External Sector in India

2020-06-09 18:56:24

External Sector in India

All economic activity of an economy that takes place in a foreign currency falls in the external sector such as exports, imports, foreign investment, external debt, current account, capital account, BoP etc.

Balance of Payments BOP

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includes all outflows and inflows ie payment and receipts. Various types are
1. Balance of Trade (export and import).
  - It is the largest component of a countrys BoP.
2. Balance of Current Account = BO or Net Trade in Goods (Export of Goods, Import of Goods) + BO or Net Trade in services (Net Factor and Non Factor Income) + Transfer of Payment (Gifts, remittances and Grants) - services are further divided into factor and non factor income. Factor includes earning on factors of production ie Land, labour and capital and Non factor from services like shipping, banking, software etc
3. Balance of Capital Account = Investment (Direct investment viz FDI, Equity Capital, Reinvested Earnings and Portfolio investment ex FII, Offshore funds) + External borrowing (ECB, Short term Debt) + External Assistance (Gov AId, Intergov/Multilateral/Bilateral loans)
BOP crisis 1991 - Gulf war and increasing oil prices, tourism dropped, rating were downgraded. Had to pledge gold to meet short term obligations, Rupee was devalued
BoP equilibrium is when sum of current account and its non reserve capital account equals to Zero. This means that current account is entirely balanced by finances from international lending.
Autonomous transactions : international economic transactions are called autonomous when transactions are made due to some reason other than bridging the gap in BoP. They are done with sole motive of earning a profit. They are not influenced by other transactions in BoP account.
Accomodating transactions are those that are undertaken to cover deficit/ Surplus in BoP ie they are determined by the gap in Balance of Payment. They are determined by net consequences of autonomous transactions.

Devaluation/Cheaper

means more rupees for a dollar and Revaluation/Stronger is opposite both are done by Central Banks.
- If it is done by Market forces it is called depreciation and appreciation respectively.

Convertibility of Rupees

It a currency is allowed to be converted into foreign currency for all current account purposes it is called full current account convertibility. Similarly for capital account.
able to convert into foreign currency
Rupee Convertibility in 1992 was allowed as 40% in official exchange rate decided by RBI and other 60% by market forces
was called Partial Convertibility of rupee
Under Liberalised Exchange Mgt System LERMS the dual exchange rate system is followed.
Was made fully convertible in 1994
Convertibility is different from Exchange in the formers there is always a sale or purchase of goods.

Tarapore Comm. 2006 on Full Ruppee Convertibility

Improve regulatory and supervisory standards
Ban on participatory notes as mode of investment
Ease direct investment routes, NRI investor = Foreign individual investors
Increase outbound remittance by Indians
Control fiscal deficit
Set up Monetary Policy Committee

Current account Convertibility

Current account is fully convertible this means that full amt of foreign exchange required by someone for current puroses will be made available to him at official exchange rate and there could be unprohibited outflow of foreign exchange rate. This was done after IMF deal.
in BoP means foreign trade in physical goods, invisibles (services) and remittances.
- Current account convertibility for exports, import of services, remittances
Current Account Deficit CAD
- Occurs when value of imports is greater than the value of exports.
- To reduce this devaluation of currency, tight monetary policy and supply chain augmentation is done.

CAD = Bo Trade (Export - Import) + Net factor income (interest and dividends) + Net transfer payments (foreign aid)

Capital account Convertibility

India is a partially convertible in capital accounts.
Indian corporates are allowed full convertibility in automatic route upto $500 mil overseas investment.
they can repay their ECBs upto $500mil
Individuals can invest in foreign assets upto level of $250,000 per annum.
Unlimited gold can be imported.
Capital account convertibility means more FDI/FPI
- More the convertibility stronger economy
CAC is regulated under FEMA, steps taken to relax CAC rules
Liberal FPIs and FIIs
ECB does not require approval from RBI/Ministry
Inflows are more liberalised than outflow to avoid BoP crisis
Increased investments limits on MFs, Companies

Tarapore Committee on CAC, 1997

Phased introduction, reduce fiscal deficit, keep inflation 3-5% range
Reform financial sector, reduce NPAs
Full convertibility means least restriction in capital and current account convertibility. 100% FDI and FPI in most sectors, liberal regime

Effects of Convertibility

Good Effects	Bad Effects
Causes more investment	Destabilizing
Access to cheaper capitals by Indian firms	Unemployment in domestic industry
Decrease in lending rate	Rupee volatility
Indian coys take over foreign ones	FDI hike in defence can cause security issues
Macro-economic discipline
More diversification of portfolio

