India's International Trade, BOP & International Trade Documents

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India’s International Trade, BOP

& International Trade Documents

A
PROJECT ON
GLOBAL FINANCE
International Trade
Introduction

Exchange of capital, goods, and services across international borders


or territories.

Normally, it represents a significant share of gross domestic product

Impacted by industrialization, advanced transportation,


globalization, multinational corporations & outsourcing

Fundamental is to buy goods and services from a country of the


lowest price, and sell to a country of the highest price
Why International Trade?

Allocation of economic resources in the world markets by


means of international trade

Benefits of production efficiency, better quality and lower prices

Developing countries have the opportunities to accelerate the


pace of their economic development

Crucial to the continuance of globalization


Models of International Trade

 Ricardian Model
Focuses on comparative advantage

 Heckscher-Ohlin Model
Stresses that countries should export goods of abundant resources & import goods of
scarce resources

 Specific Factors Model


Suggests that if there is an increase in the price of a good, the owners of the factor of
production specific to that good will profit in real terms
Contemporary Models..

New Trade Theory


Explains the empirical elements of trade that comparative advantage-based models have
difficulty, like monopolistic competition and increasing returns to scale

Gravity Model
Predicts trade based on the distance between countries and the interaction of the countries'
economic sizes.
Risks in International Trade

Buyer insolvency
Non-acceptance
Credit Risk
Regulatory Risk
Exchange Rate Risk
Government Intervention
Political Risk
War and other uncontrollable events.
India’s International Trade
Objectives

Like any other country, trade propels economic growth and national
development in India. The primary purpose is not the mere
earning of foreign exchange, but the stimulation of greater
economic activity. The Foreign Trade Policy of India is based on
two major objectives, they are –

 To increase the percentage share of global merchandise trade by


each span of five years.

 To act as an effective instrument of economic growth by giving a


thrust to employment generation.
India’s Foreign Trade Strategies

 Removing government controls and creating an atmosphere of


trust and transparency to promote entrepreneurship,
industrialization and trades.
 Simplification of commercial and legal procedures and bringing
down transaction costs.
 Simplification of levies and duties on inputs used in export
products.
 Generating additional employment opportunities, particularly in
semi-urban and rural areas, and developing a series of
‘Initiatives’ for each of these sectors.
India’s Foreign Trade Strategies

 Facilitating technological and infrastructural up gradation of all the


sectors of the Indian economy, especially through imports.
 Free Trade Agreements / Regional Trade Agreements / Preferential
Trade Agreements that India enters into in order to enhance
exports.
 Up gradation of infrastructural network, both physical and virtual,
related to the entire Foreign Trade chain, to global standards.
 Revitalizing the Board of Trade by redefining its role, giving it due
recognition and inducting foreign trade experts while drafting
Trade Policy.
India’s Export & Import

 The Ministry of Commerce recognizes approximately 90 export


commodities and 68 import commodities as major contributors to
international trade.

 India's export growth is the second fastest in the world after


China's.

 The value of India's imports is greater than the value of its


exports. India uses foreign loans to finance the extra imports.
Total Exports by India

1997-1998 2002-2003 2005-2006 2010-2011

  Rs 130,101 Cr. Rs. 250,130 Cr. Rs. 454,800 Cr. Rs. 9,00,471 Cr

Exports (in Rs crores)


1000000
800000
600000 Exports (in Rs
crores)
400000
200000
0

Source : Indian Ministry of Commerce and Industry


Total Imports by India

1997-1998 2002-2003 2005-2006 2007-2008

  Rs 154,176 Cr. Rs. 297,206 Cr. Rs. 630,527 Cr. Rs. 949,133 Cr

Imports (in Rs crores)


1000000
800000
600000 Imports (in Rs
crores)
400000
200000
0

Source : Indian Ministry of Commerce and Industry


Snapshot of Foreign Trade Growth

Value in US $ billion
Year Export Growth Import Growth Balance of
Rate (%) Rate (%) Trade

04-05 83.5 30.9 111.5 42.7 -28

05-06 103.1 23.4 149.2 33.8 -46.1

06-07 126.4 22.6 185.7 24.5 -59.3

07-08 163.1 29.1 251.73 35.5 -88.6

08-09 185.3 13.6 303.7 20.7 -118.4

09-10 117.5 -20.3 193.8 -23.6 -76.2

Source: DGCI&S, Kolkata


Export Target & Achievement in the last 5 years

Source: RBI
Major Export Commodities

Source: Department of Commerce, Govt of India. Annual Report 09-10


Major Import Commodities

Source: Department of Commerce, Govt of India. Annual Report 09-10


Major Export Partners

Source: Department of Commerce, Govt of India. Annual Report 09-10


Major Import Partners

Source: Department of Commerce, Govt of India. Annual Report 09-10


US India Partnership
Prohibited Trade

The terms "Prohibited Goods" have been defined in


sub-section 33 of Section 2 of the Customs Act as
meaning "any goods the import or export of which is
subject to any prohibition under the Customs Act or
any other law for the time being in force".
Principles of Prohibition

Protection of public morals.


