UNIT 7
FOREIGN TRADE AND BALANCE OF PAYMENT
Importance/Role of foreign trade in economic development of countries
Following points explain the need and importance of foreign trade to a nation:
1. Division of labor and specialization – Foreign trade results in division of labor and specialization at the world level. Some countries have abundant natural resources thus they should export raw materials and import finished goods from countries which are advanced in skilled manpower. Thus foreign trade gives benefits to all or any the countries and thereby leading to division of labor and specialization.
2. Optimum allocation and utilization of resources – due to specialization, unproductive lines can be eliminated and wastage of resources are often minimized or avoided. In other words, resources are channelized for the production of only those goods which would give highest returns. Thus there's rational allocation and utilization of resources at the international level thanks to foreign trade.
3. Equality of prices – Prices is often stabilized by foreign trade. It helps to keep the demand and supply position stable, which successively stabilizes the prices.
4. Availability of multiple choices – Foreign trade helps in providing a better option to the consumers. It helps in making available new varieties to consumers all over the world, thus giving the consumers a wide variety of options to settle on from.
5. Ensures quality and standard goods – Foreign trade is highly competitive so as to take care of and increase the demand for goods, the exporting countries have to continue the quality of goods. Thus foreign trade ensures that the quality and standardized goods are produced
6. Raises Standard of Living of the people – Imports can facilitate standard of living of the people. This is because people can have a choice of new and better kinds of goods and services. By consuming new and better sorts of goods, people can improve their standard of living.
7. Generate employment opportunities – Foreign trade helps in generating employment opportunities, by increasing the mobility of labor and resources. It generates direct employment in import sector and indirect employment in other sector of the economy. Such as Industry, Service Sector (insurance, banking, transport, communication), etc.
8. Facilitate economic development – Imports facilitate economic development of a nation. This is often because with the import of capital goods and technology, a country can generate growth in all sectors of the economy, i.e. agriculture, industry and service sector.
9. Assistance during natural calamities – During natural calamities such as earthquakes, floods, famines, etc., the affected countries face the problem of shortage of essential goods. Foreign trade enables a rustic to import food grains and medicines from other countries to help the affected people.
10. Maintains balance of payment position – Every country has to maintain its balance of payment position. Since every country has got to import which ends up in outflow of foreign exchange, it also deals in export for the inflow of foreign exchange.
11. Brings reputation and helps earn goodwill – A country which is involved in exports earns goodwill within the international market. For e.g. Japan has earned a lot of goodwill in foreign markets because of its exports of quality electronic goods.
12. Promotes World Peace – Foreign trade brings countries closer. It facilitates transfer of technology and other assistance from developed countries to developing countries. It brings different countries closer because of economic relations arising out of trade agreements. Thus, foreign trade creates a friendly atmosphere for avoiding wars and conflicts. It promotes world peace as such countries try to maintain friendly relations among themselves.
BALANCE OF TRADE
The balance of trade (BOT), also referred to as the trade balance, refers to the difference between the monetary value of a country’s imports and exports over a given period of time. A positive balance of trade indicates a trade surplus while a negative balance of trade indicates a deficit. The BOT is a crucial component in determining a country’s current account.
Formula
The formula for calculating balance of trade is as follows:
Balance of trade= value of exports – value important
Where:
Value of Exports is that the value of goods and services that are sold to buyers in other countries.
Value of Imports is that the value of goods and services that are bought from sellers in other countries.
INTERPRETATION OF BOT FOR AN ECONOMY
To the misconception of the many, a positive or negative balance of trade doesn't necessarily indicate a healthy or weak economy. Whether a positive or negative BOT is useful for an economy depends on the countries involved, the trade policy decisions, the duration of the positive or negative BOT, and therefore the size of the trade imbalance, among other things.
In short, the BOT figure alone doesn't provide much of an indication regarding how well an economy is doing. Economists generally agree that neither trade surplus or trade deficits are inherently “bad” or “good” for the economy.
A positive balance occurs when exports > imports and is mentioned as a trade surplus.
