BALANCE OF PAYMENT
BALANCE OF PAYMENT
- It is a systematic record of all economic transactions made between the residents and non-residents of a country for a specific time period, usually a year.
- Central Banks of each country prepare BoP records as per the format given in IMF’s BPM-6 manual, all the figures are expressed in Dollar ($).
- Since any country’s debit (outgoing money) is a credit (incoming money) for another country àWorld’s NET Balance of Payment is zero.
- BoP is further sub classified into two parts → Current Account and Capital Account, based on the nature of transactions.
RBI’S METHOD OF CLASSIFYING BOP
|Current Account||Capital & Financial Account|
|Goods and services||1. Direct Investment (FDI)
2. Portfolio Investment (FPI)
3. Loans / ECB
4. Non-resident’s investment in Bank, Insurance, Pension schemes.
5. RBI’s foreign exchange reserve
|Primary Income: wages, dividend, interest|
|Secondary income: remittance, gift, donation|
BoP – CURRENT ACCOUNT
|Component||Amount in billion dollars (2018-19)||NET Incoming
|Visible||Trade in Goods: $330 billion worth goods exported vs $510 worth imported.
Compared to last 3 years, trade deficit has increased.
|Trade in Services (Highest export: Software services > Business Services > Travel > Transport).
$208 Export – $126 Import= +82 Billion surplus.
Our Surplus has increased in last 3 years
|Income: Profit, Interest, Dividend.||-28
|Transfer: Remittance, Gift, Grants, Donations. Subtypes: Pvt transfers > Govt.||+70
|Net Current Account Balance (if negative: “Deficit”)||-57 (-2.1% of GDP)|
From 2001-04: we had Current Account Surplus because, it was a time before the subprime crisis when global economy boom had increased our exports. But since then we are having deficit. The Current Account Deficit has increased in last 3 years (2016-19) because:
– Crude oil price increased
– US/EU protectionism= our exports decreased.
Balance of Trade (BoT)
- It is the difference between the value of import and export (of goods and services).
- Export (+330 Goods + 208 Services) MINUS Import (-510 Goods – 126 Services) = MINUS (-) 98 billion.
- If +ve = Trade Surplus (i.e. Export > Import);
- If -ve = Trade Deficit (i.e. Import > Export)
Net Terms of Trade
Gross (Barter) Terms of Trade (GTT)
In terms of quantity (kg, litres) we are exporting more than importing. This is possible because exported Indian rice’s quantity (kg) could be large even though its value ($) will not be very large.
Income terms of trade (ITT)
Top Import and Exports: ES20 DATA
- Trade deficit as a % of GDP has continuously increased in the last 3 years (2016-19).
- For 2018-19, our top-import and exports were as following:
|Goods: Top Imports (in decreasedshare)||Top Exports (in decreasedshare)|
|1. Petroleum: Crude (22%)
2. Gold (6%)
3. Pearl, Precious, Semi-Precious Stones
4. Petroleum Products
5. Coal, Coke and Briquettes etc.
Telecom Instruments, Electronics Components, Organic Chemicals, Iron And Steel, Industrial Machinery.
|1. Petroleum Products (14%)
2. Pearl, Precious & Semi-Precious Stones
3. Drug Formulations, Biologicals
4. GoldandotherPreciousMetal Jewellery
Organic Chemicals, Cotton, Motor Vehicle/Cars, Electric Machinery
|Services: Top Imports (in decreasedshare)||Top Exports (in decreased share)|
|1. Business service
2. Travel (Indian going on foreign trip)
3. Transport (of cargo/goods)
4. Software service
|1. Software service
2. Business service
India’s top trading partners for 2018-19 were as following:
|Top Import sources decreasedshare)||Top Exports destinations (decreased)|
|1. China (14%)
3. United Arab Emirates
4. Saudi Arab
Other notable: Switzerland, Hong Kong, S. Korea, Singapore, Indonesia
|1. USA (16%)
2. United Arab Emirates
4. Hong Kong
UK, Bangladesh, Germany, Netherland, Nepal
India’s top five trading partners
India have largest amount of import and export relations with following five nations.
