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foreign trade


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foreign trade

  1. 1. Foreign Trade
  2. 2. Composition of Exports <ul><li>Agricultural Products </li></ul><ul><li>Textile Fabrics </li></ul><ul><li>Leather Products </li></ul><ul><li>Gems & Jewellery </li></ul><ul><li>Machinery & Transport Equipments </li></ul><ul><li>Minerals </li></ul>
  3. 3. Composition of Imports <ul><li>Oil / Petroleum products </li></ul><ul><li>Capital goods </li></ul><ul><li>Pearls & Precious stones </li></ul><ul><li>Iron </li></ul>
  4. 4. Problems of India's Export <ul><li>Poor quality image - “Made in India” </li></ul><ul><li>Infrastructural bottlenecks </li></ul><ul><li>High cost </li></ul><ul><li>Technology </li></ul><ul><li>Political instability </li></ul><ul><li>Unreliability </li></ul><ul><ul><li>Going back on contract </li></ul></ul><ul><ul><li>Inability to provide prompt after sale service </li></ul></ul><ul><ul><li>Delivery on time </li></ul></ul>
  5. 5. 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.
  6. 6. Purpose Of BOP <ul><li>Provides data for economic analysis </li></ul><ul><li>Reveals changes in the composition & magnitude of foreign trade </li></ul><ul><li>Provides indications of future repercussions of country’s past trade performances </li></ul><ul><li>Reveals the weak and strong points of a country’s foreign trade relations </li></ul>
  7. 7. TERMINOLOGIES <ul><li>Favorable Balance Of Payments – Value of total receipts more than total payments </li></ul><ul><li>Adverse Balance Of Payments – Value of total receipts less than total payments </li></ul><ul><li>Balanced Balance Of Payments – Value of total receipts equals total payments </li></ul><ul><li>Unrequited receipts – Receipts for which nothing has to be paid in return. </li></ul><ul><li>Unrequited payments – Payments for which nothing is received in return. </li></ul>
  8. 8. Balance of Trade Definition: Difference between value of exports and imports of visible items only BOT BOP <ul><li>Records only merchandise transactions </li></ul><ul><li>Does not record transactions of capital nature </li></ul><ul><li>A part of current account of BOP </li></ul><ul><li>Records transactions relating to both goods and services </li></ul><ul><li>Records transaction of capital nature </li></ul><ul><li>Includes BOT , Balance of services , Balance Of Unrequited Transfers and Balance Of Capital Transactions. </li></ul>
  10. 10. CURRENT ACCOUNT <ul><li>All transactions relating to goods, services and unrequited transfers constitute current account </li></ul><ul><li>Flow of items pertaining to specific period of time </li></ul><ul><li>Visible items include </li></ul><ul><li>goods </li></ul><ul><li>Invisible items include </li></ul><ul><li>services </li></ul>
  11. 11. Structure of current account Transactions Credit Debit Net Balance <ul><li>Merchandise </li></ul>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/C Balance - - Surplus (+) Deficit (-)
  12. 12. CAPITAL ACCOUNT <ul><li>All transactions indicating changes in stock magnitudes concerning capital receipts and payments constitute capital account </li></ul><ul><li>Relates to </li></ul><ul><li>- Borrowing </li></ul><ul><li>- Capital repayment </li></ul><ul><li>- Sale of assets </li></ul><ul><li>- Change in stock of gold </li></ul><ul><li>- Change in reserve of foreign currency </li></ul>
  13. 13. <ul><li>Short term capital movement includes: </li></ul><ul><li>Purchase of short term securities </li></ul><ul><li>Speculative purchase of foreign currency </li></ul><ul><li>Cash balances held by foreigners </li></ul><ul><li>Net balance of current account </li></ul><ul><li>Long term capital movement includes: </li></ul><ul><li>Investments in shares, bonds, physical assets etc. </li></ul><ul><li>Amortization of capital </li></ul>