A negative balance of trade occurs when exports < imports and is referred to as a deficit
FAVORABLE BALANCE OF TRADE
Most countries create trade policies that encourage a trade surplus. It's like making a profit as a country. Nations prefer to sell more products and receive more capital for his or her residents. That translates into a higher standard of living. Their companies also gain a competitive advantage in expertise by producing all the exports. They hire more workers, reduce unemployment, and generate more income.
To maintain this favorable balance of trade, leaders often resort to trade protectionism. They protect domestic industries by levying tariffs, quotas, or subsidies on imports. That doesn’t work for long. Soon other countries retaliate with their protectionist measures. A trade war reduces international trade for all nations.
UNFAVORABLE BALANCE OF TRADE
Most of the time, trade deficits are an unfavorable balance of trade. As a rule, countries with trade deficits export raw materials. They import tons of consumer products. Their domestic businesses don't gain the experience needed to form value-added products. Their economies become dependent on global commodity prices. Such a strategy also depletes their natural resources within the long run.
Some countries are so opposed to trade deficits that they adopt mercantilism. this is often an extreme form of economic nationalism that says remove the trade deficit at all costs. It advocates protectionist measures like tariffs and import quotas. Although these measures can reduce the deficit, they also raise consumer prices. Worst of all, they trigger reactionary protectionism from the nation's trade partners. It lowers international trade, and economic growth, for everyone involved.
BALANCE OF PAYMENTS
Balance of Payment (BOP) may be a statement which records all the monetary transactions made between residents of a country and therefore the rest of the world during any given period. This statement includes all the transactions made by/to individuals, corporate and therefore the government and helps in monitoring the flow of funds to develop the economy. When all the weather is correctly included within the BOP, it should sum up to zero during a perfect scenario. This means the inflows and outflows of funds should balance out. However, this doesn't ideally happen in most cases.
BOP statement of a country indicates whether the country has a surplus or a deficit of funds i.e. when a country’s export is more than its import, its BOP is said to be in surplus. On the opposite hand, BOP deficit indicates that a country’s imports are quite its exports. Tracking the transactions under BOP is something similar to the double entry system of accounting. This means, all the transaction will have a debit entry and a corresponding credit entry.
WHY BALANCE OF PAYMENT IS SIGNIFICANT FOR A COUNTRY?
A country’s BOP is important for the following reasons:
ELEMENTS OF BALANCE OF PAYMENT
There are three components of balance of payment viz current account, capital account, and financial account. The total of the current account must balance with the total of capital and financial accounts in ideal situations.
1. Current Account
The current account is used to monitor the inflow and outflow of goods and services between countries. This account covers all the receipts and payments made with reference to raw materials and manufactured goods. It also includes receipts from engineering, tourism, transportation, business services, stocks, and royalties from patents and copyrights. When all the goods and services are combined, together they create up to a country’s Balance Of Trade (BOT).
There are various categories of trade and transfers which happen across countries. It might be visible or invisible trading, unilateral transfers or other payments/receipts. Trading in goods between countries is stated as visible items and import/export of services (banking, information technology etc.) are referred to as invisible items. Unilateral transfers refer to money sent as gifts or donations to residents of foreign countries. This will even be personal transfers like – money sent by relatives to their family located in another country.
2. Capital Account
All capital transactions between the countries are monitored through the capital account. Capital transactions include the purchase and sale of assets (non-financial) like land and properties. The capital account also includes the flow of taxes, purchase and sale of fixed assets etc. by migrants moving out/in to a different country. The deficit or surplus within the current account is managed through the finance from capital account and vice versa.
There are 3 major elements of capital account:
Loans & borrowings – It includes all kinds of loans from both the private and public sectors located in foreign countries.
Investments – These are funds invested within the corporate stocks by non-residents.
Foreign exchange reserves – foreign exchange reserves held by the central bank of a country to monitor and control the exchange rate does impact the capital account.
3. Financial Account
The flow of funds from and to foreign countries through various investments in real estates, business ventures, foreign direct investments etc. is monitored through the financial account. This account measures the changes within the foreign ownership of domestic assets and domestic ownership of foreign assets. On analyzing these changes, it can be understood if the country is selling or acquiring more assets (like gold, stocks, equity etc.).
