2. Effect of Liberalisation on India’s
Current Account
Presented by :
Name Roll Number
Sreejoyee Roy 29
Souvik Saha 44
Archisman Neogi 34
Budhaditya Banerjee 32
3. Balance of Payments (BOP)—is an accounting record of a
country’s trade in goods, services, and financial assets with
the rest of the world during a particular time period (year or
quarter).
The BOP is divided into three main categories:
• The current account,
• The capital account and,
• The financial account.
Balance of Payments
4. Current Account
• The current account includes the value of trade in
merchandise, services, income from investments,
and unilateral transfers.
• Merchandise—tangible goods.
• Services—include travel and tourism, royalties, transport
costs, and insurance.
• Income from investments—interest and dividends.
• Unilateral transfers—include foreign aid, gifts, and
retirement pensions.
5. Capital Account
Financial Account
The financial transactions include:
Direct Investment
Purchases of Equity and Debt Securities
Bank Claims and Liabilities
Government Assets Abroad
Foreign Official Assets in the country in
consideration
The capital account is where all international capital transfers
are recorded. This refers to the acquisition or disposal of non-
financial assets and non-produced assets, which are needed for
production but have not been produced, like a mine used for the
extraction of diamonds.
6. Balance of Trade
• The trade balance is identical to the difference between a country's
output and its domestic demand.
• The balance of trade forms part of the current account. If the current
account is in surplus, the country's net international asset position
increases correspondingly and vice-versa.
• Factors that can affect the balance of trade include:
The cost of production (land, labor, capital, taxes, incentives, etc.) in the
exporting economy vis-à-vis those in the importing economy
The cost and availability of raw materials, intermediate goods and other
inputs
Exchange rate movements
The availability of adequate foreign exchange with which to pay for
imports
7. Difference between Balance of Trade
and the Balance of Payments
Balance of Trade
• The Balance of Trade includes only visible
imports and exports, i.e. imports and exports of
merchandise, the difference of imports and
exports is called Balance of Trade.
• Balance of Trade includes revenues received or
paid on account of imports and exports of
merchandise. It shows only revenue items.
• Balance of Trade can be favourable or
unfavourable. If imports are more than exports, it
is unfavourable balance of trade. If exports
exceeds imports, it is favourable balance of
trade.
• In case of Balance of Trade, there is no deficit or
surplus balance. The balance shows favourable
or non-favourable. So, external assistance is not
required.
Balance of Payment
• The Balance of Payments includes all those
visible and invisible items exported from and
imported into the country in addition to exports
and imports of merchandise.
• Balance of Payments includes all revenue and
capital items whether visible or non-visible.
Balance of Trade thus form a part of Balance of
Payments.
• Balance of Payments is always balanced just like
Trading and Profit and Loss A/c of a business.
• In case of Balance of Payments, any balance,
deficit or surplus is to be financed by external
source or assistance or be utilised.
9. Objectives
• To study India’s current account position in the post
liberalization period.
• A view of India’s import intensity in the post liberalization
period.
• To study the relationship between India’s degree of openness
and GDP in the post liberalization period.
• To study the dependency of India’s import of Oil and Non Oil
products on its GDP.
10. Trends
• The global slowdown had its impact on the economy of most of the
countries, including India. As a result, the trade deficit abruptly increased
from Rs. 3,56,448 crores in 2007-08 to Rs. 5,33,681 crores in 2008-09, an
increase by almost 50%.
• However, these are global slowdown effect, as after 2009-10, when the
economy started picking up, both export as well as import recorded
substantial growth of 34.5 % and 23.5 % respectively, resulting in
Rs.5,46,503 crores trade deficit with 5.46 % positive growth in 2010-11.
• India’s trade deficit did not cross 1000 crores before 1995-96 though it has
been negative throughout the time period we have taken. It crossed the
1000 crore mark just one time before that in 1990-91. This may be due to
the economic liberalization of 1991. The trade deficit fluctuated quite a lot
(sometimes more than 100%) from 1991-1995.
