Module 4 ( Indian & Global Economy )

Explain Economic Crisis ?

Economic crisis is a situation in which the economy of a country experiences a sudden downturn
brought on by a financial crisis. An economy facing an economic crisis will most likely experience a
falling GDP, liquidity dries up, property & stock market prices falls. In most cases financial crisis is the
cause of an economic crisis.

Economic downturn refers to slowing GDP growth or GDP contraction. During a downturn, property
prices fall, joblessness rises, borrowing falls, and companies invest less.

If the financial crisis worsens and spreads, it will eventually affect macroeconomic conditions. When
this happens, the financial crisis starts turning into an economic crisis.

Unlike a financial crisis, which is limited to one sector, an economic crisis affects the whole economy.
Unemployment rises, GDP stops growing or shrinks, and many other things go wrong.

Explain Financial Crisis ?

A financial crisis typically involves problems in the banking and finance sector. Banks, financial
institutions, the currency market, and the capital markets, for example, are part of the banking and
finance sector.

If a country’s major bank collapses, this is a financial crisis, especially if other banks also start
crashing. It is also a financial crisis if a significant number of borrowers when they fail to pay back
what they borrowed.

Explain Business Cycle ?

A business cycle is the natural expansion and contraction of economic growth that occurs in a
country over a span of time. It is also known as an economic cycle or a trade cycle. The cycle is a
useful tool for analyzing the economy and can help you make better financial decisions.

The business cycle goes through four major phases: expansion, peak, contraction, and trough.

Stages Of A Business Cycle

1. Expansion

The expansion stage is always the first stage of a trade cycle. There may be positive economic
indicators at this stage, including income, employment, demand, supply and profit growth. The
frequency of investments increases as a company grows, and both corporations and individuals repay
their loans on time.
2. Peak

The peak is the second phase of the cycle. This is the stage when the economy reaches a saturation
point, or peak which means the maximum limit of growth is attained.

The economy might take weeks or a year to transition into the contraction phase. The GPD growth
rate falls below 2% and continues to decline. The peak is displayed on a graph as the highest portion
of the curve before moving downward.

3. Contraction

The third phase is the contraction stage.In this stage, the economy does not experience growth,
instead, it shrinks. When the GDP rate turns negative, the economy enters a recession. There are two
separate stages of contraction:

 Recession

The recession is the stage that follows the peak phase. The demand for goods and services starts
declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly
and go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All
positive economic indicators such as income, output, wages, etc., consequently start to fall.

 Depression

When GDP falls and when there is a rise in unemployment, the growth in the economy continues to
decline, and as this falls below the steady growth line, the stage is called a depression.

4. Trough

In the depression stage, the economy’s growth rate becomes negative. Supply and demand may
become as low as possible.

5. Recovery

After the trough, the economy moves to the stage of recovery.

In this phase, there is a turnaround in the economy, and it begins to recover from the negative
growth rate. Demand starts to pick up due to low prices and, consequently, supply begins to
increase. The population develops a positive attitude towards investment and employment and
production starts increasing.

Employment begins to rise and, due to accumulated cash balances with the bankers, lending also
shows positive signals.
Explain Balance of Trade (BOT) ?

Balance or Trade

The difference between the value of imports and the value of exports of a country in a specific
period of time is called the balance of trade. When exports are greater than imports, it is known as a
favourable balance of trade and is the largest component of a country's balance of payments (BOP)

The balance of trade is also referred to as the trade balance, the international trade balance, the
commercial balance, or the net exports.

A country that imports more goods and services than it exports in terms of value has a trade deficit
while a country that exports more goods and services than it imports has a trade surplus.

The United States regularly runs a trade deficit, while China usually runs a large trade surplus.

The formula for calculating the BOT can be simplified as the total value of exports minus the total
value of its imports. Economists use the BOT to measure the relative strength of a country's
economy.

Balance of Trade: Favorable vs. Unfavorable

A favorable balance of trade, also known as a trade surplus, occurs when a country exports more
goods than it imports. This means that the country is earning more from its exports than it is
spending on its imports, and it is generally seen as a sign of economic strength. A trade surplus can
be a result of a country having a competitive advantage in the production and export of certain
goods, or it can be the result of a country's currency being relatively undervalued, making its exports
cheaper for foreign buyers.

On the other hand, an unfavorable balance of trade, also known as a trade deficit, occurs when a
country imports more goods than it exports. This means that the country is spending more on
imports than it is earning from exports, and it can be a cause for concern if it persists over a long
period of time. A trade deficit can be the result of a country having a comparative disadvantage in
the production of certain goods, or it can be the result of a country's currency being relatively
overvalued, making its imports cheaper and its exports more expensive.

Explain Balance of Payment (BOP) ?

