global trade and its growth
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GLOBAL TRADE AND Its GROWTH
A HISTORICAL PROSPECTIV OF INDIA RELATIVE
POSITION IN WORLD TRADE
Trade is exchange of goods for money or other goods.
International Tradeis a transaction between residents of
different countries or flow of goods, services & capital across
international borders.`
Global trade existed from time immemorial & can be traced to the
Indus valley civilization around 3000 B.C.
The first ship of the East India Company arrived at the port of
Surat in 1608, primarily to carry out trade with India.
America was discovered accidentally when Vasco da Gama was trying
to reach India for trade
MAIN DRIVRSE OF GLOBLE TRADE ( MICRO
GROWTH - Saturation of domestic market potential. PROFITABILITY - Price differential amongst different markets
ECONOMIES OF SCALE Large scale and economical production
capacity has to be backed by large market size.
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RISK SPREAD Reduces dependencies on one market.
ACCESS TO IMPORTED INPUTS - Lowers cost of manufacture.
UNIQNESS OF PRODUCT/SERVICES : IT/ BPO
LIFE CYCLES : Extends life cycle.
SPREADING R & D COSTS : Ultimately reduces value of the
product
REASONS OF GLOBAL TRADE
Uneven distribution of natural resources:
Oil, Natural Gas in Gulf countries, iron ore, metallic ores in specific
countries.
Difference in level of technologies:
High technology products are often confined to developed nations
Differences in costs of production
Advances in Information Technology:
Has created millions of new customers in developing countries,
and brand awareness.
GLOBAL BUSINESS
DO WE HAVE CHOICE
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Even if a company does not desire to participate directly in
international business, it can not escape the ever increasing
influences of firms exporting, importing & manufacturing abroad.
Neither can any firm ignore the effects of various M&As &
consolidations of business, growth of regional trade areas, rapid
growth of world markets & the increasing number of competitors
for global business.
Four trends stand out as the most dynamic, affecting global
business today & are likely to impact the growth of international
business in the coming days:
Rapid Growth of WTO & regional free trade areas
Acceptance of free market system among developing
countries in Latin America, Asia & Eastern Europe.
Impact of internet & global media on the dissolution of
national borders
Mandate to properly manage the global resources & global
environment for generations to come.
THE EMERGING SCENARIO
Today
Most business activities are global in scope
Technology, research, capital investment, production &
marketing, distribution & communication networks have
global dimensions
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Every business has to compete in an increasingly
interdependent global economic & physical environment.
As competition for world markets intensify, the number of
companies operating solely on domestic markets will
decrease and all businesses will subsequently become
international in some form or other.
CHALLENGES OF GLOBAL TRADE
Uncontrollable Factors in
- Social Environment
- Economic Environment
- Political Environment
- Legal Environment
- Logistics Issues
- Technology Environment
- Local Competition
- Marketing Channels.
The answerlies in responding competitively to the above
challenges by effective marketing strategies and ability to understand
and respond quickly andamending our offer in terms ofproduct, price,
distribution & promotion .
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VALUE OF WORLD EXPORT
YEAR1980 1990 2002 2004 2006
VALUE IN$(BILL)
1271 3303 4071 8567 12083
GLOBAL VALUE AND TRADE TRENDS
GLOBALOUTPUT
(REAL GDPGrowth%)
WORLD TRADE (VOLGr %)
2001 2.6 -0.3
2002 3.1 3.7
2003 4.1 6
2004 5.3 10.9
2005 4.9 7.5
2006 5.1 9.4
2007 4.9 7.8
2008 3.7 5.6
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GROWTH IN GLOBAL TRADE ( HISTORICAL )
Pre World War I (up to 1914)
- Very few barriers- either tariff or non-tariff, resulting in
rapid integration of economies & smooth trade flows,
movement of capital and migration of people.
- Between 1st & 2nd World Wars (1915 to 1944)
- Creation of many barriers resulting in deceleration of pace
of globalization. Trade virtually at standstill during peak war-
time
- Post World War II (after 1945)
- Drive to create integration & cooperation between
countries. Despite this it took a very long time to reach
trade levels prior to 1st world war.
- Several developing countries which gained independence,
followed a self reliance & import substitution strategy.
