✅ Chapter 09 - External Sector

International Institutions

PYQ of Prelims

NRI Deposit is a Liability to India

BOP (Stock)

Introduction to BOP

The account that keeps a record of all transactions between Residents and Non Residents

Import - Paisa Bahar Jaa Raha Hai

Export - Paisa India main aa raha Hai

Inflow > Outflow → BOP + ve → Surplus goes to Forex Reserves Forex Reserves Increase

Outflow > inflow → BOP - ve Forex Reserve Decrease

Currency of Transaction

Foreign Currencies + Rupees

RBI Manages all the reports and transactions for BOP

Components of BOP

Current A/C

Balance of Trade (BoT) + Balance of Invisibles (BoI)

Balance of Trade Covers all the Merchandise, Not Service = Exports - Imports

Export & Import in Terms of GDP

Total Export in % age of GDP → 20%

Total Import in % age of GDP → 21%

Net Export of (-1%) GDP

Hence BoT for India has been Negative Since 1947 for 99.2%

Hence India is majorly an Importing Country in Merchandise

Trade to GDP Ratio

Export + Import = 41% of GDP

Indian (41%) Trade to GDP Ratio is more than China's (36%)

Balance of Invisibles SIP = Services Income & Transfers

Each of them is a Net Value 👇👇👇👇

Services = Export of Services - Import of Transfers

India is a Majorly Service Exporting Country

Income = Profit + Interest + Dividend
Transfers = Gift + Donation + Remittances

India receives the highest remittances in the world i.e 80 Billion Dollars

Current Account would be

Positive → BoT(-ve) > BoI (+ve)
Negative → BoT(-ve) < BoI (+ve)
Generally, the Current a/c of India was negative. In the last 2 years, it has been in Surplus

Capital A/C

FDI - Foreign Direct Investment

FPI - Foreign Portfolio Investment

ECB - External Commerical Borrowing

Trade Credit

Loans from Multilateral Institutions

NRI Deposits

👨‍🏫

In India Current a/c is generally (-ve) & Capital a/c is generally (+ve)

Summary of BOP

Practise Questions

Autonomous and Accommodating Transactions

NIIP - Net International Investment Position (Flow)

NIIP for India is Negative

Note: BoP is Flow, whereas NIIP is Total Stock

NIIP of India: -332 Billion Dollars & -11.3 %age of GDP

According to Present Scenario of Indian Economy, It is good for India as of Now.

Prelims Pointers on Indian BoP

FDI into India PYQ of Prelims

Terms

FDI - Foreign Direct Investment
FPI - Foreign Portfolio Investment
FII - Foreign Institutional Investment
QFI - Qualified Foreign Investment
QFI & FII are now part of FPI

Difference Between FDI & FPI

Recommended by Arvind Mayaram Committee

FDI can be in Secondary Market but it is very Scarce.

Prelims Pointers on FDI

Difference between Foreign Direct Investment & Indirect Foreign Investment

Control Means → BOD appointed by Foreign Entity

Indirect Investment is considered as FDI with similar restrictions

in Indirect Investment → Indian Company at Mid Level, if makes a Downstream Investment

FDI (Sectoral Caps in FDI)

Allowed → Railways, Cultivation under Control Conditions, Seeds, Animal Husbandry, Plantation Sector

E Commerce →

Inventory Based Model (Own their Good) → Croma, Jio Mart

Example : Cloud Tale is now closed

Marketplace Model (Bring Sellers & Buyers together) → Amazon

Single Brand Retail → Under One Roof, Commodity of One Brand → Nike, Puma, Starbucks

Multi Brand Retail → Under One Roof, Many Brands → Shoppers Stop, Lifestyle, Walmart

Current Condition : First Centre and then State Govt Approval Needed

Changes in FDI Policy

Contract Manufacturer for Apple → FoxCon & BisCon

Practise MCQ on the topic

External Sector

ECB → External Commercial Borrowing

FEMA - Foreign Exchange Management Act, 1999

In Case of FDI in Approval Route → Approval has to be taken from respective Ministry or Department whereas in ECB Approval has to be taken from RBI only

Trade Credit

Less than Three Years → Simple Trade Credit
More than Three Years → as a Part of ECB

Type of Trade Credit

Buyers Credit → Company Arranges Loan and Gives Money to Seller
Seller's Credit → Seller Says Baad Main Paisa De Dena

Money coming to India unless it is converted into Shares will be considered as ECB. Ones it is converted into Share it will be considered as FDI & FPI

Stages of Trade Integration

Trade Agreement is Free Flow of Goods, Service, Investment & People

From Inner to Outer → Phase 1 to Phase 6

Phase 1 → Preferential Trade Agreement

Creation of Positive List - Reduction of Custom Duty on Goods in Positive List

Phase 2 → Free Trade Agreement

Meaning of FTA

More Broader, On Most of the goods as much as 90% to 95%, There will be NO Custom Duty

In Case of FTA we have Negative List (Contains Goods which will NOT have custom duty)

Example of Indian FTA → With Australia, UAE

Concept of Early Harvest Scheme in FTA’s

Implementation Phase of FTA is known as Early Harvest Scheme.