  14. 14. DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT CURRENT ACCOUNT CAPITAL ACCOUNT <ul><li>Indicates flow aspect of country’s national transactions </li></ul><ul><li>Relates to goods , services and unrequited transfers </li></ul><ul><li>Indicates changes in stock magnitudes </li></ul><ul><li>Relates to all transactions constituting debts and transfer of ownership </li></ul>
  15. 15. STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT Total Receipts Total Payments CREDITS DEBITS <ul><li>Current A/c: </li></ul><ul><li>Exports of goods(Visible items) </li></ul><ul><li>Exports of services (Invisibles) </li></ul><ul><li>Unrequited receipts(gifts , remittances, indemnities, </li></ul><ul><li>etc. form foreigners) </li></ul><ul><li>Capital A/c: </li></ul><ul><li>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.) </li></ul><ul><li>Current A/c: </li></ul><ul><li>Imports of goods(Visible items) </li></ul><ul><li>Imports of services(Invisibles) </li></ul><ul><li>Unrequited payments( gifts, remittance, indemnities etc. to foreigners) </li></ul><ul><li>Capital A/c: </li></ul><ul><li>Capital payments (lending to , capital repayments to , or purchase of assets from foreigners, reduction in stock of gold and reserves of foreign currency etc.) </li></ul>
  16. 16. An Example <ul><li>Let us consider the following hypothetical situation: </li></ul><ul><li>Export of goods Rs. 550 Crore </li></ul><ul><li>Import of goods Rs. 650 Crore </li></ul><ul><li>Export of services Rs. 150 Crore </li></ul><ul><li>Import of services Rs. 70 Crore </li></ul><ul><li>Unrequited receipts Rs. 100 Crore </li></ul><ul><li>Unrequited payments Rs. 80 Crore </li></ul><ul><li>Capital receipts Rs. 200 Crore </li></ul><ul><li>Capital payments Rs. 200 Crore. </li></ul>
  17. 17. Balance Of Payment Account Credits <ul><li>Current A/c: </li></ul><ul><li>Export of goods 550 </li></ul><ul><li>Export of services 150 </li></ul><ul><li>Unrequited receipts 100 </li></ul><ul><li>Capital A/c: </li></ul><ul><li>Capital receipts 200 </li></ul><ul><li>Total receipts 1000 </li></ul>Debits <ul><li>Current A/c: </li></ul><ul><li>Import of goods 650 </li></ul><ul><li>Import of services 70 </li></ul><ul><li>Unrequited payments 80 </li></ul><ul><li>Capital A/c: </li></ul><ul><li>Capital payments 200 </li></ul><ul><li>Total payments 1000 </li></ul>
  18. 18. EQUILIBRIUM IN BOP ACCOUNTS <ul><li>Total receipts equals total payments arising out of transfer of </li></ul><ul><ul><li>Goods and services </li></ul></ul><ul><ul><li>Other transactions </li></ul></ul><ul><li>These transactions are classified as:- </li></ul><ul><ul><li>Autonomous transactions </li></ul></ul><ul><ul><li>Induced transactions or Accommodating capital flows </li></ul></ul>
  19. 19. <ul><li>In the current account autonomous transactions are the export and import of goods and services </li></ul><ul><li>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 </li></ul>
  20. 20. <ul><li>In the capital account the export and import of long term capital are autonomous transactions </li></ul><ul><li>The short term capital movements viz. gold movements and accommodating capital movements on account of autonomous transactions are induced transactions. </li></ul>
  21. 21. Example of Autonomous and Accommodating transactions <ul><li>Credits </li></ul><ul><li>Current A/c </li></ul><ul><li>Autonomous transactions </li></ul><ul><li>Export of goods 550 </li></ul><ul><li>Export of services 150 </li></ul><ul><li>Unrequited receipts </li></ul><ul><li>Gifts 75 </li></ul><ul><li>Indemnity 25 </li></ul><ul><li>Capital A/c </li></ul><ul><li>Accommodating transactions </li></ul><ul><li>Borrowings 200 </li></ul><ul><li>Receipts 1000 </li></ul><ul><li>Debits </li></ul><ul><li>Current A/c </li></ul><ul><li>Autonomous transactions </li></ul><ul><li>Import of goods 800 </li></ul><ul><li>Import of services 50 </li></ul><ul><li>Unrequited payments </li></ul><ul><li>Gifts 20 </li></ul><ul><li>Remittance 60 </li></ul><ul><li>Capital A/c </li></ul><ul><li>Accommodating transactions </li></ul><ul><li>Lending 70 </li></ul><ul><li>Payments 1000 </li></ul>
