global trade and its growth

7/31/2019 Global Trade and Its Growth

1/39

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.


2/39

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


3/39

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


4/39

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 .


5/39

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


6/39

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

- .


7/39

- 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.


8/39

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.


9/39

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


10/39

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.


11/39

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


12/39

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


13/39

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


14/39

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


15/39

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


16/39

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%.


17/39

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.


18/39

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.


19/39

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


20/39

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%).


21/39

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.


22/39

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:


23/39

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;


24/39

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

.


25/39

FDI Equity inflows in various sectors

between

April 2004 to March 2008 (In $ Bn)


26/39

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.


27/39

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


28/39

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.


29/39

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


30/39

$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


31/39

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.


32/39

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)


33/39

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


34/39

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.


35/39

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.


36/39

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.


37/39

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


38/39

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.


39/39

- 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.

global trade and its growth

Documents