Dutch disease : more investment leads to appreciation of currency dec in competitiveness of export and deindustrialisation

Internationalisation of Rupee

being able to pay in Rs for imports, exports, repaying bonds etc.
Masala bonds, Currency Swap Agreements, being traded in global market etc are some ways to achieve.
Currency needs to be stable, liquid, be available in sufficient amount
Greater integration, helps reduce dependence on forex

Exchange Rate Depends upon :

Growth rate of economy, future potential, foreign trade profile
Inflation, Forex reserves, global interest rates etc
Rupee is fully floated not managed by RBI, intervention is only when there is chance of instability internally and externally.
Exchange Rate in India till was fixed till 1975 when it was delinked to British pound.
Then till 1992 it was determined by RBI. From then it moved to a floating rate following a ‘dual exchange rate’ mechanism. One is the ‘official rate’ and the other is the ‘market rate’. The latter determines the former.

Currency Mechanism

Floating rate : Exchange rates are regulated based on market force of demand and supply. Domestic currency is left to free float against a number of foreign currencies to determine its own value.
Fixed : Exchange rate was fixed by the IMF
Managed Exchange Rate : mix of both fixed and flexible where govt attempts to exchange rate directly by buying or selling or indirectly through monetary policy.
Dirty float : largely floated, bank intervenes to determine national goals
Pegged : to international currency or to a basket of currency

Steps Taken by RBI to Stabilise Rupee Fall :

Reduce outbound investment and remittances
Encourage capital inflows
Encourage exports and limit imports
Using local currency for trade, importing oil etc
International cooperation, curb speculation in currency

NEER : Nominal Effective Exchange Rate NEER of rupee is weighted average of exchange rate before currencies of India’s major trading partners.

REER : Real Effective Exchange rate is when weight of inflation is adjusted with NEER

EEF : Exchange Fund Facility is a service provided by IMF to its member countries that authorises them to raise any amt of foreign exchange from it to fulfill BoP crisis but on conditions of structural reforms.

Forex

Total foreign currencies an economy possesses at any point is called forex.

Consists of FCA + Gold Reserves + Special Drawing Rights SDRs + Reserve Tranche Position in IMF

In Forex reserves most is Foreign Currency Assets FCAs > Gold Reserves > SDR + Reserve Tranche
Problems with large forex
- Cost of acquisition is high
- Sterilisation cost is high. Sterilisation is form of monetary action that where reserve bank seeks to limit the effects of inflow and outflow of capital on money supply. Involves the purchase or sale of financial assets by central bank.
- Market risks
- Return is little
Interest rates are high foreign inflows increases so does confidence in international financial markets.
Sovereign Wealth Funds - fund of foreign currency invested in global assets. India does not have one because of inadequate forex, more borrowings.
Sterilisation :
- A monetary action/ intervention by RBI in money market to keep money supply stable.
- Done through sale of fin assets to manipulate value of domestic currency relative to the foreign currency.
- Ex. if RBI purchases foreign currency there would be less of it in the open market and an inc of Rupee. To offset this RBI would bring out gov bonds to suck out excess Rupee.
Forex market is where currencies can be bought and sold is called foreign exchange market.

Devaluation and Revaluation of Rupee

#todo
In the foreign exchange market when exchange rate of domestic currency decreases wrt to the foreign currency in a free floating exchange rate it is called Depreciation. Appreciation is when domestic currency increases in value.
Devaluation and Revaluation are similar but they are done by the govt.

Effect of depreciated/devalued Rupee

Good Effects :
- Exports become competitive
- FIIs increase
- More money from loans
- Non Essential imports dec
Bad effects :
- Giving back foreign loans become costly
- inflation rises
- Subsidy and Fiscal deficit rise

Effect of Rupee Appreciation

Good Effects
- Imports and Borrowing becomes cheap
- Exports that require imported raw material become cheap
Bad Effects
- Profits in exports in general dec

Rupee Depreciation in 2018

Dollar interest rates were raised led to flow of money to US
US-China trade war, Turkish Lira fell
Inc. in global crude prices