- Saudi Arabia
- Hong Kong
Largest importer and exporter in world – India Year Book 2020
|2018: In The World||Largest Importer||Largest Exporter|
|Goods (Merchandise)||USA (India – 10th)||China (India – 19th)|
|Services||USA (India – 10th)||USA (India – 8th)|
|Q. The balance of payments of a country is a systematic record of (CSE-2013)
|Q. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? (CSE-2014)
Q. Among the following, which one of the following is the largest exporter of rice in the world in the last five years? (CSE-2019)
|Q. Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years? ? (CSE-2019)
(b) Fresh fruits
(d) Vegetable oils
Remittance: World Bank’s Remittance Report
- According to 2018’s data, India receives largest amount of remittance (about USD 80bn).
- India⇒China (USD 67 bn)⇒Mexico⇒Philippines⇒Egypt
- In quantitative figures too India received more amount compared to previous years.
- Because higher oil prices → Arabian Sheikhs are earning more and spending more → Indian workers in middle east are earning more overtime → more remittance to India.
|World Bank also noted: remittances have a direct impact in poverty removal for many households:
o But Post Offices charge very high fees in remitting the money to household.
o So, Financial inclusion, UPI/BHIM/IMPS blockchain Technology led money transfer mechanism are important in that context as well.
Remittance: Global migration report 2020
- Report released by – The International Organization for Migration (IOM)is a related organization of UN.
- HQ: Geneva, Switzerland
- As per its latest Global migration report 2020:
- Top amount of remittance received to 1) India 2) China 3) Mexico.
- Top number of international migrants are from 1) India 2) Mexico 3) China
- Top destination country of migrants is USA.
Pravasi Bharatiya Diwas (PBD)
- Pravasi Bharatiya Divas (PBD) is celebrated on 9th January every year to mark the contribution of Overseas Indian community in the development of India.
- January 9 was chosen as the day to celebrate this occasion since it was on this day in 1915 that Mahatma Gandhi, the greatest Pravasi, returned to India from South Africa, led India’s freedom struggle and changed the lives of Indians forever.
|1915||9th January: Gandhi-ji returned from South Africa to Bombay (India).|
|2003||NDA-I (PM Vajpayee) decides to celebrate Pravasi Bharatiya divas (PBD) annually every 9th January. First summit was at New Delhi.|
|2020||At New Delhi. But just a small scale video conference type of event.|
CURRENT ACCOUNT AND IMPORT OF OIL
- Govt’s target of reducing the oil import by 10% by 2022 (compared to 2015).
- Therefore, boosting domestic oil exploration & production is necessary in india.
Domestic Oil Exploration Policies
- Meaning – Hydrocarbonexploration (or oil andgas exploration) is search by petroleum geologists and geophysicists for deposits of hydrocarbons, particularly petroleum and natural gas, in the Earth using petroleum geology.
- Nodal Agencyà Directorate General of Hydrocarbons: (DGH) – Ministry of Petroleum & Natural Gas.
- Before the 1991’s LPG reforms – only ONGC and other Public sector companies were allowed to explore the oil, gas and hydrocarbon reserves in India. But under 1991’s Liberalization norms, this sector was opened for the private sector players as well.
- 1997: New Exploration Licensing Policy (NELP) to award contract to public and private sector companies using bidding / auction system.
Limitations of NELP
- Separate license required for each type of hydrocarbon.
- NELP worked on production sharing contract (PSC), wherein the Oil Explorer will pay a share to Govt from the profits from production. However,
- whenever the oil prices decreases in the global market, Indian producers will also decreases their production.
- Indian producers exaggerate their production costs to show less profit. So, Govt earned less, and will do more ‘inspector raj’ to check account books. No ease of doing business at all.
- In 2016, NELP was replaced with Hydrocarbon Exploration and Licensing Policy (HELP).