- Political blocks were created and some of them shielded
themselves from the rest of the world
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- COMPOSITION OF WORLD
MERCHANDISE EXPORT
1965 1980 1995 2001
FOOD 18.2 11.1 8.9 7.4
AGRICULTURAL R. M. 7.8 3.7 2.8 1.8
ORES & METALS 12 4.7 3.4 3
FUELS 9.6 24 7.2 9.1
MANUFACTUREDGOODS 49.8 54.2 74.6 74.1
GROWTH IN WORLD TRADE ( CURRENT SCENE )
Post World War II, a need was felt to create anestablishment to
facilitate trade between various nations & GATT came into
existence in 1947 when a combined package of trade rules and
tariff concessions were negotiated and agreed by 23 countries.
WTO came into existence in 1995 as a successor to GATT and itsmain function is to ensure smooth flow of international trade as
predictably & as freely as possible.
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Current scenario indicates rapid pace in growth in world trade as
a result of market integration and impact of information
technology.
World Bank studies have revealed that counties that trade, grow
faster. The growth in world trade has outpaced the growth in
world output every year since 2002.
There have been strong import demands from developing
countries of Asia, the transition countries and USA. Import &
Export growth of 10-12% was observed in Asia & the transition
countries whereas the import growth in us was around 5-7%
High income countries account for more than 75% of world trade
and are major markets for low and middle income countries.
Countries of emerging Asia ( China, Hong Kong, India, Indonesia,
Korea, Malaysia, Philippines, Singapore, Taiwan & Thailand) have
driven world trade of late:
Had GDP growth averaging 7% between 1970-2002 as
compared to GDP growth of 3% for OECD counties.
Share in world GDP has increased from 7 % in 1970 to 25 %
in 2002.
Accounted for 44% of GDP growth & 24% of export growth
in 2002
Are integrating economically and exports between these
counties have grown steadily from 20% in 1970 to 40% in
2002.
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There has been a shift in composition of world trade and the
shift is from resource base to value added products and the
share of manufactured goods have risen significantly. This is
due to developments in technology, lower transportationcosts & improved communications and business practices.
Institutional reforms have also played a key role.
Consumer desires have been created by increases in per capita income,
developments in information & communications technologies
GLOBAL MARCHANDISE TRADE IN BILLION
2006
EXPORTS SHARE% RANK IMPORTS SHARE% RANK
GERMANY 1112 9.2 1 909 7.3 2
USA 1038 8.6 2 1919 15.5 1CHINA 969 8 3 792 6.4 3
JAPAN 650 5.4 4 580 4.7 5
FRANCE 490 4.1 5 534 4.3 6
NETHERLANDS 462 3.8 6 416 3.4 8
U.K 448 3.7 7 619 5 4
ITALY 411 3.4 8 437 3.5 7
CANADA 390 3.2 9 358 2.9 9
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BELGIUM 369 3.1 10 354 2.9 10
HONGKONG 323 2.7 12 336 2.7 11
SINGAPORE 272 2.2 14 239 1.9 15
MALAYASIA 161 1.3 19 131 1.1 23
INDIA 126 1 28 175 1.4 17
INDIA RELATIVE POSITION IN WORLD TRADE Indias foreign trade has grown significantly:
Exports increased from $ 1.27 b in 1950-51 to $ 126.4 b in
2006-07.
Yearly exports have grown by 20% or more in several
phases during 1972-77, 87-90, 93-96 & 2000-04.
The average growth in merchandise exports during 04-07
has been 25.6%
Despite this, Indias share in world exports fell from 2.53% in
1947 to 1.0% by 2006.
India was the 28th largest exporter in 2006, but this
situation will improve considerably in the next few years,as Indias exports are growing far faster than that of most
other countries.
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Indias imports have also grown from $1.7b in 1951, to $ 185.6b
in 06-07 and India was the 17th largest importer in 2006.
Indias net service exports have also grown rapidly and India was
the 10th largest service exporter in 2006.
Over the years, there has been a major change in the product
profile of goods exported by India.
Share of agricultural products have declined from 44.2% in
1960-61 to 11.8% in 03-04.
Share of manufactured goods have risen from 45.3% in 60-61 to 76.2% in 2003-04.