Important Terms

One of the policies of Trump is to oversupply dollars to weaken imports and increase exports
To lower exchange rate money supply is increased or through OMO. Extreme form of OMO is called Quantitative easing
- Also through expansionary fiscal policy ie spending more or cutting taxes
Dollarization - currency substitution to dollar
Currency Board - only controls the exchange rate of a country, specific function
Global Reserve Currency - Dollar was till 1960s it was the only currency pegged to gold by Bretton Woods Agreement was changed later.
Hard currency is a global reserve currency that is adequately supplied and is stable. Soft Currency is easily availabe in any economy in its forex market ex Rupee.
Flight of Capital : when money rapidly leaves a country
Capital Control done to control inflow or outflow of foreign capital
Hot currency : if any hard currency is exiting an economy at a fast pace hard currency seems to have become hot.
Heated currency : Term used in forex market to denote the domestic currency which is under enough pressure of depreciation due to hard currency’s tendency of exiting the economy. Aka currency under hammering.
Cheap currency : When govt starts re purchasing its bonds before their maturities money that flows into the economy then is called cheap currency. This implies lower/softer interest rate regimes.
Dear currency : Opposite of cheap currency when govt issues bonds, money that flows from public to govt is called dear currency.

Foreign Trade

2020-06-25 16:11:51

India’s EXIM Policy

After independence : import substitution and self-reliance model
80s : easing trade restriction to promote competitiveness
90s : LPG, devaluation and convertibility of Rupee
Now : tariff reforms, cutting customs duty, import without licenses
IN export declined continuously from 1948 to 1980

SEZ Objectives

Generate additional economic activity
Promote exports
Promote investment from domestic and foreign sources
Employment generation, dev infra

Facilities and Incentives given to SEZ :

duty free imports and domestic procurement, operation and maintenance.
100% tax free from 1st 5 years, 50% for next 5.
Exemption from central, state sales tax.
Single window clearance for Centre/ state approvals.

Foreign Trade Policy 2015-2020

Respond to external challenges and rapidly changing trade scenario.
Promotion of exports through schemes, New policies ex MEIS and SEIS were introduced.
Advance authorisation to allow duty free import of inputs.
Measures were adopted to nudge procurement of capital goods from indigenous manufacturers under EPCG scheme by reducing specific export obligation to 75% of normal export obligation.
Measures to boost exports of defence and hi tech firms.
==Interest equalisation scheme, Niryat Bandhu scheme==
Agri Export policy 2018: Diversify export, promote indigenous, organic, ethnic, non-traditional agri products.

Merchandise Exports :

IN had $330 billion an increase of 8.75%.
Mineral Fuel Gems Machinery including computers Vehicles Organic Chemicals Pharmaceuticals.
Iron and Steel, Clothing and Gems and Precious metals declined.
US UAE China Hong Kong.

Service Sector Export Was $205bil in 2018

Software services accounted for more than 45%

Steps to Improve

To boost service sector identif export destination is imp
Create a brand India image
Better dissemination of information foreign exhibition to Indian companies
Resolving visa related issues
Timely delivery of quality service

Merchandise Imports :

USD 514bil an inc of 10.4%
Mineral Fuels Gems Electrical Machinery Organic Chemicals Plastics Iron and Steel
IN trade surplus w/ US Bangladesh Nepal Netherlands SL
IN trade deficit with China $60bil KSA $23bil Iraq Switzerland
WTO, GATS and India Mode 2 services are ‘consumption abroad’
- Long term plan to attract foreign tourists,
- Expansion of healthcare services esp to border areas
- Raise standards of Indain academic institution with FDI policies
WTO, GATS and Mode 3 ‘commercial presence’
- Scope in Finance, banking, insurance, legal, accounting
Trading Across Border of WB parameter asses the time taken in clearing imported and export goods and cost involved
GST and Exports
- No GST charged for exports
- IGST is levied on import and Basic Customs Duty is levied

Export Promotion Scheme

Market Access Initiative MAI scheme fin support for medium term export promotion.
Market Development Assistance MDA : provide fin assistance for export promotion
FOB - Free on Board value is value of goods excluding carriage, insurance and freight
Served from India : create brand eligibility based on min forex earning
Focus Market Scheme FMS - to offset high freight cost
Focus Product Scheme FPS - incentivise exports which have high employment intensity in rural and semi urban areas
Hitech Products export promotion scheme
GS1 (Global Standard) India : NPO to spread awareness and guide on adoption of global standards in supply chain management
Advance Authorisation Scheme : issued to allow duty free import of inputs that are physically incorporated into export products.
Interest Equalisation Scheme : Impremented by DG of Foreign trade through RBI for pre and post Shipment Rupee Export Credit. 3% pa interest equalisation is made to eligible exporters. For MSME it is 5%.
Transport and Marketing Assistance TMA : for specified agricultural products to mitigate disadvantage of higher cost of transportation.
Duty Free Import Authorisation DFIA : on post export basis for products for which standard input output norms have been notified. It is similar to AAS.

