c) ‘Secular’ Disequilibrium : Sometimes, the BoP disequilibrium persists for a long time because of certain
secular trends in the economy. The factors of high aggregate demand and high domestic prices (eg of
petroleum and gold) may result in imports being higher than exports. This could be one of the reasons for
the persistent Balance of Payments deficit of India.
(d) ‘Structural’ Disequilibrium : Structural changes in the economy may also cause Balance of Payments
disequilibrium. Such structural changes include the requirement of alternative sources of supply, enhanced
consumer demand, the exhaustion of productive resources, inefficient domestic manufacturing
capabilities, excessive regulative mechanisms and cost-overun.
2.
Political Factors : Certain internal or external political factors may also produce a BoP disequilibrium. A
country plagued with political instability may experience large capital outflows, inadequacy of domestic
investment, etc.
3. Social Factors : Sometimes social factors also influence the BoP. For instance a laidback attitude of the
people, excessive taxation regime, lack of incentives etc. will affect Volumes of Imports and Exports.
7. Current Account (CA)
This is record of a country’s trade in goods and
services in the current period.
CA = Exports (X) – Imports (M)
It is divided into 4 sub-categories:
Goods Trade
Services Trade
Income
Current Transfers
The sum of the four sub-categories = CA Balance
8. Capital Account (KA)
This includes all short-term and long-term
transactions pertaining to financial assets.
KA = Capital Inflow (cr) – Capital Outflow (dr)
The two main components:
Capital Account.
Financial Account (direct, portfolio, other).
KA Balance = Sum of Capital Account and
Financial Account.
9. OFFICIAL RESERVES
Records the purchase or sale of official reserve assets by the
Central Bank. These assets include
Commercial Paper, Treasury Bills and Bonds
Foreign Currency
Money deposited with the IMF
This account shows the change in foreign exchange reserves
held by the Central Bank.
The Balance of
Since the BOP must balance
Payments Identity
CA + KA + RFX = 0
CA + KA = – RFX
For floating rate regime countries, such as the
U.S., Canada etc official reserves are relatively
unimportant.
10. Statistical Discrepancy (E&O)
The identity CA + KA = – RFX assumes that all transactions are
measured accurately.
Inaccurate recording of transactions (errors &
omissions), results in the above equality not holding. For BOP
to balance,
CA + KA + E&O = – RFX
Assuming changes in official reserves, errors are approximately
zero:
Current Account = (–) Capital Account
This will hold approximately for floating rate countries
11. BOP in Total
A surplus in the BOP generally implies that the
demand for the country’s currency exceeded the
supply and that the government should allow the
currency value to increase – or intervene and
accumulate additional foreign currency reserves in
the Official Reserves Account. (NA for India!)
A deficit in the BOP implies an excess supply of the
country’s currency on world markets, and the
government should then either devalue the currency
or expend its official reserves to support its value.
12. Accounting Principles
1.
2.
3.
4.
5.
Any transaction resulting in a payment to foreigners is
entered in the BOP accounts as a debit and is given a
negative sign.
Any transaction resulting in a receipt from foreigners is
entered as a credit and given a positive sign.
Current Account records transactions involving exports and
imports of goods and services
Capital Account records transactions involving the purchase
and sale of assets.
Double-Entry book keeping: Every international transaction
automatically enters twice, once as a credit and once as a
debit.
13. Examples of Transactions
Credit Transactions (+ve):
Provision of goods and services to non-residents
Income receivable from non-residents
A decrease in foreign financial assets
An increase in foreign financial liabilities
Debit Transactions (-ve):
Purchase of goods & services from non-residents
Income payable to non-residents
An increase in foreign financial assets
A decrease in foreign financial liabilities
15. INDIA’S BALANCE OF PAYMENTS POSITION 2013
BoP Position as on 31 March 2013
A Current Account (in Billion $)
Earnings
1. Merchandise Exports
Spendings
306.58
2. Merchandise Imports
502.34
3. BALANCE OF TRADE
- 195.66
4. Invisibles (which include :-)
107.49
(a) Software Exports less Imports :
64.92
(b) Private Transfers less Income Outflow :
42.89
Total Current Account Deficit
=
- 88.16
16. INDIA’S BALANCE OF PAYMENTS POSITION 2013
INDIA’S CURRENT ACCOUNT DEFICIT
Points to Note
1. Current Account Deficit is 4.2 % of GDP.
2. Average BOT Deficit was running @ - 16.31 Billion $ / Month !
3. Share of Manufactured Goods & Engineering Goods in Exports was only
41 %. This needs to expand @ 15-20 % every year over the next 5 Years by
a CCEA monitored strategy, if we have to quickly get into the Safety Zone.
4. Petroleum Imports was $ 169.4 Billion $. Urgent need to give priority to Oil &
Gas Exploration & Production to cut down imports from the present 80 % to
< 50 % over the next 7 Years.