- Advantages of HELP:
- Single uniform license sufficient to explore and produce all type of hydrocarbons from the given area. (oil, gas, coal bed methane, shale gas, tight gas and gas hydrates etc)
- to receive a share from gross revenue from sale of oil / gas etc, irrespective of company’s profit
- not to interfere in the marketing and pricing of the oil and gas.
- Relaxed norms for exploration in offshore areas, because they have higher risk and higher cost of production.
- Open Acreage Licensing Policy (OLAP) – company can pick and choose the blocks from the designated area, even if no specific bids are invited by Govt before. Then Govt will invite other companies for auction.
- By July 2019: Govt finished auctioning process of HELP-OLAP round 2 and 3.
India’s Strategic Oil Reserves
- According to the agreement on an International Energy Programme (I.E.P.), each International Energy Agency (IEA) country has an obligation to hold emergency oil stocks equivalent to at least 90 days of net oil imports.
- India became an associate member of the International Energy Agency in 2017.
- India’s strategic crude oil storages are currently located at Visakhapatnam (Andhra Pradesh), Mangaluru (Karnataka), and Padur (Karnataka).
- In the second phase, The Ministry of Petroleum & Natural Gas (MoPNG) is planning to create 12.5 MT storage capacity at Padur, Chandikhol (Odisha), Bikaner (Rajasthan) and Rajkot (Gujarat).
- They are stored in underground rock cavern facilities so they are more secure / safe during airstrikes, more economical and environmental friendly than conventional ‘Above Ground Storage Tanks’.
- The construction of the Strategic Crude Oil Storage facilities in India is being managed by Indian Strategic Petroleum Reserves Limited (ISPRL).
- Objective – (When crude prices are low) India should buy and store crude oil for strategic- cum-buffer stock → use during war & other emergency.
Crude Oil prices & OPEC
- 1961: Organization of the Petroleum Exporting Countries (OPEC) is a group of oil producing countries Saudi, UAE, Venezuela, Iran, Iraq etc.
- Total 14 members, HQ at Vienna city of Austria.
- Qatar withdrew from 1 January 2019. Russia is not a member.
- Depending on these factors of supply versus demand, there have been ups and downs in the oil price movement in the last 3 years.
- 2016 onwards OPEC and Russia agreed to reduce their oil production. For a while, it resulted increase the crude oil prices.
- Oct 2018onwards: oil prices decrease because:
- Nigeria etc. produced more oil due to USA pressure. USA also increased its own domestic oil and shale gas production.
- Chinese tariff war on American cars which decreased car sales so, less oil demand in China.
- Dec 2018oilpricesraised because:
- All major currencies weakened against US Dollar so purchase cost increased.
- OPECandRussia started even more stricter output reduction.
- Sept 2019 – Houthi (Shia rebel group of Yemen with Iran’s backing) attacked Abquaiq- Khurais oil field ofSaudi Arabia’s Armaco company using drone.
- Oil production suspended, global oil prices increased further.
- 2020 March: oil prices decreased and fell to$20 per barrel, because:
- OPEC and Russia couldn’t agree for production cuts.
- Corona air travel ban led to less fuel consumption so the less demand and prices decreased.
- This impact is not felt by Indians because as oil prices fall, keeps raising Excise + VAT on the petrol and diesel. Economic survey appreciate it as “this Excise and VAT led high price helps reducing fuel consumption so it’s like a Carbon tax”
Cartel is an association of manufacturers who collude to keep prices high, and keep the competitors away.
Sweet crude oil = Low Sulphur content.
Sour crude oil = High Sulphur content.
BRENT Index is an index that measures price of crude oil.
Fall Of Crude Oil Prices In Negative Figure
- USA’s crude oil prices are monitored through West Texas Intermediate (WTI) contracts.
- Oil demand reduced due to Corona lockdown on vehicle/aviation traffic. But, American oil drilling companies can’t stop production because it’s more expensive to ‘restart’ the production after shutting it.
