Balance of Payment problems of India


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This ppt focuses on the balance of payment problems faced by the Republic of ndia

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Balance of Payment problems of India

  1. 1. BoP is an account of the international transactions of a country, and shows how the country is faring in trade, attracting capital from abroad, and the effect of that on its foreign exchange reserves.
  2. 2. Current Account The current account shows you the trade position of the country.  It shows you the merchandise imports and exports, and then the invisibles part of it is also trade but it’s that part of trade where there is no physical good exported or imported. In India’s case, the transfers and grants part of the invisibles is quite big relative to other countries because of the large Indian diasporas.
  3. 3. Capital Account Where current account shows you trade, capital account can be thought of as the investments part of the international transactions. This is further broken out into equity and debt investment and the FII money and FDI money is part of the equity investments while the external commercial borrowings, money deposited in banks by NRIs and trade credits are debt investments.
  4. 4. Change in Forex Reserves The difference between the Current account and the Capital account is reflected in the change in the Forex reserves. For example, in 2010 – 11 – India’s Current Account Deficit was $45.9 billion but the Capital Account Surplus was $62.0 billion and this resulted in increase in Foreign Exchange Reserves of $13.1 billion.  This doesn’t exactly total up due to the effect of Errors and Omissions.
  5. 5. Link between Internal and External Indicators X-M = Y-(C+I+G) = (T-G)+(SP-Ip)  X-M  Current Account Deficit  Y  Income  C  Consumption  I  Investment  G  Government Expenditure  T-G  Fiscal deficit  SP-Ip  Private Saving-investment Gap C Rangarajan
  6. 6.   a) If a transaction earns foreign currency for the nation, it is a credit and is recorded as a plus item. b) If a transaction involves spending of foreign currency it is a debit and is recorded as a negative item.
  7. 7.  Occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world
  8. 8. CAD has hit a historic high of 6.7 per cent in the December quarter of the fiscal 2012-13 due to highly subsidised fuel and the voracious appetite for gold
  9. 9.  EXCESS DEMAND  EXCHANGE RATES (Rs 44 in July 2011 to Rs 54-55 levels)  CAPITAL FLOWS (higher capital flows lead to higher CADs but just when the CAD widened in 2011, there were capital outflows that made it difficult to finance the CAD)
  10. 10.  EXTERNAL SHOCKS (supply shocks that have sustained high inflation over 2007-13, alongside lower growth)  POLICY ACTION ( freer import competition without building export capacity, leading to import growth exceeding that of exports) Indian CAD is countercyclical. That is, it rises when output falls and not when demand rises. GDP growth has fallen to sub-six per cent levels and industry is actually faced with a problem of excess capacity
  11. 11. Gold import bill will go down by $8 billion because of the price effect A fall of $10 per barrel of crude oil will help lower the net import oil bill by $9 billion Also WPI may fall to 5.6% source: Nomura
  12. 12. • Measures to address supplyside constraints • Cabinet Committee of Investments has cleared $14 billion of projects in oil & gas, coal road and power sector • Increased customs duty on gold
  13. 13. 1.Dissuade investment in gold. 2.Reduce dependency on oil. 3.Open the market. 4.Promote exports. 5.Reduce subsidies. 6.Reduce unplanned expenditure in five year plans. 7.Transparency in governance. 8.Austerity measures
  14. 14.  Indian Economy – Mishra and Puri  Economics – Samuelson and Nordhaus      The Economic Times  Hindu Business Line