Amongst manufactured products, most significant growth have
been shown by gems & jewellery (0.1% to 2.4%) and readymade
garments (0.1% to 9.8%) during the above period.
Similarly, there has also been a significant shift in market profile
and the exports are shifting southwards. the main markets todayare Asia & Oceania which account for around 47% of our
merchandise exports followed by West Europe(24%) & North
America(18%). As per our governmental policy, future trade flows
are to be geared towards the developing nations.
Indias main imports during 06-07 have been petroleum &
petroleum products(30.7%) followed by capital goods (25.4%).
Electronic goods (8.6%) & gold (7.8%) are the two principal non-oil
commodities imported by us.
China is the major source of imports to India and value of imports
from China increased from $2.8b in 02-03 to $17.4 b in 06-07. This
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represented 9.4% of Indias total imports that year. Other major
sources are USA $11.7b (6.3%). Other major import sources are
Switzerland, Germany, Australia etc.
TRADE AND ECONOMY DEVELOPMENT
International Trade is very closely linked to growth & economic
development.
In the year 2001, world output ( as real GDP) grew only by 2.6%.
Major economies such as USA & Euro, grew only by 0.8% and
1.9%. World trade showed a growth of -0.3%. Indian exports alsoshowed a growth of -1.7%, whereas imports grew by only 1.7%.
However, since 2003-04, GDP growth was accelerated and Indian
economy grew at about 8.5%. Export growth also picked up,
growing by ~ 23-24%. Imports grew at a sharper rate specifically
during 2004-05 & 2005-06.
Global economy expanded by 4.9% in 2007 as against 5.0% in2006. The growth in global economy is projected to decelerate to
3.7% in 2008 on account of expected slowdown in most of the
advanced economies. IMF has projected the US economy to grow
by 0.5% in 2008 as compared to 2.1% in 2007 & Euro to grow by
1.4% in 2008 as compared to 2.6% in 2007. The growth in world
trade in 2008 is expected to moderate to 5.6% in volume terms as
compared to 6.8% in 2007.
IMF has projected GDP in china to grow by 9.3% in 2008 as
compared to a growth of 11.4% in 2007. Similarly, Indias growth
would moderate to 7.9% in 2008 from 8.7% the previous year. It is
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expected that sharp economic decline in key developed countries
will be partly offset continuing strong growth in emerging
countries.
COMPOSITION OF WORLD MERCHANDISE
EXPORT ( In Percentages )
1965 1980 1995 2001
FOOD 18.2 11.1 8.9 7.4
AGRICULTURAL R. M. 7.8 3.7 2.8 1.8
ORES & METALS 12 4.7 3.4 3
FUELS 9.6 24 7.2 9.1
MANUFACTURED GOODS 49.8 54.2 74.6 74.1
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COMPOSITION OF TRADE INDIA PRINCIPAL
EXPORT ( IN Billions )
2004-05 2005-06 2006-07
Value % Value % Value %
PRIMARY PRODUCTS 13.55 16.2 16.38 15.9 19.55 15
Agriculture &Allied 8.47 10.1 10.21 9.9 12.52 9
Ores & Minerals 5.08 6.1 6.17 6 7.03 5
MANUFACTURED GOODS 60.73 72.7 72.56 70.4 82.82 65
Leather & Manfd 2.42 2.9 2.7 2.6 2.93 2
Chemicals & Allied Prods 12.44 14.9 14.77 14.3 16.73 13
Engineering Goods 17.35 20.8 21.72 21.1 29.08 2
Textile Fab & Manufactures 13.56 16.2 16.4 15.9 17.01 13
PETROLEUM CRUDE &
OTHERS 6.99 8.4 11.64 11.3 18.55 14
TOTAL(INCLDG OTHERS) 83.54103.0
9 126.33
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INDIAS PRINCIPAL IMPORTS BY PRODUCTS
VALUE IN $ BN
2000-01 2003-04 2004-05 2005-06 2006-0
PETROLEUM CRUDE 15.7 20.6 29.9 43.9 57.1
ELECTRONIC GOODS 3.5 7.5 10 13.2 16
GOLD 4.1 6.5 10.5 10.8 14.5
MACHINERY EXCEPT 2.7 4.7 6.8 10 13.8
ELECTRICAL&ELECTRON
TRANSPORT EQUPT 3.2 4.3 8.8 9.4
METAL ORES &
SCRAP 3.9 8.3
PEARLS & PRECSTONES 4.8 7.1 9.4 9.1 7.5
IRON & STEEL 1.4 2.5 4.4 6
0RGANIC CHEMICALS 1.4 2.8 3.9 4.7 5.4
COAL, COKE &
BRIQUETT 1.4 3.2 3.9 4.6
TOTAL( INCLDGOTHERS) 49.9 78.1 111.5 149.2 191.2
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Composition of Trade
Historically, the main exports from India were primary goods like
jute, tea, cotton, hides & skins, manganese ore, mica etc whereas
manufactured goods constituted the bulk of imports.