The balance of payments position of the country reflects on its economic health. The balance of payments of any country may be a comprehensive and systematic accounts of all the different transactions occurred between the residents of a country and therefore the rest of the world during a particular period of lime.
The balance of payments maintains detailed classified records of various kinds of receipts against exports of goods, services and all the capital received by its residents on the one hand and also of all the payments made by the residents against imports of goods and services received alongside the capital transferred to non-residents and foreigners, on the other hand. Thus the balance of payments is far wider than the balance of trade which refers to only merchandise exports and imports.
The balance of payments is broadly classified into:
(a) Current account and
(b) Capital account.
The current account includes: visible exports and import; invisible items concerning receipts and payments for various services like banking, insurance, shipping, travel etc. and other unilateral transfer of payments like donations, grants, taxes etc.
The capital accounts of balance of payments include all the present economic transaction for the country’s international financial position resulting changes within the foreign financial assets and liabilities. The capital transaction includes both private, banking and official transactions.
The balance of payment account is maintained on the basis of double entry system of book keeping. If a country faces deficits within the current account of its balance of payment then such deficit is generally met either by liquidating its assets or through borrowing from abroad. Thus a persistent deficit within the balance of payments of a country results in a heavy debt burden on the economy.
THE BALANCE OF PAYMENT POSITION OF INDIA ON CURRENT ACCOUNT SINCE INDEPENDENCE:
With the introduction of planning in India, the balance of payments position of the country has been recording considerable changes with the continuous changes in its imports and exports.
Balance of Payments (BOP) Position during the first Four Plans:
The balance of payments position during the first Plan period was quite satisfactory as the country experienced a deficit in its current account only to the extent of Rs. 42.3 crore. During this period, the inflow of foreign capital was only Rs. 13.6 crore and therefore the foreign exchange reserve was about Rs. 127 crore.
During the Second Plan, the deficit within the balance of trade was to the tune of Rs. 2,339 crore and therefore the surplus of invisibles and donations ultimately reduced the deficit in balance of payment to Rs. 1,725 crore. This higher deficit within the balance of payment, during the Second Plan was resulted from heavy imports of capital goods, huge imports of food grains and raw materials and lesser expansion of exports and higher maintenance imports.
During the Third Plan the country experienced a current account deficit in its BOP to the extent of Rs. 1,941 crore which was financed by loans from foreign countries under various schemes. During the Fourth Plan, the government introduced both export promotion and import substitution measures for wining out the deficits within the BOP. Moreover, due to sudden increase within the invisibles accounts receipts to the extent of Rs. 1,680 crore in 1973-74, the plan ended with a surplus of Rs. 100 crore in its BOP.
BOP During the Fifth Plan:
During the Fifth Plan period, due to the applicability of two factors like hike in oil prices arid increase within the value of exports because of promotional measures, although a surplus in balance of trade was attained in 1976-77 (Rs. 316 crore) but the plan experienced an increasing trend in trade deficit to the extent of Rs. 3,179 crore. But due to higher entry of net invisibles, the Fifth Plan ended with surplus of Rs. 3,082 crore.
BOP During the Sixth to Tenth Plan:
The balance of payments position has recorded a total change since 1979-80. India started to record a heavy deficit in its balance of payments since 1979- 80. Table 7.6 shows the growing deficit in balance of trade along with the growing deficit in its balance of payments position during the Sixth to Tenth Plan.
This huge deficit within the balance of payments position during the entire Sixth, Seventh and Eighth and Ninth Plan periods was the results of tremendous rate of growth of imports amid a poor rate of growth of exports. The trade deficits during these four plans were so heavy that it couldn't be offset by the flow of funds under net invisibles. the subsequent table depicts a clear picture about the amount of deficits within the balance of payments from the first plan to the Ninth Plan.
