Balance of Payments (BOP)
Balance of payment of India is classified into -
- BOP on current account
- BOP on capital account
BOP on current account:
- Visible trade relating to imports and exports.
- Invisible items, viz., receipts and payments for such services as shopping, insurance, banking etc.
- Unilateral transfer such as calamity relief package.
BOP on capital account:
BOP on capital account shows the implications of current transactions for the country’s international financial position for instance, the surplus and the deficit of the current account are reflected in the capital account, through changes in foreign exchange reserves of country, which are an index of the current strength or weaker of a country’s international payments position, are also included in capital account.
Devaluation periods
- 1949- Devaluation was resorted to liberate the currency from colomial control as Brilithers bad kept rupee over valued.
- 1966- Due to sharp rise in oil prices; stagflation entire production sector was established.
- 1991- Two step devaluation (i) June 1991 (ii) Late July
Mainly due to economic crises of 1990. Gulf crises of 1989-90 had pressureved our BOP account and forex change reserves were less than $1 billion.
International Monetary Fund (IMF)
IMF is one of the furins born as a result of the Brelton Woods Agreement concluded in 1944 and thus IMF founded on Dec 27, 1945. With HQs at Washington, USA it was entrusted with the task of looking after the problems of international liquid and exchange rate stability. 31 founder members.
Main Objectives
- To help member nations tide over their balance of payment difficulties of short term and long term character.
- To promote exchange rate stability and avoid competitive exchange rate depreciation.
- To re-establish multilateral trade among the member countries.
- To move in the direction of dismantling trade and tariff barriers which separate member serunders through tariff, quotas etc.
Membership and subscription
Any country can become a member provided
- The country is willing
- Willing to pay a subscription.
At present IMF has a membership of around 185 nations.
Article 7- If demand for a currency exceeds the available supply with the fund, fund will declare the currency to be ‘scarce’ & take steps to augment the supply of the currency by other means.
Article 8- Countries to open their respective Balance of payment accounts, making their currency convertible.
In 1970, IMF introduced the most ingenuous plan the Special Drawing Plan or SDRs. It was unanimously approved by all countries (except Frame) in 1967 at Rio De Janeiro in Brazil & came into effect in 1970
SDRs are a form of paper gold, they are first book keeping entries and created at regular intervals by the fund and are allocated among member countries on the basis of each country’s quota.
India and IMF
India is a founder member of IMF and was one of the largest subscribers.
India borrowed $100 million from the fund during 1948-49 but paid back the amount by 1956-57. In 1981, India borrowed a massive amount of SDR (500 million) from IMF to overcome its external BOP problems arising basically from oil imports. This was the single largest loan made by IMF a member country at that time.
Due to worsening current account deficit in 1990-91, India’s ability to finance the deficit had weekened massively. India once again went to IMF for rescue. While agreeing to come to the assistance of India’s, IMF insisted that certain conditions should be ful-filled by India’s - the condition ability Clauses.
(a) Of IMF’s member countries.
Camille Gutt of Belguim was the first Managing Director of IMF and the present one (9th MD) is Dominigne strouess Kahn of France, who assumed office on Nov 1, 2007.
The contrd and managment of IMF rests in Board of Governors.
The Finance Minister of India is the ex-officio member of the Governing body of IMF.
Non - Resident Deposits (net)
Savings of non-resident Indians, Overseas corporate bodies and persons of Indian origin deposited with resident Financial Institutions of India are called non-resident deposits. Indian banks offer two types of accounts called NR deposits.
- FCNRB- Foreign currency non-resident bank accounts. In such accounts rate of interest is also to be paid in foreign currency which is linked to London inter-bank offer rate. It increases availability of foreign funds in India due to which exchange rate of rupee remains stable.
- NRERA- Non resident external rupee account. It is inverted in rupee form and rate of interest kept in the unit of rupee, higher than the prevailing rate of interest in India.
Foreign Investment (net):
(1) FDI (net)
(2) FIIs
(3) Euro Equities & others
Convertibility
The term convertibility related to the right of a holder of a national currency to freely exchange it into each and every other national currency at the prevailing exchange rate.
There are three types of exchange rate regime-
- Floating Exchange Rate Regime: There is fully convertibility on entire Balance of Payment account and exchange rate is determined by demand & supply forces and as these forces change, exchange rate allows changes. Eg- Foreign Exchange management Act entails the some characteristics of this regime.
- Fixed Exchange Rate Regime: Exchange rate is determined and adjusted through administrative decision, without giving any say to market forces. Thus zero convertibility. Eg-Foreign exchange regulation Act- 1973 had the characteristics of fixed ex-change rate regime. The called paged exchange rate regime.