Since trade liberalization in 1991, there has been considerable
increase in exports both in traditional & non-traditional items.
Traditional export items: Coffee, Tea, Tobacco, Cashew kernel,
Cotton yarn, Spices , Jute etc.
Non-traditional export items : Iron ore, Sugar, Molasses, Fish &
Fish preparations, Garments, Leather, Gems & Jewellery,
Chemicals & allied products, Machinery etc.
Indias exports are generally classified into three categories :
primary products, manufactured goods & petroleum crude &
others.
Primary products include agricultural & allied products & ores &
minerals. share ofagricultural & allied products has declined
considerably from about 19.4% in 1991 to about 9.9% in 2006-07.
however, share ofores & minerals marginally increased during
the period from 4.6% to 5.6%. Iron ore is the major constituent in
this category, contributing about 70%.
The total proportion ofmanufactured goods in the total exports
of India has remained steady at around 70%.
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Engineering goods, gems & jewelry, chemical products,
readymade garments, cotton yarn etc & leather & leather
productsare the main constituents of manufactured goods
During 2006-07, engineering goods was the largest constituent in
this category, with exports valued at $29.08 b (23%) , followed by
textile fabrics & manufactures at $17b (13.5%) & chemicals &
allied products $16.73b (13.2%). gems & jewelryalso occupies a
prominent place with exports of $15.59b(12.3%). Interestingly,
gems & jewelry & ready made garmentsexports constituted a
meager 0.1% each of our total exports in 1960-61.
Petroleum & crude items category had the mosOther items of
exports constituted hardly 3% of value of total exports in 1990-91.
this proportion had increased to almost 13% by the year 2005-06.
t phenomenal increase in the last few years and exports in this category
increased from $ 6.99 b (8.4%) in 04-05 to $ 18.55 b(14.7%) in 06-07
Composition of Trade (3)
CURRENT TRENDS
Indias Merchandise Trade grew at 22.8% during 2007-08(
Apr-Feb).
This compares with 23.2% growth during corresponding
period last year.
Growth in Imports at 30.1% was higher than 25.2% recorded
a year ago.
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Non oil imports which recorded a substantial increase of
31.8% (22.6% a year ago) contributed about 72% of overall
import growth.
Oil imports during April- Feb 2008 showed a deceleration of
growth ( 26.4% against 31.2% in April- Feb 2007).
Merchandise Trade deficit during April-Feb 2008 aggregated
$ 72.5 B , an increase of $ 23.1 B over a year ago.
Commodity wise details show that capital goods, gold &
silver were the main contributors of growth in non-oil
imports.Capital goods increased by 31.6% and gold & silver
increased by 34.4% during April-Dec 2006.
Commodity wise data for exports for Apr- Dec 2007, show
that all major commodity groups, barring agriculture & allied
products, ores & minerals & gems & jewellery group showed
deceleration.
Growth of exports in manufactured goods also moderated
during this period.
Direction of Trade
Pre-independence period
Colonial relationship decided Indias Trade relationships
Post- Independence period
India strengthened its political & diplomatic relationship
with other countries. It reduced the vulnerability of the
economy to political pressures.
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Indias Trading Partners have been generally categorized to
Organization of Economic Cooperation &
Development : comprises of European Union, USA,
Canada, Japan & Australia. These countries account for
a major portion of Indias Exports and Imports.
However, their share has reduced over the years.
During 2006-07, OECD countries accounted for 41.2%
of our exports as compared to 56.5% in 1990-91.The
corresponding figure for imports are 36.5% (2006-07)
as compared to 57.2% (1990-91). USA & Germany are
the largest partners of trade with us amongst these
counties.