  22. 22. Disequilibrium <ul><li>Total receipts and total payments inequality shows disequilibrium of balance of payments account </li></ul><ul><li>Total receipt and payment arising from autonomous transactions determine the deficit or surplus in the balance of payments </li></ul><ul><li>If payments>receipts, BOP shows Deficit </li></ul><ul><li>If payments<receipts, BOP shows Surplus </li></ul>
  23. 23. CAUSES OF DISEQUILIBRIUM <ul><li>Increase in imports </li></ul><ul><li>Slow progress in exports </li></ul><ul><li>Burden of interest payments </li></ul><ul><li>International developments </li></ul><ul><li>Deficit in capital account </li></ul>
  24. 24. Corrective Measures <ul><li>Devaluation </li></ul><ul><li>Export promotion </li></ul><ul><li>Import restrictions </li></ul><ul><li>Import substitution </li></ul><ul><li>Government intervention </li></ul><ul><li>Supply of credit </li></ul><ul><li>Special treatment to NRIs </li></ul><ul><li>Announcement of trade policies </li></ul><ul><li>Foreign aid </li></ul><ul><li>Improvements in production efficiency </li></ul>
  25. 25. BOP Adjustments <ul><li>INDIRECT MEASURES </li></ul><ul><li>Income measures </li></ul><ul><li>Fiscal Policy </li></ul><ul><li>Monetary Policy </li></ul><ul><li>Price measures </li></ul><ul><li>DIRECT MEASURE </li></ul><ul><li>Exchange control </li></ul>
  26. 26. Variations in India’s deficit position <ul><li>1991-1995 :- Equal growth of exports & imports </li></ul><ul><li>1995-1999 :- Growth of imports & stagnation of exports(widening of trade deficits) </li></ul><ul><li>1999-2000 :- Exports recovered while imports surged(continued rise in trade deficits) </li></ul><ul><li>2000-2001 :- Rise in exports & stagnation of imports(normal level of trade deficit) </li></ul><ul><li>2001 Onwards – Exports rising, but still deficit </li></ul>
  27. 27. India’s current BOP position <ul><li>Remained comfortable during 2007-08 </li></ul><ul><li>Increase in net inflows by FIIs </li></ul><ul><li>Increase in FDI inflows </li></ul><ul><li>Increase in net surplus </li></ul>
  28. 28. Capital Account Convertibility <ul><li>In India, Foreign exchange transactions in foreign currencies are broadly classified into two accounts :- </li></ul>Current Account Transactions Capital Account Transactions Components <ul><li>Transactions which gives rise or spends national income. </li></ul><ul><li>Merchandise /Invisible export & Imports . </li></ul><ul><li>Short Term Capital transactions </li></ul><ul><li>Long Term Capital transactions </li></ul>Examples <ul><li>Import of refrigerator </li></ul><ul><li>Export Of Software </li></ul><ul><li>Export of steel </li></ul><ul><li>Sending money to a child studying in United States . </li></ul><ul><li>Capital Inflows : </li></ul><ul><li>Indian company taking loan from US bank . </li></ul><ul><li>Foreign investment in India (FDI) </li></ul><ul><li>Capital Outflows: </li></ul><ul><li>Indian Companies buying assets abroad. Ex- Tata for Corus Steel </li></ul>
  29. 29. Convertibility <ul><li>CAC is desirable due to following reasons :- </li></ul><ul><li>Reduction in Cost of Capital. </li></ul><ul><li>Diversify Portfolios Internationally. </li></ul><ul><li>Induces Competition against Indian Finance </li></ul><ul><li>Reduce size of black economy </li></ul>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 .
  30. 30. Dangers of CAC <ul><li>Huge Inflow and Enormous Outflow. </li></ul><ul><li>Misallocation of Capital inflows. </li></ul><ul><li>Export of domestic savings. </li></ul><ul><li>Creation of an unequal playing field. </li></ul>