17. INDIA’S BALANCE OF PAYMENTS POSITION 2013
BoP Position as on 31 March 2013
B Capital Account (in Billion $)
Earnings
Spendings
This primarily includes :-
1. FDI
19.82
2. Portfolio Investment (FII)
26.89
3. External Assistance
0.98
4. Commercial Borrowings
8.49
5. Suppliers Credits
21.66
6. Banking Capital (mainly NRI Deposits)
16.57
7. Other Capital Outflow
- 5.05
8. Foreign Exchange Reserves Interventions
- 3.83
9. Errors and Omissions
NET CAPITAL ACCOUNT
2.69
=
88.16
Points to Note :
1. Urgent Need to expedite creating 8 ‘Shenzhen’ Model and Size EPZ, one in each Maritime State.
2. FDI needs to be given ‘Tax free’ status for 5 Years PERIOD.
3. Sufficient Quantity of Long Term Foreign Currency ‘India Bonds’ needs to be issued in
International Currency Markets, at attractive Rate of Interest to bring in Foreign Capital.
18. INDIA’S BALANCE OF PAYMENTS POSITION 2013
General Comments
1. India’s CAD Problem has been saved by the ‘Factors’ of Remittances
by Indians Working Abroad + Invisible Exports (Software, BPO etc). But
these Factors are reliable, only under favourable circumstances.
2. Tourism and Transit facilities Industry needs to be given a tremendous
‘Boost’ by quickly improving the Quality. Each State of ours must become
an International Tourist Destination with good connectivity.
3. We must not rely on FII inflows, as these are ‘volatile’ and not
available when there is ‘Stress’.
19.
20. How to correct the Balance of
Payment ?
• Earning more foreign exchange through
additional exports or reducing imports
• Quantitative changes in exports and imports
require FURTHER policy changes
• Such policy measures are in the form of
monetary, fiscal and non-monetary
measures.
21. FOREIGN TRADE POLICY
• TECHNOLOGICAL UPGRADATION
• INCENTIVES FOR PROMOTING INVESTMENT IN
LABOUR INTENSIVE SECTORS
• ENCOURAGEMENT FOR MANUFACTURING
SECTOR IN DOMESTIC MARKET
• SIMPLIFICATION OF PROCEDURES
• MARKET & PRODUCT DIVERSIFICATION
22. Measures to Boost Visible Trade
• Cabinet Secretary appointed an InterMinisterial Committee to suggest short and
medium term measures to enhance Exports
from MSME (Micro, Small and Medium
Enterprises) sectors in India
• The Committee submitted its report in July
2013
23. Report of the Inter-Ministerial
Committee
• the major problems for the MSMEs relate to
the availability and cost of credit, marketing
support, improving productivity, technology /
skill upgradation, infrastructure and the
institutional framework for the MSMEs.
• Issues are also related to specific products like
Chemicals, Plastic, Leather, Handicrafts,
Textiles and Agricultural Products and specific
Markets
24. MAJOR RECOMMENDATIONS OF THE COMMITTEE
• Availability and Cost of Credit
– An additional interest subvention of 2% for those
exporters who repay on a timely basis
– automatic increase in foreign currency limits due
to rupee depreciation
– banks to aim for at least 40% export credit to
MSMEs and targets for banks to increase MSME
borrowers by 10% annually until 2017
25. MAJOR RECOMMENDATIONS OF THE COMMITTEE
• Marketing Support:
– Enhancement of budget and scope under
MDA/MAI schemes
– greater focus on brand building and trade fairs
– double income tax deduction for marketing
expenses
– support for E-Commerce and a focus on Asian
Markets
26. MAJOR RECOMMENDATIONS OF THE COMMITTEE
• Productivity/Technology/Skills Upgradation
– Modification in labour laws to enable more
overtime hours and employment of women in
night shifts with necessary safety
– enhancement of technology upgradation
schemes with both capital subsidy and interest
subvention
– setting up of research/resource/product
development centres
27. MAJOR RECOMMENDATIONS OF THE COMMITTEE
• Infrastructure for MSMEs
– 24*7 facilities for export consignments at major
air cargo/sea port complexes
– enhancement of ASIDE scheme and development
of MSME clusters near Highways/Rail Corridors.
• Incentives/Taxes related issues:
– A differential corporate/income tax regime for
MSME exporters
– reduce costs & removal of service tax
28. MAJOR RECOMMENDATIONS OF THE COMMITTEE
• Institutional Framework
– resolve policy and implementation related issues
– greater coordination at the ground level between
Customs and DGFT offices.
• Sector Specific Issues
– a cess of 0.1% on the production of chemical and
Plastics for creating a fund for technology
upgradation for the two sectors
– Support for handicrafts, horticulture, agricultural
exports.
29. INDIA’S BALANCE OF PAYMENTS POSITION 2013
CONCLUSION
1. The ‘Quantitative Easing’ Tapering Policy announced in Aug 2013 by the US
Federal Reserve Bank by which Additional Supply of 80 Billion $ per Month will
cease, caused the flight of FII. Therefore hereafter FII should be taken as only
‘birds of passage’ and treated as ‘opportunistic’ investors. The Rupee lost 19 % of
its value. We must plan for CAD to come under 1% of GDP over the next 4 years.
