Foreign Trade

Composition of Exports

• Agricultural Products

• Textile Fabrics

• Leather Products

• Gems & Jewellery

• Machinery & Transport Equipments

• Minerals
 Composition of Imports

• Oil / Petroleum products

• Capital goods

• Pearls & Precious stones

• Iron
 Problems of India's Export
• Poor quality image - “Made in India”

• Infrastructural bottlenecks

• High cost

• Technology

• Political instability

• Unreliability
– Going back on contract
– Inability to provide prompt after sale service
– Delivery on time
 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.
 Purpose Of BOP
• Provides data for economic analysis
• Reveals changes in the composition &
magnitude of foreign trade
• Provides indications of future repercussions
of country’s past trade performances
• Reveals the weak and strong points of a
country’s foreign trade relations
 TERMINOLOGIES
• Favorable Balance Of Payments – Value of total
receipts more than total payments

• Adverse Balance Of Payments – Value of total

receipts less than total payments

• Balanced Balance Of Payments – Value of total

receipts equals total payments

• Unrequited receipts – Receipts for which

nothing has to be paid in return.

• Unrequited payments – Payments for which

nothing is received in return.
 Balance of Trade
Definition: Difference between value of exports and
imports of visible items only

BOT BOP
• Records only merchandise •Records transactions relating to
transactions both goods and services
• Does not record transactions of • Records transaction of capital
capital nature nature
• A part of current account of BOP • Includes BOT , Balance of
services , Balance Of Unrequited
Transfers and Balance Of Capital
Transactions.
BALANCE OF PAYMENT ACCOUNTS
 CURRENT ACCOUNT

• All transactions relating to goods,

services and unrequited transfers
constitute current account
• Flow of items pertaining to specific
period of time
• Visible items include
goods
• Invisible items include
services
 Structure of current account

Transactions Credit Debit Net Balance

• Merchandise Export Import -
2. Foreign Travel Earning Payment -
3. Transportation Earning Payment -
4. Insurance Receipt Payment -
(Premium)
5. Investment Income Dividend Receipt Dividend Payment -
6.Government Receipt Payment -
(purchase of goods &
services)
CURRENT A/C - - Surplus (+)
Balance Deficit (-)
 CAPITAL ACCOUNT
• All transactions indicating changes in stock
magnitudes concerning capital receipts and
payments constitute capital account

• Relates to
- Borrowing
- Capital repayment
- Sale of assets
- Change in stock of gold
- Change in reserve of foreign currency
Short term capital movement includes:
 Purchase of short term securities
 Speculative purchase of foreign currency
 Cash balances held by foreigners
 Net balance of current account

Long term capital movement includes:

 Investments in shares, bonds, physical assets
etc.
 Amortization of capital
 DIFFERENCE BETWEEN CURRENT
ACCOUNT AND CAPITAL ACCOUNT

CURRENT ACCOUNT CAPITAL ACCOUNT

• Indicates flow aspect of • Indicates changes in
country’s national stock magnitudes
transactions
• Relates to all
• Relates to goods , transactions constituting
services and unrequited debts and transfer of
transfers ownership
 STRUCTURE OF BALANCE OF
PAYMENTS ACCOUNT
CREDITS DEBITS

Current A/c: Current A/c:

•Exports of goods(Visible items)
•Exports of services (Invisibles)
•Unrequited receipts(gifts ,
remittances, indemnities,
etc. form foreigners)
Capital A/c:
•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.)
•Imports of goods(Visible items)
•Imports of services(Invisibles)
•Unrequited payments( gifts,
remittance, indemnities etc. to
foreigners)
Capital A/c:
•Capital payments (lending to ,
capital repayments to , or purchase
of assets from foreigners, reduction
in stock of gold and reserves of
foreign currency etc.)