- And merchants/intermediaries can’t hold stock because their storage capacity is limited.
- 2020-April: sellers are (temporarily) paying $ to buyer to take the stock of oil barrels.
- Hence negative minus $40 per barrel price.
- India may not benefit, since we mostly import from the middle-east and not the USA.
- Further, our Government will increase taxes on petrol diesel, so even if crude oil gets cheap for oil refineries, the resultant petrol-diesel may remain costly for Indian families.
Petrol & Diesel Prices in India
|1970s to 2002||Administered Price Mechanism (APM) Wherein the government fixed the prices of petroleum fuels and paid subsidy to the oil marketing companies (OMC) for their losses|
|2002-2014||Government gradually began decontrolling the fuel prices, to reduce its own subsidy burden|
|Present system||Present system Dynamic Fuel pricing system wherein OMCs decide the prices of petrol and diesel on daily basis, based on the movement in international prices.
Benefit of dynamic pricing à In theory, If the oil prices lowered in the international market, petrol diesel should become cheaper in India.
Corona crisis reduces transportation and hence decrease in demand of crude oil. This resulted into prices have fallen or remained moderate. But, Corona crisis also reduces direct tax and GST collection. Government required more fund to run the schemes. So, continuously govt. try to increasing excise & VAT. Consequently, by 2020-Jul: Petrol and diesel costing around ₹80/litre in Delhi
CURRENT ACCOUNT AND IMPORT OF GOLD
- From 2010 onwards, Indian economy was suffering from high level of inflation (8-12%)due drought and Food & Pulses shortage among others.
- MNREGA → higher wages in the hands of villagers without proportional growth in supply of commodities etc.
- So households earned ‘Negative Real Interest Rate: on their bank deposits and started investing in gold.
- However, high level of gold consumption leads to more trade deficit, current account deficit which makes Indian rupee gets weaker.
- Gold transactions also help in the storage of black money and tax evasion.
- India is the second largest consumer of Gold after China. Therefore, RBI and Indian government launched following schemes to reduce gold consumption:
RBI’s 80:20 Scheme (2013-14)
- RBI mandated that minimum 20% of the imported gold must be exported back. Until then the Jeweller/ bullion dealers will not get permission to (convert their rupees into dollars / foreign currency) to import next consignment of gold.
- RBI gets such powers under Foreign Exchange Management Act (FEMA).
- 2014: Scheme was stopped as the gold craze had declined.
Sovereign Gold Bond Scheme (2015)
- RBI (on behalf of Union Government) issued Gold bonds in the denominations of one gram and its multiples. One person can buy upto 4 kgs.
- They can be purchased from commercial banks, post offices and authorised agents. RBI continued to release them in 2018 and 2019 as well.
- Tenure – 8 years. (But investor can exit from 5th year).
- Fixed about 2% interest every year. On the redemption date you get the principal equivalent of the latest price of gold in grams. So, if gold price increased then you get more profit.
- Bonds can be tradable in stock exchange. Can be used as collateral for loans.
- They are exempted from the TDS and Capital Gains Tax.
- Benefit – People were investing in gold with speculation that when gold prices increase they’ll profit. Gold Bonds offer them similar without actually giving them gold. So it helps reducing gold import.
Gold Monetization Scheme (2015)
- Under this scheme, RBI allows commercial banks accept customers’ idle gold /jewellery for 1 year to 15 years tenure. (2019- RBI also allowed Charitable Institutions and Central Govt to deposit their gold in the commercial banks)
- Commercial Banks pay the depositor ~2% interest.
- 30gm to maximum any amount of gold can be deposited.
- Gold goes to the Metals and Minerals Trading Corporation of India:
- Gold sold to jewellers, electronic circuits companies
- Some of the gold used for Minting “Indian Gold Coin.”
- Upon maturity you can redeem deposit in the form of gold coin/bars or cash equivalent. The profit exempted from Capital Gains Tax.