2. Even a small nation like S. Korea exports manufactured goods 10 times that of
India! A nation’s competitiveness is judged by its manufacturing and marketing
efficiency. Thus there is the urgent need for political direction, bureaucratic
coordination, a supporting financial system (sub 10 % interest rates), all out
emphasis on infrastructure improvements, and a separate Ministry of International
Trade & Exports.
3. We must convert this CAD Problem and Rupee Downslide situation into an
Opportunity, by taking strong Policy Measures over the next 3 Months – speeding
up Investments internally, bringing in Monthly Performance Accountability Audit
in all Govt Depts, taking all Measures to double India’s Manufactured Goods
Exports over the next 4 Years, and creating ‘Brand India’ value abroad. The Nation
should ‘live’ the CREDO of doing International Commerce, for generating Growth.
30. DETERMINATION OF EXCHANGE RATES
Exchange Rate determination is a complex activity.
The following exhibit provides an overview of the
many determinants of Exchange Rates.
This road map is first organized by the three major
schools of thought (parity conditions, balance of
payments approach, asset market approach), and
secondly by the individual drivers within those
approaches.
These are not competing theories but rather
complementary theories.
32. Parity Conditions Approach
The theory of purchasing power parity is the
most widely accepted theory of all Exchange Rate
determination theories :
– PPP is the oldest and most widely followed of the
Exchange Rate theories.
– Most Exchange Rate determination theories have PPP
elements embedded within their frameworks.
– PPP calculations and forecasts are however plagued
with structural differences across countries and
significant data challenges in estimation.
33. Balance of Payments Approach
The balance of payments approach is the second
most utilized theoretical approach in exchange rate
determination:
– The basic approach argues that the equilibrium exchange
rate is found when currency flows match up Current and
Financial Account activities.
– This framework has wide appeal as BOP transaction data
is readily available and widely reported.
– Critics may argue that this theory does not take into
account stocks of money or financial assets.
34. Asset Market Approach
The asset market approach argues that Exchange
Rates are determined by the supply and demand
for a wide variety of financial assets:
– Shifts in the supply and demand for financial
assets alter Exchange Rates.
– Changes in monetary and fiscal policy alter
expected returns and perceived relative risks of
financial assets, which in turn alter Exchange
Rates.
35. Asset Market Approach
The asset market approach assumes that whether foreigners
are willing to hold claims in monetary form depends on an
extensive set of investment considerations or drivers (among
others) :
– Relative real interest rates
– Prospects for Economic Growth
– Capital Market liquidity
– A Country’s economic and social infrastructure
– Political safety
– Corporate governance practices
– Contagion (spread of a crisis within a region)
– Speculation
37. What Changes the Equilibrium Rate?
Inflation Rates:
Higher domestic inflation means less demand for local goods
(and decreased supply of foreign currency), plus more demand
for foreign goods (increased demand for foreign currency).
Interest Rates:
Higher domestic (real) interest rates may attract investment
funds causing a decrease in demand for foreign currency and
an increase in supply of foreign currency. BOP Position
becomes vulnerable if there is flight of FII Capital. Own
manufacturing capability and exports of value added items
suffers greatly due to high cost of investment capital.
Economic Growth:
Stronger economic growth attracts foreign investment funds
automatically causing a decrease in demand for foreign
currency and an increase in supply of foreign currency.
38. What Changes the Equilibrium Rate?
Political & Economic Risks:
Higher political or economic risk in the domestic country
results in increased demand and reduced supply of foreign
currency.
Changes in Future Expectations:
Any improvement in future expectations regarding the
domestic currency or economy will decrease the demand for
foreign currency and increase the supply of foreign currency.
Government Intervention:
Maintain weak currency to improve export competitiveness.
39. Forecasting in Practice
Numerous foreign exchange forecasting
services exist, many of which are provided
by banks and independent consultants.
Some multinational firms have their own
in-house forecasting capabilities.
Predictions can be based on elaborate
econometric models, technical analysis of
charts and trends, intuition, and a certain
measure of gall.
40. Forecasting in Practice
Technical analysts, traditionally referred to as
chartists, focus on price and volume data to determine
past trends that are expected to continue into the future.
The single most important element of technical analysis is
that future exchange rates are based on the current
exchange rate.
Exchange rate movements can be subdivided into three
periods:
– Day-to-day
– Short-term (several days to several months)
– Long-term
41. Forecasting in Practice
The longer the time horizon of the forecast, the
more inaccurate the forecast is likely to be.
Whereas forecasting for the long run must
depend on the economic fundamentals of
exchange rate determination, many of the
forecast needs of the firm are short to medium
term in their time horizon and can be addressed
with less theoretical approaches.
43. Currency Forecasting Projections
For each currency you can do the following:
RPPP and IFE (long-term influences)
Technical analysis (past trends)
Asset market approach (ongoing relationships and changes?)
Balance of payments approach
Unbiased forward rate
Then you conclude with your overall prediction based
on all of these methods and allocate funds to your
trading strategy.