Total Receipts Total Payments

 An Example
Let us consider the following hypothetical situation:

• Export of goods Rs. 550 Crore

• Import of goods Rs. 650 Crore
• Export of services Rs. 150 Crore
• Import of services Rs. 70 Crore
• Unrequited receipts Rs. 100 Crore
• Unrequited payments Rs. 80 Crore
• Capital receipts Rs. 200 Crore
• Capital payments Rs. 200 Crore.
 Balance Of Payment
Account
Credits Debits
• Current A/c: • Current A/c:
1) Export of goods 550 1) Import of goods 650
2) Export of services 150 2) Import of services 70
3) Unrequited receipts 100 3) Unrequited payments 80

• Capital A/c: • Capital A/c:

1) Capital receipts 200 1) Capital payments 200

Total receipts 1000 Total payments 1000

EQUILIBRIUM IN BOP ACCOUNTS

Total receipts equals total payments arising out

of transfer of
– Goods and services
– Other transactions
These transactions are classified as:-
– Autonomous transactions
– Induced transactions or Accommodating
capital flows
• In the current account autonomous transactions
are the export and import of goods and services

• 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
• In the capital account the export and import of
long term capital are autonomous transactions

• The short term capital movements viz. gold

movements and accommodating capital movements on
account of autonomous transactions are induced
transactions.
 Example of Autonomous and
Accommodating transactions
Credits Debits
• Current A/c • Current A/c
Autonomous transactions Autonomous transactions
1. Export of goods 550 1. Import of goods 800
2. Export of services 150 2. Import of services 50
3. Unrequited receipts 3. Unrequited payments
Gifts 75 Gifts 20
Indemnity 25 Remittance 60
• Capital A/c • Capital A/c
Accommodating transactions Accommodating transactions
1. Borrowings 200 1. Lending 70
Receipts 1000 Payments 1000
 Disequilibrium
• Total receipts and total payments inequality
shows disequilibrium of balance of payments
account
• Total receipt and payment arising from
autonomous transactions determine the deficit
or surplus in the balance of payments
• If payments>receipts, BOP shows Deficit
• If payments<receipts, BOP shows Surplus
CAUSES OF DISEQUILIBRIUM
• Increase in imports

• Slow progress in exports

• Burden of interest payments

• International developments

• Deficit in capital account

 Corrective Measures
• Devaluation
• Export promotion
• Import restrictions
• Import substitution
• Government intervention
• Supply of credit
• Special treatment to NRIs
• Announcement of trade policies
• Foreign aid
• Improvements in production efficiency
 BOP Adjustments

• INDIRECT MEASURES
Income measures
Fiscal Policy
Monetary Policy
Price measures

• DIRECT MEASURE
Exchange control
 Variations in India’s
deficit position

• 1991-1995:- Equal growth of exports & imports

• 1995-1999:- Growth of imports & stagnation of
exports(widening of trade deficits)
• 1999-2000:- Exports recovered while imports
surged(continued rise in trade deficits)
• 2000-2001:- Rise in exports & stagnation of
imports(normal level of trade deficit)
• 2001 Onwards – Exports rising, but still
deficit
 India’s current BOP position
• Remained comfortable during 2007-08

• Increase in net inflows by FIIs

• Increase in FDI inflows

• Increase in net surplus

 Capital Account Convertibility
In India, Foreign exchange transactions in foreign currencies are
broadly classified into two accounts :-
Current Account Transactions Capital Account Transactions

Components Transactions which gives rise or spends national Short Term Capital transactions
income. Long Term Capital transactions
Merchandise /Invisible export & Imports .

Examples Import of refrigerator Capital Inflows :

Indian company taking loan from US bank
Export Of Software .
Export of steel Foreign investment in India (FDI)
Capital Outflows:
Sending money to a child studying in United Indian Companies buying assets abroad.
States . Ex- Tata for Corus Steel
 Convertibility
Convertibility Aspect of India has “Current Account convertibility” which means that we are free to buy
Current Account foreign exchange for importing goods, in other words rupee is fully convertible on
current account .

Convertibility Aspect of Today the rupee is not fully convertible on capital account as there exists
Capital Account restriction on the money that comes in India or that goes out to buy assets abroad .

CAC is desirable due to following reasons :-

 Reduction in Cost of Capital.

Diversify Portfolios Internationally.

Induces Competition against Indian Finance

Reduce size of black economy

 Dangers of CAC
Huge Inflow and Enormous Outflow.
Misallocation of Capital inflows.
Export of domestic savings.
Creation of an unequal playing field.