Indian (Sovereign) Gold Coins (2015)
- Issued by a Govt company “Metals and Minerals Trading Corporation of India”.
- Available in denominations of 5, 10, 20 grams.
- These gold coins are not fiat money because not issued under the powers of Coinage act, they don’t bear any markings indicating rupee denominations. Their markings only indicate gold grams. And since they’re not ‘fiat money’ they are not ‘legal tenders’.
- BenefitàTrusted Purity, Easily resold, Easy liquidity, and Profit if any increase in gold price.
|Q. What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’? (CSE-2016)
(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 3
Gold price in Corona
- Indian banks reduced fixed deposit interest rates. People shifting towards gold investment for a better “positive real” interest rate.
- Mutual funds not giving good returns post-ILFS crisis and Franklin Templeton MF crisis → some investors prefer gold
- Geopolitical tensions like Iran-US, China-US, India-China have negative impact on share market → some investors prefer gold
- 2020 Corona-Crisis: Shares and bonds have become risky due to heavy losses faced by companies. Investors prefer a ‘safe assets’ i.e. increase in demand of gold so the price rise.
- Corona also reduced workers at gold mines / refineries which results into decrease in gold production, result is price.
- A Geographical Indication (GI) is a sign used on products with specific geographical origin and unique qualities due to that origin. E.g. Darjeeling tea from West Bengal- It was the first to obtain GI tag from India.
- Benefits of GI TagàGI tag adds premiumness to a product, helps fetching higher prices in the international market and resultantly better income for farmers and artisans.
GIs are governed under:
- WTO’s Trade Related Intellectual Property Rights Agreement (TRIPS) and India’s Geographical Indication of Goods Act, 1999.
- Once a product gets GI tag, it’s valid for 10 years (and can be renewed further.)
- GI name cannot be used for products that are manufactured outside of the designated region, else party can be punished under the law.
- International Nodal AgencyàUN’s specialized agency World Intellectual Property Organization (WIPO). HQ at Geneva, Switzerland
- Indian NodalAgencyàMinistry of Commerce, Controller General of Patents, Designs and Trademarks – Geographical Indications Registry in Chennai.
- 2010: GI status given to the Basmati rice grown only in Punjab, Haryana, Delhi, Himachal Pradesh, Uttarakhand and parts of western Uttar Pradesh and Jammu & Kashmir.
- Madhya Pradesh state government had been fighting to get GI-status for its Basmati rice as well, but 2018 rejected by GI Registry (Chennai).
- 2017-19: WestBengal and Odisha were fighting to get GI for Rasagola, ultimately they are given separate GIs: ‘BanglarRasogolla (2017)’ and ‘Odisha Rasagola (2019-July)’.
New Indian GI tag during From April 2018 till Now
‘Invaluable Treasures of Incredible India’ → Commerce Ministry’s logo for GI products to make them more attractive to foreign buyers.
2019-June: Commerce Ministry’s Department for Promotion of Industry and Internal Trade (DPIIT) issued guidelines for its usage:
- DPIIT’s prior permission required before using this logo.
- DPIIT will not charge any no fees.
- Permission duration will be decided on case-to-case basis.
- DPIIT would not be responsible for the authenticity or quality of the products with these logos.
- Foreign GI products are not allowed to use India’s GI logo
Exports and SEZ
- Special Economic Zones (SEZ) is a specifically demarcated area of India which is deemed as foreign territory for the purpose of Tax laws and Trade laws.
- SEZs work as an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
- Thus, exempted from aforementioned taxes or subjected to lower rate of taxes of Union and State Govts. This relief is for a specific time-period only, which is called “Tax holiday”
|Sector||Ordinary area||SEZ area
|Manufacturing||Excise / GST||Nil|
|Profit||Corporation Tax/ Income Tax||Nil|
|SEZ “Sunset clause” in Income Tax Act 1961
· Income Tax Act (Section 10AA) provides for a tax-holiday for SEZ firms for a period of 15 years.
· But it is available if only the firm starts activity by March 31, 2020.