Organization of Petroleum Exporting Counties :
Comprises of countries like, UAE, Saudi Arabia, Iran,
Kuwait etc. Trade with these countries have shown a
positive growth over the years. While our imports from
these countries have grown from 16.3% in 1990-91 to
29.4% in 2006-07, exports have nearly increased 3
times from5.6% to 16.4%
Direction of Trade (3
East-Europe: East European countries , specially Russia were
important trading partners of India. However, due todisintegration of USSR & unstable political climate in the region,
there has been a sharp fall in trade with these countries. Exports
to these countries fell from 17.9% in 1990-91 to mere 2.0% in
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2006-07. Similarly, imports from East Europe fell from 7.8% to
2.4% during the corresponding period.
Developing Nations: Developing nations of Asia , Africa & Latin
America fall in this category. Countries of Asia are by far the most
important of these. These countries accounted for 40.1% of our
exports & 31.3% of our imports during 06-07.
CURRENT TRENDS
USA continued to be the single largest market for our
exports during 2007-08 although its share declined
from 15.3% in Apr-Dec 2006 to 13.4% in Apr-Dec 2007.
USA was followed by UAE (10.1%), China (6.0%),
Singapore (4.5%) & UK (4.3%)
Direction of Trade (4)
Among major regions, Indias exports to European Union &
Asian Developing Countries showed accelerated growth
while exports to North America & OPEC Countries
decelerated during AprilDecember 2007.
Source wise, China was the major source of imports
accounting for 11.5% of total imports (oil plus nonoil )
during Apr- Dec 2007.
The other major sources of Imports were Saudi Arabia (
7.8%) , the USA (5.8%), the UAE (5.6%) , Switzerland (4.6%) ,
Iran (4.2%) & Germany (3.9%).
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Balance Of Trade
The difference between the value of exports(in FOB terms) and the
value of imports in (CIF Terms) is termed as the Balance of Trade.
India consistently had a negative Balance of Trade or a Trade Deficit
from the early 50s to the present times, except for the year 1972-
73, when we had a marginalTrade Surplus of $134 M & the year
1976-77 when we had a surplus of $ 77 M.
While Indias trade Deficit was a mere $ 4 M in the year 1950-51, it
rose to $ 59.3 B in the year 2006-07 and further to $ 80.4 B during
April-March 2008.
The widening Trade deficit shows that Indias Imports, both oil and
non-oil, have risen more steeplythan the export figures.
The various factors which have hindered our export growth are:
High Costs: due to higher prices of inputs, time and cost over-
runs, lower levels of productivity, higher interest rates and so
on.
Inadequate quality perceptions, unreliability in contractual
fulfillment.
Inability to establish strong brand image & lack ofcommitment
to exports.
Infrastructure bottlenecks, procedural complexities and
institutional rigidities.
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Inadequacy ofTrade information systems
A countrys Balance of Payments is defined as a summary of all
economic transactions that have taken place between the
countrys residents and the residents of other countries during a
specific time period.
The Balance of Payments, generally:
- Are computed
on a monthly, quarterly or yearly basis.
- Includes bothvisible & invisible transactions.
- Reports the
countries international performance in trading with other
nations and the volume of Capital flowing in & out of the
country.
- Uses thesystem of Double-entry bookkeeping
- Every debit or
credit in the account is also representedas a credit or debit
somewhere else
- Currency
inflows are recordedas credits (plus sign) & currency oTheaccounts used for computing the Balance of Payments include
the following three components:
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Current Account: It includes import and export of goods
and services and unilateral transfer of goods & services.
The current accounts balance thus includes trade balance
as well as invisible accounts balance. Invisible Accountsincludes the following heads
Services : This includes travel,
transportation,insurance,governmentnot included
elsewhere, software and other services. Software
services is by far the largestcomponent in this
category, followed by travel. The contribution of
other items in this category are marginal (The term
non-factor services is also used to denote these).
Transfers: Mainly denotes the monies sent by Non
Resident Indians and others to India. The amounts
received under this head have contributed
significantlyto a comfortable foreign exchange
situation at present. India received almost $ 28B as
transfers during Apr-Dec 2007.