RECOVERY IN BALANCE OF PAYMENTS POSITION IN INDIA SINCE 1991-92, AFTER ECONOMIC REFORMS:
The balance of payments position, which had reached a point of near collapse in June 1991, gradually stabilized during the course of 1991-92. In 1990-91, foreign currency reserves had declined to $ 1.1 billion despite heavy borrowing from the IMF. so as to restore international confidence, the government negotiated a stand by arrangement with the IMF in October 1991 for $ 2.3 billion over a 20 month period, a Structural Adjustment Loan with the world Bank of $ 500 billion and a Hydrocarbon Sector Loan with ADB for $ 250 million.
Along with this effort, the govt. also launched the India Development Bonds aimed toward mobilizing NRI sources of funds. With the assurance of external support through these efforts, the balance of payments position was gradually stabilized in 1991-92 and therefore the foreign exchange reserves were restored to the extent of $ 5.6 billion at the top of March 1992.
Thus, the balance of payments position in India showed a steady improvement since 1991-92 with exports covering a larger proportion of imports than within the earlier years. The export-import ratio has averaged nearly 90 per cent during 1991-92 to 1993-94 compared to an average of about 65 per cent for the preceding three years.
In 1994-95, this export-import ratio stood at 91.9 per cent. the current account deficit has also declined, averaging about 0.7 per cent of GDP for these three years (1991-94), compared to an average of about 2.6 per cent of GDP within the preceding three years.
In this connection, Economic Survey, 1995-96 observed, “The development in India’s trade and payments over the past five years mark a noticeable structural change towards a more stable and sustainable balance of payments. During the post-liberalization period, there has been a sharp improvement within the coverage important payments through export earnings. The coverage ratio has averaged around 88 per cent since 1992-93, compared with only 52.4 per cent at the beginning of the 1980’s and about 70 per cent at the top of the 1980’s. There has also been a marked improvement within the flow of invisible receipts. Together, these changes brought about a sharp reduction within the ratio of the current account deficit to GDP from an unsustainable level of 3.2 per cent in 1990-91 to 0.8 per cent in 1994-95.”
There has been a structural change within the capital account in terms of a sharp reduction in debt creating flows and an increased recourse to non-debt creating foreign investment flows. for instance , debt creating flows, as a percentage of total capital flow within the balance of payments, averaged as much as 97 per cent during the Seventh Plan Period (1985-86 to 1989-90).
But the ratio declined very sharply to but 18 per cent in 1994-95. This declining trend is shared by all the main components of debts flows, namely external assistance, commercial borrowing and non-resident deposits. This favorable shift, far from recourse to debt creating flows for financing the current account deficit, has obvious implications for moderating and reducing future debt service liabilities.
During the recent years, the balance of payments position of the country experienced a mixed scenario. The year 2004-05 marked a significant departure within the structural composition of India’s balance of payment (BOP), with the current account, after three consecutive years of surplus, turning into a deficit. During a significant transformation, the present account deficit, observed for 24 years since 1977-78, had started shrinking from 1999-2000.
The contraction gave way to a surplus in 2001-02, which continued until 2003-04. However, from a surplus of us $14.1 billion in 2003-04, the current account turned into a deficit of us $5.4 billion in 2004-05. This deficit was caused by a burgeoning more than merchandise imports over exports, which was left uncompensated by internet surplus in invisibles.
Which the magnitude of deficit is one of the highest in recent times, it underscored the rising investment demand within the economy. As a proportion of LSDPP, the turnaround within the current account balance was from a surplus like 2.3 per cent in 2003-04 to a deficit of 0.8 per cent in 2004-05.
The turnaround within the current account during 2004-05 was accompanied by a significant strengthening of quite 80 per cent within the capital account leading to continued reserve accretion. Compared with 2003-04, when loan inflows and turned not net outflows, such inflows shot up rapidly during 2004-05 and bolstered the rise of the capital account surplus with good support from robust foreign investment inflows. Reserve accumulation during 2004-05, at around four-fifths of such accumulation during 2003-04, maintained India’s status jointly of the biggest reserve holding economies within the world.
RISE IN TRADE DEFICIT DURING 1995-96 AND THEREAFTER:
India’s deficit during 1995-96 swelled to $ 4,538 billion—more than double of the deficit of $ 2.027 billion within the previous financial year. The country’s exports during 1995-96 were estimated at $ 31,830 billion signifying growth of 21.38 per cent over the exports during the previous fiscal year valued at $ 26,623 billion.
