External Sector - 02
Foreign Trade Policy
The Foreign Trade Policy (FTP) 2015-20 highlights of the FTP:
- FTP 2015-20 provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in line with the ‘Make in India’ programme.
- The Policy aims to enable India to respond to the challenges of the external environment, keeping in step with a rapidly evolving international trading architecture and make trade a major contributor to the country’s economic growth and development.
- FTP 2015-20 introduces two new schemes, namely ‘Merchandise Exports from India Scheme (MEIS)’ for export of specified goods to specified markets and ‘Services Exports from India Scheme (SEIS)’ for increasing exports of notified services.
- Duty credit scrips issued under MEIS and SEIS and the goods imported against these scrips are fully transferable.
- For grant of rewards under MEIS, the countries have been categorized into 3 Groups, whereas the rates of rewards under MEIS range from 2 per cent to 5 per cent. Under SEIS the selected Services would be rewarded at the rates of 3 per cent and 5 per cent.
- Measures have been adopted to nudge procurement of capital goods from indigenous manufacturers under the EPCG scheme by reducing specific export obligation to 75per cent of the normal export obligation.
- Measures have been taken to give a boost to exports of defence and hi-tech items.
- E-Commerce exports of handloom products, books/periodicals, leather footwear, toys and customised fashion garments through courier or foreign post office would also be able to get benefit of MEIS (for values up to INR 25,000).
- Manufacturers, who are also status holders, will now be able to self-certify their manufactured goods in phases, as originating from India with a view to qualifying for preferential treatment under various forms of bilateral and regional trade agreements. This ‘Approved Exporter System’ will help manufacturer exporters considerably in getting fast access to international markets.
- A number of steps have been taken for encouraging manufacturing and exports under 100 per cent EOU/EHTP/STPI/BTP Schemes. The steps include a fast track clearance facility for these units, permitting them to share infrastructure facilities, permitting inter unit transfer of goods and services, permitting them to set up warehouses near the port of export and to use duty free equipment for training purposes.
- 108 MSME clusters have been identified for focused interventions to boost exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised and repositioned to achieve the objectives of ‘Skill India’.
- Trade facilitation and enhancing the ease of doing business are the other major focus areas in this new FTP. One of the major objectives of new FTP is to move towards paperless working in 24×7 environments.
The capital account measures transfer in assets and liabilities.
The components of the capital account include foreign investment and loans, banking and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.
If a country has a current account deficit then, assuming exchange rates are floating, it will have an equivalent capital account surplus. This is necessary to finance a current account deficit.
Balance of Payment
It is more elaborate concept than balance of trade. BOP include all parts of transaction happens between countries. The balance of payments (BOP) is a statement of all transactions (including service) made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.
It is a systematic record of a country’s economic and financial transaction with the rest of the world over a period of time. Central Banks of each country prepare their own BOP records based on IMF’s guidelines. All those figures are expressed in dollars for simplification and comparison purposes.
The sum of all transactions recorded in the balance of payments must be zero, as long as the capital account is defined broadly. The reason is that every credit appearing in the current account has a corresponding debit in the capital account, and vice-versa. If a country exports an item (a current account credit), it effectively imports foreign capital when that item is paid for (a capital account debit).
BOP = Current Account Balance + Capital Account Balance
At the end of financial year or particular period, BOP is calculated by central Bank If BOP is Surplus Balance Money Added to Foreign Exchange Reserve If BOP is deficit Balance is deduced from Foreign Exchange Reserve
When the export of a country exceeds the import, then BOP is termed as the favourable BOP or surplus BOP. But when import exceeds the export, then BOP is termed as the unfavourable or deficit BOP.
The BOP deficit or surplus indicate imbalance in the BOP. This imbalance is interpreted as BOP Disequilibrium. A country’s balance of payments is said to be in disequilibrium when its autonomous receipts (credits) are not equal to its autonomous payments (debits)
One country’s credit is other countries. Debit Hence BOP of world is always zero.
When current account receipts are greater than current account expenditure it is known as current accounts surplus. Similarly the reversal is known as current account deficit. A Current Account Deficit should always balance by capital account surplus. Since India is labour intensive country it always have strong capital account surplus. India always have current account deficit because,
1) More Dependent of imported crude oil.
2) High level of Gold consumption which is imported
3) Unavailability of certain resources
BOP CRISIS – India 1991
India faced its worst financial crisis in 1991 when it was close to default. Foreign exchange reserves had been reduced to such a point that India could barely finance three weeks’ worth of imports. To manage the crisis Indian government kept national gold reserves as a pledge to the IMF in exchange for a loan to cover BOP debts.