Investment income & Compensation of employees are the
other two heads included in the computation of Current
Accounts Balance. The investment income is a large
contributor to the balanceutflows are represented as debits(
minus sign)
Capital Account: It includes transactions leading to changes in
financial assets & liabilities of the country. The following
transactions are known as Capital Account transactions;
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Foreign Direct Investment: This plays a very important role
in the economic growth of the country. During Apr-Feb
2008, total inflows under FDI category was $ 25.5 B . These
went mainly into manufacturing industries(20.1%),followed byfinancial services ( 18.7%) and the construction
sector (14.7%). Source wise, Mauritius, remained the main
source of FDI to India during Apr- Feb 08, followed by
Singapore & USA. During 2006-07, India received FDI of $
8.5B. Interestingly, India has also made significant FDI
outflows during recent years. FDI abroad amounted to $
9.53 B during Apr- Dec 2007.
Portfolio Investment: These are normally made by Foreign
Institutional Investors (FII). Net inflows by FIIs aggregated
to $ 20.3 B during the financial year 2007-08 as compared
to the figure of $7.1B in 2006-07. The number of FIIs
registered with the SEBI increased to 1319 by March 31,
2008.
External Commercial Borrowings (ECB): these are mainly
medium to longterm borrowing and during the period Apr-
Dec 2007-08, the net inflows under ECBs amounted to $
16.3 B as compared to the figure of $ !6.2 B in 2006-07
.
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FDI Equity inflows in various sectors
between
April 2004 to March 2008 (In $ Bn)
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Short Term Trade Credit : Net short term trade credit
amounted to $10.8 B ( inclusive of suppliers credit up to
180 days, amounting to $4.2 B) in Apr- Dec 2007.
External assistance : India received external assistance
valued at $1.8 B in 2006-07. The net External assistance
received during Apr- Dec 2007 was $1.25 B.
NRI Deposits: The NRI deposits during the period 2006-07
was $4.3 B. This amount was very low during the current
year.
We can observe that
there have been significant increase in capital flows in 07-08
as shown below:
FDI to India:
increased by 29.8 % in Apr-Feb 07-08 over same period 06-07.
FII (Net)
increased by 6.3 times in 07-08 over 06-07.
` ECB (Net)
increased by 66% in Apr- Dec 07 over that of Apr- Dec 06
Short term
Credit : increased by 91% in Apr- Dec 07.
Reserve Account : It includes only the reserve assets of thecountry. These are the assets that the monetary authority of
the country uses to settle the deficits and surpluses that arise
in the other two categories taken together.
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Indias foreign
exchange reserves were $ 309.7 B in end march 2008, showing
an increase of $110.5 B over end March 2007.
Foreign Institutional Investment (FII)
Some of the features of foreign institutional investments are :
These are volatile in nature.
The investors make portfolio investments in a country,
when, after tax, after conversion rate adjustments, the rate
of returns are attractive to the investors.
Conversely , FII investments are withdrawn from a country
when returns are considered to be less attractive and not
commensurate with risks foreseen there.
These are portfolio investments in a countrys equity
markets by international investors.
To reduce concentration of risks, FII investors diversify their
portfolio of investments across currencies and interest rates,
thereby improving the overall risks-return profile.
Spurred by the growing investor interest in stock exchange,
India is set to allow foreign investment in commodity
exchange as well.
Foreign Direct Investments(FDI)
Interesting features of foreign direct investments(FDI) are
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FDI is a long term commitment of funds by companies of
one country to another country.
FDI involves transfer not only of money but also of
technology.
FDIs are generally made by MNCs and their profitability is
vulnerable to change since cash flows depend on the
generation of revenues, the exchange rate and the cost of
capital.
FDI decisions are guided by not only financial returns
analysis but by a host of other factors and a comprehensive
country risk analysis has to be made before giving shape to a
FDI proposal. Such analyses then must also be carried out on
a regular basis, for updating strategy, capital budgeting
decisions, evaluation of cost of capital etc. in respect of the
investments made.
Top sectors receiving FDI inflows during Aug 1991 to Apr2007 to India are electrical equipment ($8.72B), services (
8.37B), tele-communications ($3.9B), transportation
($3.74B) & power & oil refinery ($2.87B).