Against a target of 18 to 20 per cent rate of growth for the year 1995- 96, the particular achievement was considerably higher at 21.4 per cent in dollar terms. Import during 1995-96 was estimated at $ 36,369 billion against $ 28,251 billion during the previous fiscal year reflecting a growth of 28.74 per cent. Thus the rise within the deficit during 1995-96 has been resulted mostly from the sudden spurt in imports, in spite of achieving a considerable higher growth in exports.
1996-97:
The balance of payments position of India has been experiencing some changes within the year 1996-97 as India’s exports went up by only 4.01 per cent and imports grew by 5.99 per cent during 1996-97 as compared thereto of 21.58 per cent and 28.74 per cent recorded respectively during 1995-96.
1998- 99:
The balance of payments (BOP) position of India has been gradually improving in recent years. India’s BOP remained comfortable in 1998-99 partly because of anticipatory policy actions, such as issue of Resurgent India Bonds. The deficit within the current account of the BOP in 1998-99 had declined to about 1.0 per cent of GDP as against 1.7per cent in 1995-96 and 1.4 per cent in 1997- 98, mainly reflecting sharp declines in POL and non-customs imports.
Reflecting the trends in exports and imports, the deficit on the trade account of BOP in 1998-99 narrowed to US $ 13.25 billion from US $ 15.51 billion in 1997-98 or from 3.8 per cent of GDP in 1997-98 to 3.1 per cent of GDP in 1998-99.
1999- 2000:
India’s Balance of payments position in 1999-2000 remained comfortable. The current account deficit in 1999-2000 was contained to 0.9 per cent of GDP, despite an unfavorable international trade and financial backdrop including a near two-third like in India’s oil import bill.
2000- 01:
India’s balance of payments (BOP) position in 2000-01 remained comfortable and therefore the external sector experienced a distinct improvement. there have been , however, some pressures on the BPO during the first half the year on account of significant hardening of international oil prices, the sharp downturn in international equity prices and successive increases in interest rates within the United Suites and Europe; but the situation cased with the mobilization of funds under the India Millennium Deposits, which helped to revert the declining trend in reserves and enhanced confidence within the strength of India’s external sector. As a result, the BOP situation experienced a turn around 0.5 per cent of GDP from 1.1 per cent of GDP in 1999-2000.
2001- 02:
India’s balance Of payments in 2001-02 exhibited mixed developments. While exports, on BOP basis, remained stagnant at previous year’s level, but imports declined by 2.8 per cent, thus resulting in a decline in merchandise deficit, as per cent of GDP, from 3.1 per cent in 2000-01 to 2.6 per cent in 2001-02. Moreover, the current account BPO became a surplus in 2001-02, after a gap of 24 years (last recorded in 1977-78).
2007-08 and 2008-09:
Both the year 2007-08 and 2008-09 were marked by adverse developments within the external sector of the economy, reflecting impact of global financial crisis on the emerging economies including India. India’s BOP exhibited considerable resilience during fiscal 2008-09 despite one of the severest external shock.
The current account balance [(-) 2.4 per cent of GDP in 2008-09 visa-a-versa (—) 1.3 per cent in 2007-08] remained well within sustainable limits and there was limited use of foreign exchange reserves despite massive decline in net capital flows to US $ 7.2 billion in 2008-09 as against US $ 106.6 billion in 2007-08. As a result, the total net capital account of BOP as per cent of GDP stood at only 0.6 per cent in 2008-09 as compared thereto of 8.8 per cent in 2007-08.
For the first time, the Union allows 1992-93 has made the Indian rupee partially convertible. This was an inevitable move for the expeditious integration of Indian economy with that of the planet so as to face the serious current account deficit within the balance of payments, the govt. of India introduced the partial convertibility of rupee from March 1. 1992.
Under this system, which remained in operation for a period of 1 year, 60 per cent of the exchange earnings were convertible in rupees at market determined exchange rate and therefore the remaining 40 per cent earnings were convertible in rupees at the officially determined rate of exchange.