Institutional Infrastructure

Board of Trade : chaired by Mo Commerce advises gov on Foreign Trade policy and how to boost India’s exports. #body
Inter State Trade Council : to ensure continuous dialogue with state gov and UT’s to boost export. #body
Export Promotion council : NPOs they perform advisory and executive roles. #body
Commodity boards : Do Commerce responsible for production, development and export of tea, coffee, rubber, spices and tobacco. #body
Agricultural and processed Food products Export Development Authority APEDA
Marine Products Export Development Authority MPEDA -
EXIM Bank - Finances Indian exports.
Export Credit Guarantee Corporation of India Ltd ECGC - provides insurance cover.

Regional Free Trade Arrangements and India - Ex SAFTA, CECA, CEPA

to reduce customs tariff and non-tariff barriers.
Can also cover IPR, investment, gov procurement etc.
Preferential Trade Agreement PTA - ex India - Mercosur PTA is a South American trade bloc consists of Argentina, Brazil, Paraguay, Uruguay.
Diff is that FTA there is negative list on which duty is not reduced or eliminated in PTA positive list duty is reduced. #important

Comprehensive Economic Cooperation Agreement CECA and Comprehensive Economic Partnership Agreement CEPA

Major difference b/w CECA and CEPA is that ==CECA involve tariff reduction eliemination in a phased manner on all items except negative list and tariff rate quota TRQ itmes==.
CEPA is a wider term and is followed after a CECA agreement.
- India and UAE signed a CEPA 90% of India’s exports to UAE will have duty free access to the Emirates. UAE is 3rd biggest partner of India. ^6fc60f
consists of services, goods, IPR, competition, investment, competition etc
Includes Mutual Recognition Agreements MRAs covering regulatory regimes, professional qualification
Customs Union - have a common external tariff against non-members
Common market - Customs Union has provision to facilitate free movement of labour and capital
Economic Union is a Common Market further harmonisation of fiscal/monetary policies and shared judicial/executive and legislative institution ex EU
Early Harvest scheme EHS is a precursor to FTA
RCEP - FTA b/w ASEAN and six other Asia Pacific states. India refused to join
Exports and Employment
States and Export Efforts :
- ASIDE - dev of infra
- SEZ set up by the states
- AEZ set up in states for agro exports

Trade Finance

Letter of Undertaking LoU bank guarantee allows its customer to raise money from another banks foreign branch. Short term credit
LoC Letter of Credit says that person is creditworthy/bankable
Letter of Comfort - reassurance to the lending institution that the Parent company is aware
South-South Trade - developing countries trade with one another Quantitative Restriction - other than tariff viz quota, licensing requirements and canalization

Non-Tariff Barriers

protect domestic economy against competition,
example the social laws brought by WTO to exclude imports from developing countries on the grounds of labour laws, child labour, human rights, weak green laws etc
- Sanitary and Phytosanitary Measures SPS to protect from pests, toxins etc
- Technical barriers
Forfaiting - purchasing of receivables from exporters as well as the risk associated
Deemed export - inputs and concessions given for export promotion
EPCG - Export Promotion Capital Goods EPCG scheme - gives manufacturer facility for imp of capital goods for export production
Exchange Earners Foreign Currency EEFC Account Scheme - retain a portion of their export in foreign exchange
ITC HS - Indian Trade Classification (Harmonised System) - classifies products for purpose of export and import
Counter Trade - international barter

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Regional Trade Agreements RTAs

Are efforts by nations aimed at deepening economic relations with neighbouring countries and are mostly political in nature.
India was part of 16 RTAs and 10 FTAs and 6 PTAs.
10 FTAs that India is member is are :
1. Sri Lanka
2. SAFTA
3. Nepal
4. Bhutan
5. Thailand
6. South Korea CEPA
7. ASEAN CECA
8. Japan CEPA
9. Malaysia CECA
6 Preferential Trade Agreements that India is a mem are : 11. APTA 12. GSTP 13. SAARC 14. India Afghanistan 15. India MERCOSUR 16. India-Chile

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