Disequilibrium in BoP
Balance of payment position is considered favourable, when
receipts from foreigners, exceed payments made to them and
unfavourable when payments exceed receipts.
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Disequilibrium is caused by random variations in trade,
fluctuations in production of primary goods resulting in unusual
trade in such commodities and are generally temporary in nature.
Disequilibrium in BoP can also occur as a result of :
Technological improvements affecting quality & price of
some products, in certain parts of the world, resulting in
altering pattern of trade.
State of economic development of a nation
Drastic shifts in consumer tastes, as a result ofimprovements in communications technology , information
systems etc.
Changes in income level of the people of a nation, as a result
of high growth rates, leading to a different level of
consumption pattern & higher imports.
Inflation, thereby increasing the cost of output of a country
also results in reduction in exports.
Balance of Payments, India
(pre-reforms era)
Historically, India had a negative trade balance since 1950-51,
excepting for 1972-73 & 1976-77 when there was a marginal
positive trade balance.
The invisible accounts hardly contributed to a surplus and showed
marginal balances. The balance in the invisible account was
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$0.173B in 1960-61, $ -0.049B in 1970-71, $5.065B in 1980-81 & $
-0.242B in 1990-91.
This led to significant current account deficits and in the late
1980s Indias BoP was vulnerable to external shocks.
Our foreign exchange reserves declined from $5.97 B in 1985-86
to $3.37B in 1989-90 & the current account deficit which
traditionally used to be less than 2% of GDP had reached 2.93% of
GDP in 1988-89.
Because of increased short term borrowings, interest burden
nearly doubled from $2.128B in 1988-89 to $4.12B in 1990-91.
Our reserves accounted for 1.6 months of imports in the year
1989-90. The Gulf war in 1990 nearly doubled the crude oil price
& our reserves got depleted to $ 2.24B by the end of 1990-91.
This covered less than one months import bill.
Substantial outflows of deposits by NRIs added to the crisis.
Reserves declined further to $ 0.9B on 16th January, 1991 &
current account deficit as a percent of GDP shot upto 3.24%
The Government of Indias initial response was to cut on imports
and impose further control on consumption of petroleum
products. Import of most of the products, barring the extremely
essential ones, was made extremely difficult to conserve foreign
exchange.
New Government was formed in June 1991. Rupee was devalued
but this new Government subsequently went on to initiate a host
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of reforms in the economy & some of the measures initiated
were:
The Rupee was partially freed in February, 1992
Import restrictions on capital goods, raw materials &
components were virtually eliminated.
Tariff and non-tariff barriers were reduced to partially open
up our markets.
Government liberalized the policy framework for inflow of
capital by
Allowing Indian companies to raise capital from
international capital markets through Global
Depository Receipts (GDRs)
Welcoming Foreign Institutional Investments
This led to substantial inflow of capital and capital account
surplus exceeded current account deficits by wide margins.
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Balance of Payments- Key Indicators ($Bn)
89-90 90-91 91-92 92-93 93-94 94-95
1. Imports (cif) 24.41 27.72 21.21 24.32 26.74 35.90
2. Exports (fob) 16.96 18.48 18.14 18.87 22.68 26.85
3. Trade Balance (2-
1)
-7.46 -9.44 -3.07 -5.45 -4.06 9.05
4. Net Invisibles 0.62 -0.24 0.05 1.92 2.90 5.68
5. Current Account (Net) -6.84 -9.68 -2.84 -3.53 -1.16 -3.37
6. Capital Account (Net) 6.97 7.19 5.63 2.94 9.70 9.16
7. Overall Balance (5+6) 0.13 -2.49 2.79 -0.59 8.54 5.79
8. Increase (-),Decrease (+) in Reser
+0.74 +1.28 +3.57 -0.70 -8.72 -4.64
( Source- RBI, MoF)
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Balance of Payments - Trends, Apr- Dec
2007
(Annual policy statement for 08-09 by RBI Governor,on 29/4/08)
Net Invisibles:
Net invisible earnings amounted to $50.5 B as against $36.3
B , a year ago.
The key contributors were:
Remittances from overseas Indians which remained
sizeable at $ 28.8B during Apr-Dec 2007 as compared
to $ 20.2 B during the corresponding period an year
ago.