The entire foreign exchange requirement for meeting import obligations was required to be purchased at market determined rate of exchange, excepting a few specified imports and imports on the government account.
The term convertibility of a currency indicates that it are often freely converted into the other currency. Convertibility also can be identified as the removal of quantitative restrictions on trade and payments on current account. Convertibility establishes a system where the market place determines the rate of exchange through the free interplay of demand and supply forces.
In India, hawala trade normally handles about 4 billion dollars a year. Until recently, this was traceable to the increasing differential between official and hawala exchange rates. This convertibility of rupee has bridged this gap and in restraint the hawala trade effectively.
Current Account Convertibility:
Current account convertibility is that the next phase for attaining full convertibility of rupee. current account convertibility relates to the removal of restrictions on payments relating to the international exchange of goals, services and factor incomes, while capital account convertibility refers to an identical liberalization of a country’s capital transactions like loans and investment, both short term and future .
The International monetary fund (IMF) which works towards the establishment of multilateral system of payments, requires member countries to move towards restoration of current account convertibility, but permits them to restrict convertibility for capital transactions.
Current account convertibility has been defined as the freedom to buy or sell foreign exchange for the subsequent international transactions:
(a) All payments due in connection with foreign trade, other current business, including services and normal short term banking and credit facilities;
(b) Payments due as interest on loans and as net income from other investments;
(c) Payments of moderate amount of amortization of loans or for depreciation of direct investment; and
(d) Moderate remittances for family living expenses.
Capital Account Convertibility:
The next and final step in this line is that the convertibility of rupee on capital account. But we must draw a pointy distinction between currency convertibility within the current and capital accounts. Capital account convertibility refers to a liberalization of a country’s capital transactions like loans and investment, both short term and future also as speculative capital flows.
When it involves capital account convertibility, one has got to be more prudent and be very much sure about its capacity to launch such a system. If the country can build a large stock of international reserves, then only this system could provide a bonus. Confidence within the financial system and a steady macro-economic environment are very much essential to the introduction of capital account convertibility of rupee in near future.
Capital account convertibility in India are often introduced in stages by gradually widening access to resident Indians to external financial markets. Within the light of historical experience, the overall view is that opening from the capital account should occur late within the sequencing of stabilization and structural reforms.
Capital account convertibility is likely to be sustainable as long as it's supported by credible macro- economic policies, listing reduction in fiscal deficit, moderation in inflation and a flexible financial system which may adapt to changing situations as some of the essential pre-conditions for capital account convertibility. Thus capital account convertibility implies the right to transact in financial assets with foreign countries without restrictions. Although the rupee isn't fully convertible on the capital account, convertibility exists in respect of certain constituent elements.
These are as follows:
(a) Capital account convertibility exists for foreign investors and Non-Resident Indians (NRIs) for undertaking direct and portfolio investment in India.
(b) Indian investment abroad up to US $ 4 million is eligible for automatic approval by the RBI subject to certain conditions.
(c) In September 1995, the RBI appointed a special committee to process all applications involving Indian direct foreign investment abroad beyond US $ 4 million or those not qualifying for fast track clearance.
But within the context of the necessity for attracting higher capital inflows into the country, it's also important for the government to introduce convertibility on capital account, as foreign investors may enter confidently only there's an assurance that the exit doors will always remain open.
The Budget 2002-03 has adopted a cautious step towards Capital Account Convertibility by allowing NRI to repatriate their Indian income. Considering this condition alongside the comfortable foreign exchange reserve of the country at present, the government is now favoring a make towards fuller capital account convertibility within the context of changes within the last 20 years. For the mean solar time on 18th March, 2006 Prime Minister Dr. Manmohan Singh asked the Finance Ministry and RBI to figure out a roadmap for fuller capital account convertibility supported current realities. Dr. Singh is of the view that such roadmap for fuller capital account convertibility would attract greater foreign investments into the country.
Thus it's expected that the govt. of India and therefore the RBI are going to announce a roadmap soon for the attainment of fuller capital account convertibility of the country. However, while taking decision for full convertibility of rupee, the government should take adequate care of its possible consequences.