Protection of human, animal or plant life or health.
Protection of patents, trademarks and copyrights and the
prevention of deceptive practices.
Protection of national treasures of artistic, historic or
archaeological value.
Conservation of exhaustible natural resources.
Protection of trade of fissionable material or material from which
they are derived; and
Prevention of traffic in arms, ammunition and implements of war.
Some common Prohibitions

 The Central Govt. has issued many notifications to prohibit


import of sensitive goods such as coins, obscene books, printed
waste paper containing pages of any holy books, armored guard,
fictitious stamps, explosives, narcotic drugs etc.
 Import of second hand goods and second hand capital goods is
restricted
 Export of human skeleton is absolutely prohibited
 Export of all wild animals and exotic birds indigenous to the
country and articles made from such listed animals like skins,
pelts, furs, ivory, rhino horns, trophies, etc. have been totally
banned.
Some Common Prohibitions

 There is ban on sand wood products including logs, timber,


stumps roots bark, chip, powder, flakes dust, pulp and charcoal.

 Export of sandalwood in any form, excluding finished handicrafts


and machine-finished products is prohibited.

 Antiquities which include sculpture, painting or other works of


arts or crafts illustrative of science, art, craft, religion of bygone
ages and of historical interest which have been in existence for
not less than one hundred years may not be exported from India.
Policy Objectives by present UPA Government

Achieving an annual export growth of 15% with an


annual export target of US$ 200 billion by March
2011

By 2014, it expect to double India’s exports of goods


and services

To double India’s share in global trade by 2020


5 Influencing Factors in 2011

International crude oil prices

Inflation

Management of the fiscal deficit

The country’s trade deficit

The domestic policy


Exchange Rate and International Trade

International Trade influencing Exchange Rate

Trade of goods and services between countries is the major reason


for the demand and supply of foreign currencies. The value or
strength or weakness of a countries currency in terms of other
currencies depends on its trade with those countries. If a
country’s imports are higher, the demand for foreign currency in
this country will be high and vice versa.
Exchange Rate and International Trade

Exchange Rate influencing International Trade

The exporters have long wanted the RBI to change its Currency
Policy from free floating to fixed for exporters. This would
enable them to focus on managing their business and save them
from the trouble of managing currency movements. With a stable
exchange rate, more trade can be booked abroad by Indian
traders.
Balance Of Payments
Introduction

 A balance of payments (BOP) sheet is an accounting record of


all monetary transactions between a country and the rest of the
world. These transactions include payments for the country's
exports and imports of goods, services, and financial capital, as
well as financial transfers. The BOP summarizes international
transactions for a specific period, usually a year, and is prepared
in a single currency, typically the domestic currency for the
country concerned
Evolution

Washington
Bretton Consensus
Woods 1945- post 2009
Deglobalizatio 2009
n 1914-1945

Free Trade
1820-1914

Merchan
tilism
pre 1820
Trends in India’s BOP
1949-50 to 1999-2000
The Situation

After achieving independence, the foremost challenge before India


was of attaining economic growth with social justice.

Not only was our technology backward then, there was food
scarcity too. Large amounts of food grains had to be imported to
feed the huge population.

The BOP was always under pressure and had huge deficits due to
high imports of food grains and capital goods, the heavy external
borrowings and its payment and poor exports.
Influencing Factors

 Protectionist Policy - The high degree of protection to


Indian industries led to inefficiency and poor quality products
due to lack of competition. The high cost of production further
eroded our competitive strength.

 External Debt - India had to resort to large scale foreign


borrowings for its developmental efforts in the field of basic
social and industrial infrastructure. The country’s resources were
very much limited due to low per capita income and savings.
Influencing Factors

 Export Promotion- By the Sixth Five Year Plan the need of


food grain imports was reduced. However the exports remained
discouraging.

 Exchange Rate - The instability of the exchange value of the


rupee was another problem. The constant devaluations (to
promote exports) raised the amount of external debt.
Trends in India’s BOP
2000 to 2010
The Situation

The easy going and conservative attitude of the policy makers were
shaken by the 1990-91 liberalization.