11. Fig.1: Export and Import as percentage of GDP at factor cost
Fig. 2: Export and Import as percentage of GDP at market price
12. Trends
• We can see from the above table and the figures
that import intensity has raised gradually through
this time period to 25%. The export intensity has
also risen but to 18%. Until 2003-04, the import
and the export intensity go at a same pace more or
less but from 2004-05 the gap has steadily
widened. Therefore the trade deficit have also
widened to 82000 crore. In 2012-13 the trade
deficit went up to as much as 1034843 crore, the
highest in recent years.
13. Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) -4.132 .157 -26.264 .000
Log_of_GDP_at_Fact
or_cost
1.621 .037 .993 44.144 .000
a. Dependent Variable: Log_of_import_of_oil
Regression between Import of Oil and GDP at factor cost and market price
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) -4.253 .158 -26.926 .000
Log_of_GDP_at_Mark
et_Price
1.635 .037 .994 44.730 .000
a. Dependent Variable: Log_of_import_of_oil
On both GDP at factor cost and market price we can see that the results are statistically significant.
On both account we have rejected the null hypothesis: β=0 and the results are significant at 1% level
of significance. Therefore, we can say that import of oil depends largely upon GDP.
14. Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1
.993a .987 .986 .088016
a. Predictors: (Constant), Log_of_GDP_at_Factor_cost
Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate
1
.994a .987 .987 .086879
a. Predictors: (Constant), Log_of_GDP_at_Market_Price
From the above table we can see that both R square and adjusted
R square is very good which can be concluded of having a high
goodness of fit.
15. Regression between Import of non-oil and GDP at factor cost and market price
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) -2.604 .094 -27.832 .000
Log_of_GDP_at_Factor
_cost
1.373 .022 .997 62.886 .000
a. Dependent Variable: Log_of_Import_of_non_oil
Coefficientsa
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.B Std. Error Beta
1 (Constant) -2.705 .095 -28.352 .000
Log_of_GDP_at_Marke
t_Price
1.385 .022 .997 62.713 .000
a. Dependent Variable: Log_of_Import_of_non_oil
Here also, we can see that the result is statistically highly significant. In both the cases the
results are significant at 1% level and therefore rejecting the null hypothesis β=0 leading
to the conclusion that import of non-oil is highly dependent on GDP at factor cost and
market price.
16. Model Summary
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .997a .993 .993 .052339
a. Predictors: (Constant), Log_of_GDP_at_Factor_cost
Model Summary
Model R R Square Adjusted R Square
Std. Error of the
Estimate
1 .997a .993 .993 .052482
a. Predictors: (Constant), Log_of_GDP_at_Market_Price
From the above table we can see that both R square and adjusted R
square is very good which can be concluded of having a high goodness
of fit.
17. The Openness Index is an economic metric calculated as the
ratio of country's total trade, the sum of exports plus imports, to
the country's gross domestic product.
The interpretation of the Openness Index or degree of openness
is the higher the index the larger the influence of trade on
domestic activities.
18. Year Degree of Openness at factor cost Degree of openness at market price
1986-87 11.11 10.05
1987-88 11.42 10.30
1988-89 12.23 11.09
1989-90 13.80 12.55
1990-91 14.24 12.92
1991-92 14.98 13.64
1992-93 16.63 15.11
1993-94 17.46 16.03
1994-95 18.07 16.51
1995-96 20.48 18.67
1996-97 19.80 18.16
1997-98 19.64 18.08
1998-99 19.06 17.64
1999-00 20.17 18.53
2000-01 21.71 19.95
2001-02 20.88 19.28
2002-03 23.57 21.78
2003-04 24.85 22.96
2004-05 29.49 27.03
2005-06 32.94 30.24
2006-07 35.72 32.88
2007-08 36.41 33.45
2008-09 41.77 39.35
2009-10 36.16 34.11
2010-11 38.99 36.31
2011-12 45.42 42.30
2012-13 45.84 42.55
2013-14 44.00 40.58
We have seen that the correlation between degree of openness and GDP is also very high of
approximately 0.95.
