BALANCE OF PAYMENTS AND BALANCE OF TRADE IN POST REFORMS IN INDIA

PRESENTED BY

Vinayak R Sandeep Koyande Lovekeshkumar Satish C Ayappan Nandish Doshi Devendra Pendse

Introduction

WHY THE POST-1990 REFORMS?

WHAT ARE THE DRIVING FORCES BEHIND THE REFORMS ? THE FUNDAMENTAL OBJECTIVE OF ECONOMIC REFORMS

MAJOR ECONOMIC REFORMS

Economic reforms launched since June 1991 may be categorized under two broad areas:
Major macro-economic management reforms Structural and sector-specific economic reforms

BALANCE OF PAYMENTS

Systematic record of all economic transactions during a given period between the country's residents & the rest of the world during a specific time period, usually a year.
Economic transactions include goods, services or assets. exchanges of

Balance of payments comprises Current account, Capital account and Reserve account

Cont

Current account records import of goods and export

of goods. Invisibles like services provided and recd. Transportation, Travels & Tourism receipts and payments, income from investments, and unilateral transfers like gifts, government aid.

Capital account represents all the inflows and outflows of capital of a country Reserve account is the balancing account of balance of payment countries monetary control authority maintains certain reserves of gold foreign bonds of various countries and foreign exchange.

Balance of trade

Trade account of the balance of payments includes exports and imports of goods in a year
Difference between the value of exports of goods and imports of goods

CURRENT A/C

Merchandise i.e. Tangible Goods BOT

Invisible i.e. Intangible i) Services ii) Income on Investment iii) Unilateral Transfers

Merchandise trade

Export of goods (+) Import of goods (-) Merchandise Trade Balance is affected by exchange rates & income changes, monetary & fiscal growth, unexpected supply shocks & international competitiveness. All exports & imports must be registered through customs. It is reported on a monthly basis.

Invisible i.e. Intangible

Services - Banking, Insurance, services and consultancy

services etc. are provided by one country to other countries.

Income on Investment - receive interest on loans given to other countries

- Dividends on investments made by its people in other countries

Unilateral Transfers
- People of a country receive gifts from their friends and relatives living abroad or sending gifts to their relatives or friends

CAPITAL A/C
Investments Foreign Investment Loans & Fixed Assets Debts

Balancing OR Reserve A/C:IMF & RBI

Foreign exchange reserve, special drawing rights

gold

reserve,

Generic Balance of Payments

Factors Affecting balance of Payments

Economic factors
Import of new technology new machines from other countries lead to deficit in balance of payment position High rate of inflation Developing and exporting of high quality of products which may lead to surplus in balance of payments.

Cont

Political factors
portfolio investment and also industrial production increases which indirectly improves exports.

Populist measures adopted by govt. generally adds deficits to balance of payment.

Social factors
Large Population

Trade Policies Pre-Reform Period

Trade Policies can be divided to following

Import Polices Export Policies

Import policies

Import policies are formulated to control different facets of business & economy
Pre-reform period had two important parts viz Import restrictions Import substitution Import Restrictions Licenses were issued for import of goods

Items to be imported were divided into three groups a) consumer goods b) intermediate goods C) capital goods

Cont.

Each category further sub-divided into Non permissible or banned Limited Permissible Automatic permissible Open General License

Cont

Import Substitution Govt. gave emphasis for development of products which could substitute imports
Mainly 2 objectives To save scarce foreign exchange for imports of more important goods To achieve self reliance in production of as many goods as possible From 1977 India adopted import liberalization policy, salient features were

Cont

Capital goods were placed under OGL i.e they could be imported freely.
Large number of raw materials, components & consumables were also placed under OGL. Import Policy for Registered Exporters Policy for Registered Trading Houses.

Technology import was made liberal.

Export policies

Export policies can also be divided into 3 periods Phase 1-1956-73 i.e upto 1st oil shock of 1973 Phase 2- Begun on 1973 to a decade.

Phase 3 -The following years to 1991

Important export policies in Prereform Period

Cash Compensatory Support.

Duty Drawback System. Replenishment licenses. Advanced Licenses And Duty Exemptions. EPZ and 100% EQUs.

Fiscal Concessions for exports.

Export Credit And Assistance to EPCs.

New trade policies

New trade policies were formulated liberalization process started in 1991

after

From 1991 Govt. made efforts to make Indian companies comparative with companies from developed countries In 1995 India joined WTO as a founder member. To strike down all quantitative restrictions on imports so as to open Indian market for foreign companies. Free Imports & Exports barring few critical items mainly relating to defense & nuclear related items were moved to OGL

Features of New Trade Policy

Rationalization of Tariff Structure- lot of categories merged & import duties drastically cut
Decanalisation- restrictions on who can export/import were removed Trading Houses- Govt. allowed wide range of items to be imported & 51% foreign equity allowed Special Economic Zones (SEZs) to generate economic activity promotion of export of goods & services

Cont

investment, employment opportunities & development of infrastructure facilities

Export Oriented Units (EOUs)- units which export 100% of production Agriculture Export Zones-clusters are formed such that services of pre & post harvest treatment & operations, plant protection, processing, packaging, storage & related R&D facilities are

Cont

other policies are also formulated Market Access initiative

Focus on service exports

5 thrust exports mainly for agri, handicrafts, handlooms, gems& jewellery & leather & footwear sectors
Served from India to be built as a brand Reducing transactional costs & simplifying procedures
.

Concessions & exemptions

Balance of payment positions in Pre & Post reform period

In 1972 during 4th plan crude oil prices were increased by OPEC countries which intern added to deficit in balance of payment position.
during first period i.e. 1956-57 to 1975-76 balance of payment positions was deficit. Period II i.e. 1976 -77 to 1979-80 is called golden period as country has current account surplus and foreign exchange reserves to cover 7 months exports. Period III is from 198081 to 1990*91 is marked with severe balance of payment difficulties.

Balance of payment and balance of trade position of India after post reform period
India's balance of payments Situation since 1991
Indicator Current accunt balance (as % of GDP) Import cover of foreign exchange reserves (no. of months) Imports, dollar values (annual growth rate) Export, dollar values (annual growth rate)

1992-93 1993-94 1995-96 2000-01 2001-02 2002-03 2004-05 2006-07 2007-08 2008-09

-1.7

-0.4

-1.7

-0.6

0.7

1.3

-0.4

-1.1

-1.5

-2.6

4.9

8.6

8.8

11.5

14.2

14.3

12.5

14.4

10.3

15.4

10

21.6

4.6

-2.8

14.5

48.6

21.4

35.5

14.3

3.3

20.2

20.3

21.1

-1.6

20.3

28.5

22.6

29

3.4

India's balance of payments: 1993-94 to 2008-09 (US $ million)

year
1993-94 1994-95 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2007-08 2008-09

Trade balance
-4056 -9049 -13246 -17841 -12460 -11574 -10690 -13718 -91626 -119403

Invisibles
2898 5680 9208 13143 9794 14974 17035 27801 74592 89586

Current
-1158 -3369 -4038 -4698 -2666 3400 6345 14083 -17034 -29817

Capital
9882 8013 7867 10840 8535 8357 10640 17338 109198 9737

Reserve use
-8724 -4644 -3829 -6142 -5842 -11757 -16985 -31421 -92164 +20080

Thank You