Balance Of Payment (BOP) is a statement that records all the monetary transactions made between
residents of a country and the rest of the world during any given period. This statement includes all
the transactions made by/to individuals, corporates and the government and helps in monitoring the
flow of funds to develop the economy.

A BOP statement of a country indicates whether the country has a surplus or a deficit of funds, i.e.
when a country’s export is more than its import, its BOP is said to be in surplus. On the other hand,
the BOP deficit indicates that its imports are more than its exports.

Tracking the transactions under BOP is similar to the double-entry accounting system. All
transactions will have a debit entry and a corresponding credit entry.

For example:

Funds entering to a country from a foreign source are booked as credit and recorded in the BOP.
Outflows from a country are recorded as debits in the BOP. Let’s say Japan exports 100 cars to the
U.S. Japan books the export of the 100 cars as a debit in the BOP, while the U.S. books the imports as
a credit in the BOP.

What is the Formula for Balance of Payments?

The formula for calculating the balance of payments is current account + capital account + financial
account + balancing item = 0.

Elements of BOP

1. Current Account ( Goods & Services )

The current account is used for monitoring the inflow and outflow of goods and services between
countries.

Current account covers all the receipts and payments made with respect to raw materials and
manufactured goods.

The current account includes receipts from tourism, transportation, engineering, business services,
stocks, and royalties from patents and copyrights.

When all the goods and services are combined, together they will make up to a country’s Balance Of
Trade (BOT).

2. Capital Account ( Assets )

All capital transactions between the countries are monitored through the capital account. Capital
account includes the purchase and sale of assets (non-financial) like land and properties.

The capital account also records the flow of taxes, purchase and sale of fixed assets by migrants
moving out to a different country.

There are three major elements of capital account such as loan & borrowings, investments and
foreign exchange reserves.

 Loans and borrowings - It includes all types of loans from both the private and public sectors
located in foreign countries.
 Investments - These are funds invested in the corporate stocks by non-residents.
 Foreign exchange reserves - Foreign exchange reserves held by the central bank of a country to
monitor and control the exchange rate does impact the capital account.

3. Financial Account ( Investment $ Intangibles )

The flow of funds from and to foreign countries through various investments in real estates, business
ventures, foreign direct investments etc is monitored through the in financial account.

Explain India’s Foreign Trade Policy ?

The Foreign Trade Policy (FTP) was introduced by the Government to grow the Indian export of goods
and services.

Foreign Trade Policy is a set of guidelines and instructions established by the DGFT (Directorate
general of foreign trade )in matters related to the import and export of goods in India. The
Government of India, Ministry of Commerce and Industry announces Export Import Policy every five
years.

The export Import Policy (EXIM Policy) is updated every year on the 31st of March and the
modifications, improvements and new schemes are effective from 1st April of every year.

Objectives of India's Foreign Trade Policy

• India's Foreign Trade Policy boosts a country's revenue by promoting exports

• It promotes national development and economic growth.

• Provide access to raw materials, components, intermediates (goods used as inputs for the creation
of other goods), consumables, and capital goods to support long-term economic growth.

• India's agriculture, industry, and services should be strengthened.

• Provide high-quality consumer goods at a fair price.

Features of foreign trade policy 2015-2020

• MEIS (Merchandise Export from India Scheme) and SEIS (Service Exports from India Scheme) have
been launched

• Special Economic Zones (SEZs): India's strategy provides expanded incentives for SEZs under MEIS
and SEIS.

• Direction of foreign trade.

• Balance of trade.

• Foreign trade by government.

• State control over foreign trade.

New Initiatives of India’s Foreign Trade Policy

1. Niryat Bandhu Scheme - The program is implemented by the Director-General of Foreign Trade in
collaboration with the Indian Institute of Foreign Trade (IIFT). Niryat Bandhu scheme trains exporters
and entrepreneurs on essentials of running an export-import business.

2. Issue of e-IEC(Import Export Code) is mandatory

3. E-BRC(Electronic Bank Realization Certificate)- An e-BRC (Electronic Bank Realisation Certificate) is

an important digital certificate for those involved in an export business. It is issued by a bank as
confirmation that the exporter has received payment from the importer against the export of goods.

4. Facility of Deferred Payment- Is another measure for facilitation of trade, the CBEC (central board
of excise and customs) has introduced the facility of deferred payment of customs duty.

5. Exporter Importer Profile- The Import-Exporter Profile captures important details with respect to
the importing or exporting firm as registered with DGFT.

6. Online filling of applications- The entity has introduced a web interface for online filing of
application.

7. Online Inter-Ministerial Consultation-In a recent development, the exporters are provided with a
facility to upload copies of all the required documents including technical specifications, literature
etc. No hard copy required.
8. Round-the-Clock Customs Clearance

9. National Committee on Trade Facilitation (NCTF)- An NTFB acts as an open forum to promote
trade facilitation, encourage inter-agency coordination, and provide directives on major trade
facilitation issues.