In the meantime on 29th March, 2006, 160 renowned Indian economists asked the govt. to desist from moving towards full convertibility of rupee because it was brought with dangerous consequences. They argued, “We urge the UPA government from such an unnecessary and dangerous measure. This (full float of rupee) would expose Indian economy to extreme volatility”.
The statement made by about 160 leading economists from various institutions across the country and signed by Prof. Prabhat Patnaik of JNU, Delhi also expressed apprehension that to expose the country to unpredictable movements in capital flows would create a potential for fragility and crisis and particularly when the stock market is witnessing a speculative boom.
Tara-pore Committee’s Second Report on Capital Account Convertibility (July 2006):
With the growing strength of balance of payments within the post-1991 period and with external sector remaining robust and gaining strength every year and therefore the relative macro economic stability with high growth providing a conducive environment relaxation of capital controls, RBI, in pursuance of the announcement the Prime Minister constituted a committee on March 20, 2006 with Mr. S.S. Tarapore as its chairman for setting out a roadways towards fuller capital account convertibility. The committee submitted its report to the RBI on July 31, 2006.
Keeping itself conscious of the risks involved within the movement towards fuller convertibility of the Rupee as emanating from race experiences during this regard the committee calibrated the liberalization road map to the specific contexts of preparedness—namely, a strong macroeconomic framework, sound financial systems and markets and prudential regulatory and supervisory architectures.
After making review of the existing capital controls, it detailed a broad five year time-frame for movement towards fuller convertibility in three phases: Phase-I (2006-07); phase ii (2007-08 to, 2008-09) and phase iii (2009-10 to 2010-11).
The report recommended the meeting of certain indicators/targets as a concomitant to the movement in: meeting FRBM targets; shifting from this measures of fiscal deficit to a measure of the public Sector Borrowing Requirement (PSBR); segregating government debt management and monetary policy operations through the fixing of the office of public debt independent of the RBI; imparting greater autonomy and transparency within the conduct of monetary policy; and slew of reforms in banking sector including one banking legislation and reduction within the share of Government/RBI within the capital of public sector bank.
Keeping the current account deficit to GDP ratio under 3 per cent; and evolving appropriate indicators of adequacy of reserves to hide not only import requirements, but also liquidity risks associated with present kinds of capital flows, short-term debt obligations and broader measures including solvency.
Thus, the committee recommended a three phase strategy for moving towards capital account convertibility. Although, RBI has not been taken any final decision on acceptance of the recommendations in totality but it's initiated measures on an on-going basis beginning with the announcement in Us Mid-term Review of the Annual Policy Statement for 2007-08.
INTRODUCTION
EXIM Policy, a synonym to foreign trade policy, may be a set of guidelines and instructions established by the govt. within the sphere of foreign trade i.e. import and export of India. Exim policy may be a five year plan. it's updated every year on 31st march and therefore the modifications, improvements and new scheme become effective from 1st April every year. Exim policy of the Indian government is regulated by foreign trade development and regulation act, 1992.
EXIM POLICY(2015-2020)
The new Exim policy has been formulated focusing increases in export scenario, boosting production and supporting the concepts like MAKE in India and Digital India.
Salient features-
IMPACT ON THE ECONOMY
The EXIM Policy 2015-2020 has expected to double the share of India in world trade from present level of three by the year of 2020.
Simplifying the present the multiple schemes, the new policy has come up with two schemes MEIS & SEIS that reduce the complexity and encourage the entrepreneur. Similarly, use of technology to perform the compliance reduces the transaction cost and manual errors.
This policy has also focused moving far from reliance on subsidies. By extending benefits under EPCG on domestic procurement and offering them more products under MEIS, the policy further seeks to incentive the exports.
Generation of new employment and providing quality products at reasonable price to consumers are expected to be delivered by the policy.
In short, EXIM policy boosts productivity and earn exportable surplus at competitive rates in export.
CONCLUSION
The EXIM policy 2015-2020 is very praiseworthy as it purely focuses on developing export potential, improving export performance, encouraging foreign trade and creating favorable balance of balance of payments resolving quality complaints and trade disputes. Good governance and export are facilitated by this policy and hope the expectations the policy has brought, will be met.