Software export proceeds amounted to $ 27.5 B as
against $ 21.8 B in Apr- Dec 2006.
Miscellaneous receipts, net of software exports, stood
at $ 18.1 B in Apr-Dec 2007as compared with $ 17.6 B
a year ago, mainly on account of. business services
such as trade related services , business and
management consultancy, engineering and technical
know-how.
Invisible payments increased to $ 49.7 B during the
first 9 months of 2007-08 as compared with $ 43.1B a
year ago.The key components of this were travel
payments, transportation, business & management
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consultancy, technical services, dividends, profit &
interest payments.
Thus, net invisible surplus amounted to $ 50.5 B in Apr-
Dec 2007.
Reflecting the developments in merchandise & invisible
accounts, current account deficit (CAD) at $ 16.0 B was
higher than $ 14.0 B in the corresponding period of the
previous year.
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Balance of Payments
Invisibles on Current Account ($ Bn)
2002-03 2003-04 2004-05 2005-06 2006-07
ForeignTravel (net)
1.4 1.4 1.2 2.4
InvestmentIncome(net)
-3.4 -4.5 -5.0 -5.9 -6.6
MiscellaneousReceipts(net)
4.3 7.7 13.7 24.2 27.9
Transfer
Private(Net)
16.4 21.6 20.5 24.5 27.9
TOTAL(Net)
17 27.8 31.2 42.0 53.4
Net Capital Inflows
Net Capital Inflows surged by 172% to $ 81.9 B during Apr-
Dec 2007, as compared with $ 30.1B a year ago.
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Net FDIincreased to $ 8.4 B from $ 7.6 B in Apr- Dec
2006.
Portfolio Investments by FII recorded a substantial
increase of $ 33.0 B from $ 5.2 B an year ago.
ECB increased to $ 16.3 B as against increase of $ 9.8 B
during the previous year, in response rising financing
requirements for domestic capacity expansion.
NRI deposits registered a net outflow of $ 0.9 B as
against an increase of $ 5.7 b in Apr- Dec 2006,
responding to reduction in ceiling on interest rates of
NRI deposits in April 2007.
Net short term creditrose to $ 10.8 B as compared to
$ 5.7 B an year ago.
Net debt flows, in the form of external assistance,
ECBs, NRI deposits & short term credit put together
increased to $ 27.5 B in Apr- December 2007 from $
20.2 B, in Apr- Dec 2006.
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FDI Inflows ( Country wise) $ Million
(Source- Statistical Outline Of India)
2006-07 2005-06 2004-05 2003-04 2002-03
Mauritius 3,780 1,363 820 381 534
U.S.A 706 346 469 297 268
Japan 80 86 122 67 103
Germany 116 45 143 69 103
South Korea 68 61 14 22 15
Netherlands 559 50 196 197 94
TOTAL (Incl others) 9,307 3,359 2,320 1,462 1,658
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Balance of Payments - Trends, Apr- Dec 2007
(contd 2)
(Annual policy statement for 08-09 by RBI Governor, on
29/4/08)
Foreign Exchange Reserves:
There was a large accretion of $ 67.2 B to foreign
exchange reserves, excluding valuation changes, during
Apr- Dec 2007 as against $ 16.2 B in Apr-Dec 2006.
Valuation gains, reflecting the appreciation of major
currencies against US$ , accounted for $ 8.9 B of
accretion.
Thus, the foreign exchange reserves recorded an
increase of $ 76.1 B and rose to a level of $ 275.3 B byend December 2007 and stood at $ 313.5 as on April 18,
2008.
External Debt:
- Indias
external debt increased by $ 31.8 B from end- March 2007 to $
201.4 B at end Dec
2007.
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- This was
mainly in ECBs ($15.3B) & short term credit ($ 8.8B)
- Valuationchanges due to depreciation of US$ accounted for $ 6.0B of the
increase in external debt.
- At end 2007,
ratio of short term debt to total debt was 17.5% & the share of
US$ debt was 54.5% in the
total debt.
India holds the third
largest stock of reserves amongst the emerging market
economies. According to RBI, Indias foreign exchange reserves
are at a comfortable level & are consistent with the rate of
growth, the share of external sector in the economy and the size
of risk adjusted capital flows.
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