- Mixed Regime/Managed Currency Regime: Exchange rate is allowed in a given band to adjust in accordance with changes in market forces. But of exchange rate is Trans, gressing levels then administrative body interferes to manage the market forces.
Dirty Float: We allow the exchange rate basically to be determined by market forces of demand and supply for foreign exchange (clean), but we allow government intervention into foreign exchange market to, what one may call, set right the ups and downs in exchange rate movement (thus becomes dirty).
Current Account Convertibility
The right to convert the local currency Payments relation to imports of goods & services. For all practical purposes, including, and most of all a international negotiations, whether a country has or has not achieved current account convertibility is judged by the fact whether the respective has accepted or not Article VIII status according to Articles of agreement of IMP.
- Partial convertibility of rupee was introduced in 1992-93 Under this system a dual exchange rate was Fixed under which 40% of foreign exchange was to be surrendered at the official exchange rate while the remaining 60% of foreign exchange was to be converted at a marked be termined rate.
- 1993-94 budgets introduced full convertibility on trade account. Dual exchange rate was dispeneed with and a unified exchange rate system introduced.
- India introduced current account convertibility in August 1994 and accepted obligations under Article VIII of IMF.
- Thus India’s balance of Payment account is partially convertible with only current account being convertible and zero convertibility on capital Account.
Capital Account Convertibility
It relates to the right to convert the local currency into foreign currencies for to purpose of capital transactions and transfers.
- A committee on Capital Account Convertibility was set up by RBI under the chairmanship of former RBI deputy governor S.S Tarapore to “lay the road map” for capital account convertibility.
- The 5-member committee recommended a three year time frame for complete convertibility by 1999-2000.
The three crucial pre-conditions were:
- (1) Fiscal Consolidation
- (2) A Mandated Inflation
- (3) Strengthening of Financial System
- East Asian crises intervened soon thereafter leading to lack of popular enthusiasm for capital account convertibility.
- In response to Prime Minister’s statement regarding laying out a road map on capital account convertibility based on current realities RBI constituted a committee (Chairman: S.S. Tarapore) on March 20, 2006 It detailed a broad five year time frame for movement towards fuller convertibility in 3 phases.
- Phase I - (2006-07)
- Phases II - (2007-08 to 2008-09)
- Phases III - (2009-10 to 2010-2011)
Foreign Exchange Reserves
Forex reserves can be classified into:
- (1) Foreign currency reserve
- (2) Bullion reserve (Gold)
- (3) Special Drawing Right held by IMF
- (4) Foreign Securities held by RBI
Reduction in these assets will be used to finance expenditures abroad. Reductions appear as a credit item in the BOP (because their sale causes foreign exchange inflow appears as into the country). An increase in these reserves will appears as a debit because purchasing assets will cruse an outflow of foreign exchange.
The continuance of the robust net capital inflows not only helped financing reining current account debit but also resulted in further accretion to exchange reserves.
External Debt
India’s total foreign debt rose by 22.6% to $155 billion in 2006-07 as compared to $ 126 billion in 2005-2006 as companies went overseas to borrow on account of cheaper credit.
In rupee terms, India’s external debt stood at Rs. 6,75,857 crore, accounting for 16.4% of GDP In terms of composition, 56% of the increase was accounted for by external commercial 16% short term debt
Presently India’s foreign exchange reserves are about one and half times its total external debt. The debt service ratio- ratio of interest charges and loan repayments to export earnings showed “a per-ceptible improvement”, declining to 4.8% last year from 9.9% a year ago.
Short term debt to GDP ration rose to 1.3%./ short term debt to total debt rose to 7.7% short term debt to foreign exchange assets to 6.2% short term debt rose mainly due to rising imports and import related trade credits.
World Bank & IMF developed joint by a centralised database system called Quarterly External Debt Statistics (QEDS) prescribing certain standard formats of debt data reporting. India joined it in November 2006.
According to Govt. Of India report on India’s external debt, India. India was seventh in position among the to ten debtor countries in 2005 with total external debt $123.12 billion.
China > Russia > Brazil > Turkey > Mexico > Indo-nesia > India> Argentina> Polled> Hungary ( Total external debt in decreasing order)
Dumping
With its diversified manufacturing and export base, India has been one of the major users as well as one of the major targets of anti dumping measures in the world.
According to an investigation initiated by top ten users of anti dumping measures, 1995- 2006. India reported the highest anti dumping initiations with 20 new initiations followed by European Union and Australia