Example : Currently India is in Early Harvest Scheme with Thailand

Phase 3 → CECA & CEPA

Full Form

CECA : Comprehensive Economic Cooperation Agreement
CEPA : Comprehensive Economic Partnership Agreement

Meaning

Goods, Services, Investment, IPR, Mutual Recognition on Regulatory Laws

As Per Ministry of Commerce there is No Distinction between CEPA & CECA
Example : India Singapore, Japan, South Korea

Phase 4 → Customs Unions

Countries which have already Signed FTA, decide to impose common Custom Duty on Products
All these countries do not Impose CD on each other but when they Import from another country, they do so at the same CD Rate
Example : SACU : South Africa, Namibia, Botswana

Phase 5 → Common Market

Common Market → Custom Union + Free Movement of People without Visas
Example : EU by Schengen Agreement

Phase 6 → Economic Union

Economic Union → Common Market + Common Currency

Practise MCQ

Regional Trade Agreements

Focus on Countries where India is a Part

Asia Pacific Trade Agreement → India is a Part with China, Despite India Saying No to RCEP, because China was a Part of It

CPTPP → TPP was proposed by Obama. TPP was seen as US Led and RCEP was seen as China Led. But Trump said no to TPP

Eurasian Economic Union → Russia proposed India to be part of Eurasian Economic Union

GCC → India is trying to crack a FTA with whole of GCC

NAFTA → North American Free Trade Agreement

RCEP → ASEAN + 5 (Australia, Japan, China, New Zealand, China)

List of FTA’s Signed by India

BTIA - Bilateral Trade and International Agreement is being Negotiated with EU

Types of Exchange Rate Systems

Fixed Exchange Rate like in Gulf is for prevention of DUTCH DISEASE

Prelims PYQP

Concept of Rupee Appreciation or Depreciation

Practise MCQ on Rupee Appreciation & Depreciation

Rupee Depreciation = Outflow of Dollar in India

Counter (Rupee Depreciation) = Counter or Reduce (Outflow of Dollar in India)

Reverse Currency War

Reverse Currency War - US is trying to Strengthen Dollar where as Emerging Economies are trying to Devalue Dollar

US Strengthens by → Reducing Dollar Supply → Fed Tapering

Emerging Economy De Values by → Increasing Dollar Supply → By Injecting Dollar in Economy or Market

Currency War → Suck Out Dollar from Market → Devalue Local Currency

Reverse Currency War → Sell or Put Dollars in Domestic Market thus Strengthening Local Currency

Happens with Taper Tantrum and Fed Tapering of US Bank

Practise MCQ

Rupee Convertibility

Full Rupee Convertibility → Current Account Transaction

Partial Rupee Convertibility → Capital Account Transaction

Pros and Cons of Partial Account Convertibility (Capital Account Convertibility)

Introduction to Indian Forex Reserve

They are assets readily available to RBI for Financing BOP (Balance of Payments) or to control Exchange Rates

BIS : Bank of International Settlement

Type of Gold

Monetary Gold → Gold within custody of RBI

Non Monetary Gold → Gold in Circulation

RoDTEP (Present) & MEIS Scheme (Past)

MEIS → Merchandise Exports from India Scheme (MEIS)

It was against WTO Norms as it provided Export Subsidies

Was Introduced to India by FTP 2015-20 (Foreign Trade Policy)

It gave incentives to Exports

Duty Credit Scrip when compared between Exports to USA or Uganda ; USA will be higher and Uganda will be lesser

Other Exporters can use Duty Credit Scrip to pay for its Custom Duties

Problem

Incentives given to exporter are based on only Exports, this was kind of Export Subsidies as per WTO under WTO Agreement on Subsidies and Countervailing Measures

RoDTEP → Remission of Duties and Taxes on Export Products

Issue is with the fact that despite getting subsidy on Input Tax Credit in the form of Duty Credit Scrip. There are still some types of taxes paid by Exporter where company is not able to avail any Input Tax Credit.