It was realized that the basis of a sound BOP situation lies in the
inner economic strength of the country.

The advantages of foreign trade were noticed and Indian


entrepreneurs no longer had to drag cheap, obsolete
technology.
Influencing Factors

New Economic Policy – This aimed at opening up the


economy, allow free trade and competition and reduce the role of
government significantly in foreign trade matters. Restrictions on
international trade were removed, foreign investments were allowed
and a new Liberalized Exchange Management System was introduced.

Foreign Investment - India successfully attracted foreign


investors to the country with its positive economic changes like
reduced paperwork & other cumbersome formalities. From a meager
US$103 million  net foreign investment in the year 1990-91, it grew to
US$ 8669 million  in 2008-09.
Influencing Factors

 Foreign exchange reserves - Foreign exchange reserves


played an essentially part in the country’s economy, reflecting it’s
economic strength. Foreign investors brought in the much
required foreign exchange to country adding to the foreign
exchange reserve.

 Exchange Rate - The RBI monitored and managed the


exchange rate with flexibility, while allowing the market demand
and supply conditions to determine its movements over a period
of time.
Balance of Payment

When all components of the BOP sheet are included


it must balance – that is, it must sum to zero – there
can be no overall surplus or deficit. For example, if a
country is importing more than it exports, its trade
balance will be in deficit, but the shortfall will have
to be counter balanced in other ways – such as by
funds earned from its foreign investments, by
running down reserves or by receiving loans from
other countries.
BOP Crisis

 A BOP crisis, also called a currency crisis, occurs when a nation


is unable to pay for essential imports and/or service its debt
repayments. Typically, this is accompanied by a rapid decline in
the value of the affected nation's currency.
 Overseas investors become concerned about the level of debt
their inbound capital is generating, and decide to pull out their
funds.
 The resulting outbound capital flows are associated with a rapid
drop in the value of the affected nation's currency.
How to Correct Imbalance?

Adjustments of exchange rates


An upwards shift in the value of a nation's currency relative to others will make a nation's
exports less competitive and make imports cheaper and so will tend to correct a current
account surplus.

Adjustment of a nations internal prices along with its levels of


demand
When exchange rates are fixed by a rigid gold standard, the standard approach to correct
imbalances is by making changes to the domestic economy.

Rules based adjustment


Nations can agree to fix their exchange rates against each other, and then correct any
imbalances that arise by rules based and negotiated exchange rate changes and other
methods.
Components

Current Account

I. Trade Balance
II. Invisibles

Capital Account

III. FDI & FII


IV. Reserves
India’s Balance of Payments
Current Account

The current account is the sum of the balance of


trade (exports minus imports of goods and services),
net factor income and net transfer payments.

In other words,
current account = changes in net foreign assets
Elements of Current Account

The balance of trade is the difference between a


nation's exports of goods and services and its
imports of goods and services, if all financial
transfers, investments and other components are
ignored. A nation is said to have a trade deficit if it is
importing more than it exports.
Elements of Current Account

Factor income is the returns received on factors of


production: rent is return on land, wages on labor,
interest on capital, and profit on entrepreneurship. It
is also known as Net Factor Payments (NFP).
Elements of Current Account

Transfer payment (or government transfer or


simply transfer) is a redistribution of income in the
market system. These payments are considered to be
non exhaustive because they do not directly absorb
resources or create output.
Invisibles

Invisibles refer to services and other products that


do not result in the transfer of physical objects.
Examples include consulting services, shipping
services, tourism, and patent license revenues.
Types of Invisibles

Generally 2 types of invisibles are

International payments for services (as opposed to


goods) and,

Movements of money for which there is no contra


transaction (i.e. money is not exchanged for either a
good or a service).
Capital Account

The capital account (also known as financial


account) is one of two primary components of the
balance of payments.

Capital Account = FDI + Portfolio investment + other

investment + reserve account


Capital Account Elements

Foreign direct investment (FDI) , refers to long term


capital investment such as the purchase or
construction of machinery, buildings or even whole
manufacturing plants. If foreigners are investing in a
country, that is an inbound flow and counts as a
surplus item on the capital account. If a nations
citizens are investing in foreign countries, that's an
outbound flow that will count as a deficit.
Capital Account Elements

Portfolio investment refers to the purchase of shares


and bonds. Its sometimes grouped together with
"other" as short term investment. As with FDI, the
income derived from these assets is recorded in the
current account - the capital account entry will just
be for any international buying and selling of the
portfolio assets.
Capital Account Elements

