Government influence on

trade
Saranya S/AP/FT/KSRCT

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 India’s foreign trade policy
• Foreign trade policy of India, like that of any
developing country was inward-looking till 1991.
• Imports into India were highly restricted.
• Exports were allowed and encouraged to earn
foreign exchange.
• However without imports, allowing exports alone
was not sustainable for economic growth.

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 Liberalization of India’s trade
policy
• 1991 marked the year of substantial change in
India’s foreign policies.
• Most of the changes were forced by World Bank
and IMF (International Monetary Fund).
• In addition, India became one of the members of
WTO in the year 1995, forcing it to remove its
own trade barriers imposed earlier on foreign
markets.

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 Governing council for foreign
trade
• India’s trade policies were formulated and
implemented by Ministry of Commerce and
Industry.
• Other ministries such as Finance, Agriculture
and Textile were also involved.
• Reserve Bank played a crucial role in the
appointment of Director General of Foreign
Trade (DGFT), who is responsible for execution
of the foreign trade policy.

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 Objectives of foreign trade
policy
• Two main objectives of foreign trade policy are
– Doubling India’s share in global merchandise trade
within next five years.
– Economic growth with due emphasis on jobs
generation.

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Strategies of foreign trade policy
• Unshackling controls and creating an
atmosphere of trust and transparancy to unleash
the innate entrepreneurship of Indian
businessmen, industrialists and traders.
• Simplifying procedures and bringing down
transaction costs.
• Neutralizing incidence of all levies and duties on
inputs used in export products.
• Facilitating development of India as a global hub
for manufacturing, trading and services
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Strategies of foreign trade policy
• Identifying and nurturing special focus areas to
generate additional employment opportunities.
• Facilitating technological and infrastructural up-
gradation through import of capital goods and
equipment leading to increase in value addition,
productivity and quality.
• Strengthening the role of Indian embassy in
exports.

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 Salient features
• Removal of restrictions on exports and imports
• Rationalization and reduction of tariffs
• Rupee has been made convertible in current account.
Consequently the exchange rate is market determined.
• Special Economic Zones (SEZs) have been set up to
promote exports.
• Agri Export Zones (AEZs) have been set up to give a
push to agricultural exports.
• Tax benefits and exemptions have been intensified.

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 Balance of payment (BOP)
• BOP is a statistical statement that systematically
summarizes the monetary transactions of an
economy for a specific period of time with the
rest of the world.
• BOP data helps measure the financial
transactions between resident of the country and
resident of all other countries.
• Transactions include goods and services,
income flows, capital flows, gifts and similar ono-
sided transactions
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 Balance of payment (BOP)
• BOP is an accounting statement prepared on
double entry book-keeping system. All currency
inflows are recorded as credits and outflows are
recorded as debits.
• Credits indicate a sign of surplus, and debits
have a minus sign.
• Three major BOP catogories:
– Current account
– Capital account
– Official reserves account.
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 Current account
• Current account records all flows of goods, services and
transfers.
• Current account itself can be broken down into two parts
– Balance on Trade (BOT) – deals with only exports and imports of
merchandise (or visibles)
– Balance on Invisibles (BOI) – shows net receipts on invisibles
such as dividends or interests on foreign investments, royalties
on patents or trademarks held abroad, travel, insurance,
banking, transportations and unilateral transfers.

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 Capital account
• Capital account records all public and private
investments and lending activities.
• The capital account is segmented by
– Direct foreign investment – the investment in fixed assets in
foreign countries
– Portfolio investment – transactions involving long-term financial
assets such as stocks and bonds
– Other capital investments – transactions involving short-term
financial assets such as money market securities

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 Official reserves account
• This account measures changes in holdings of
gold and foreign currencies (reserve assets) by
official monetary institutions.
• The change in official reserves measures a
nation’s surplus or deficit on its current and
capital account transactions by netting reserve
liabilities from reserve assets.
• A surplus will lead to an increase in official
holdings of foreign currency and/or gold; a deficit
will normally cause a reduction in these assets.
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 Importance of BOP to IB
• BOP helps forecast a country’s market potential.
• It is an important factor in deciding a country’s
foreign exchange rate.
• BOP data can also signal an increased riskiness
of lending to particular countries
• A generic BOP statement for any country for any
period of time will follow a pattern as described
in the next slide.

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 Balance of payment account
No Current account Capital account Official reserves
account
a Goods and merchandise Direct investment Gold exports or
- imports and exports - To abroad imports (net)
- From abroad
b Services Portfolio investment Increase or decrease
- Net goods and service - To abroad in foreign exchange
balance - From abroad (net)
C Unilateral transfers Short-term capital Increase of decrease
- To abroad - To abroad in liabilities to foreign
- From abroad - From abroad central banks (net)
Net Current account balance Capital account balance Official reserves
BOP= Current account balance + Capital account balance + Official reserves

BOP = + (Surplus)
15-Nov-19 BOP = - (Deficit)
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 BOP Vs. BOT

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 THANK YOU

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