Other investment includes capital flows into bank


accounts or provided as loans. Large short term
flows between accounts in different nations are
commonly seen when the market is able to take
advantage of fluctuations in interest rates and / or
the exchange rate between currencies.
Capital Account Elements

The reserve account is operated by a nation's central


bank, and can be a source of large capital flows to
counteract those originating from the market.
Inbound capital flows, especially when combined
with current account surplus, can cause a rise in
value(appreciation) of a nations currency, while
outbound flows can cause a fall in
value(depreciation).
Highlights of BOP- Q2 (2010-2011)

 On a BoP basis, exports recorded a growth of 25.0 per cent, year-on-year,


during Q2 of 2010-11 as against a decline of 19.1 per cent during
corresponding quarter of 2009-10.
 on a BoP basis, imports registered a growth of 22.8 per cent, year-on-year,
during the quarter as against a decline of 21.3 per cent during same quarter
last year.
 After four consecutive quarters of decline, on a year-on-year basis, services
receipts recorded a growth of 13.4 per cent led by software and financial
services.
 Services payments increased by 40.7 per cent to US$ 19.3 billion during the
quarter from US$ 13.7 billion in corresponding quarter of last year 
 Consequently, net invisibles receipts declined by 3.9 per cent to US$ 19.6
billion

Source: RBI
BOP & Offshoring

“One reason for the deterioration in the balance of payments was a


decline in an invisibles surplus, caused in part by falling revenues
to India’s prized outsourcing sector.”
-RBI
Dependence on Offshoring
BOP Items
Net Invisibles
Net Capital Flows
Capital Account Convertibility

The Tarapore committee set up by the Reserve Bank of


India (RBI) in 1997 defined CAC as the freedom to
convert local financial assets into foreign financial
assets and vice versa at market determined rates of
exchange.

In simple language what this means is that CAC allows


anyone to freely move from local currency into
foreign currency and back.
Pre requisite of capital account convertibility

According to the Committee, CAC was possible only when the


following few conditions were satisfied:

 The average rate of inflation should vary between 3% to 5%


during the debt-servicing time

 Decreasing the gross fiscal deficit to the GDP ratio by 3.5% in


1999-2000
Benefit & Drawback

 It enables relaxation of the Capital Account, which is under


tremendous pressure from the commercial sectors of India. Along
with the financial capitalists, the reputed commercial firms in
India jointly derive and enjoy the benefits of the CAC policy,
which speculate the stock markets through investments.

 CAC does not however, serve the purposes of the real sectors of
Indian economy, like eradication of poverty, escalation of the
employment rates and other inequalities
Current Account Convertibility

Current account convertibility allows free inflows and outflows for


all purposes other than for capital purposes such as investments
and loans. In other words, it allows residents to make and receive
trade-related payments — receive dollars (or any other foreign
currency) for export of goods and services and pay dollars for
import of goods and services.

In India, current account convertibility was established with the


acceptance of the obligations under Article VIII of the IMF’s
Articles of Agreement in August 1994.
International Trade Documents
Requirements

Documents outline the sale and responsibilities of each party so that the
full transaction is understood and complete without delay or additional
costs.

Reflects aspects of goods such as description, quality, indemnity, medium


of transportation and so on.

Documents also ensure compliance with applicable regulations like


INCOTERMS & UCPDC 600.
In Terms of Proof

Proof of Contract

Proof of Title

Proof of Information

Proof of Compliance
In Terms of Function

Commercial Documents

Official Documents

Insurance Documents

Transport Documents

Financing Documents
Transport Documents

 Shipping Bill / Bill of Export


 Despatch Note
 Bill of lading
 Packing List
 Certificate of Shipment
 Antiquity Measurement
 Shipping Order
 Cart/ Lorry Ticket
 Dock Receipt
Inspection/Clearance Documents

 Certificate of Origin
 Post Parcel Customs Clearance
 Customs Declaration Form
 Customs Invoice
 Black List Certificate
 Certificate of Inspection
 Manufacturer's Certificate
 Certificate of Chemical Analysis
 Short Shipment Form
Financial Documents

Bill of Exchange
A non-interest-bearing written order used in international trade
that binds one party to pay a fixed sum of money to another
party at a predetermined future date
Letter of Credit
It is a commitment on the part of buyer's bank to pay or accept
drafts drawn upon it provided that such drafts do not exceed
specified amount.
Commercial Invoice:
It is a bill of goods supplied to importer. This is prepared
according to terms and conditions settled.
Learning Group 1 Members

Anuj Chaturvedi Payel Rathi


Barsha Agarwal Richa Bhagat
Debjit Chakrabarty Suman Tiwari
Deepak Sethia Ved Prakash Singh
Thank You

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