· Economists suggest this deadline should be extended to attract more foreign companies in India.
Benefits given to SEZ
- They get single window clearance for various import, export licenses or permissions.
- Government will bear the cost of developing the roads, sewage, affluent treatment, weighing –packaging-labelling etc infrastructure within the SEZ.
- They are regulated under SEZ policy (2000) and Special Economic Zone Act, 2005.
- State Govt forwards the proposal to create SEZ whereas Union’s Commerce Ministry approves.
Asia’s first SEZ was set up in 1965 at Kandla,Gujarat (At that time it was called Export Processing Zone/EPZ). Currently we have 220+ SEZ in India.
|Benefit of SEZ||More exports, employment, economic growth, world class infrastructure.|
|Challenges||SEZ entrepreneurs use legal loopholes → Tax avoidance, Workers deprived of EPFO/ESIC/Maternity benefit. When entrepreneurs’ Tax holiday is over in one SEZ, they shutdown operation and move to another SEZ with new name/registration. Agricultural and forest lands diverted to build SEZs → future challenges in food security, pollution control and climate change.|
|Ministry of Commerce had setup Baba Kalyani committee in 2018 to look into SEZ issues|
Baba Kalyani report on SEZ
- While the number of SEZ & SEZ-led employment has increased, but their export growth rates were not encouraging in the last decade.
- Instead of giving blanket-general-tax-holiday, SEZ-units should be given tax benefits linked to how many job created, how much FDI investment attracted, how much goods/services exported etc.
- SEZs should be converted into Employment and Economic Enclaves(3Es) with efficient transport infrastructure, uninterrupted water and power supply. (So, both domestic-consumer-centric entrepreneurs and export-centric entrepreneurs can operate from same locality, supply each other with intermediate goods/services. While exports sector get further tax benefits in Customs Duty & Direct Taxes.)
- Encourage MSMEs in 3Es, so we can create more jobs. Simpler entry and exit processes using time-bound online approval and dispute resolution for entrepreneurs.
- Develop infrastructure: High Speed Rail, Express roadways, Passenger/Cargo airports, shipping ports, warehouses etc. near SEZ/3Es zones.
- Focus on electronics for domestic production for domestic consumers, and need to have a plan for import substitution (i.e. encourage Swadeshi electronics companies in 3Es, so Indians buy import less videshiproducts).
2019-July: SEZ Act amendment, allows even ‘trusts’ to open units/offices in SEZ.
Government of India has set a target of creating 100 million jobs and achieving 25% of GDP from the manufacturing sector by 2022, as part of its flagship ‘Make in India’, so above reforms / recommendations will help achieving these targets.
Exports and Foreign Trade Policy (2015-2020)
- India’s export in goods and services in 2013-14 was aboutUSD465 billions. This FTP Policy aims to almost double it to USD900 billion by 2020.
- Nodal – Director General of Foreign Trade (DGFT) under Ministry of Commerce.
- Introduced new schemes / streamlined previous schemes such as: MEIS/SEIS.
- Interest Equalization Scheme: MSME exporters given interest subsidy on loans.
- Duty free import of capital goods (machinery required for production)
- Advance Authorization Scheme allows duty free import of inputs, along with fuel, oil, catalyst, etc., required for manufacturing export product.
- NiryatBandhu Scheme: Govt mentors the new and potential exporters and mentor them through training, counselling, orientation programmes
- Towns of Export Excellence (TEE)and Trade Infrastructure for Export Scheme (TIES): where Union gives ₹ for infra development for export (warehouses, transportation, packaging facilities etc.)
|E-governance initiatives||CBIC → Single Window Interface for Facilitating Trade (SWIFT) for importers and exporters through icegate.gov.in. Within that, e-governance modules like E-Sanchit, Turant etc for document approval etc.|
|Commerce Ministry & FIEO (Federation of Indian Export Organisations) launched India Trade webportal and Niryat Mitra App.|
Challenge to Foreign Trade Policy
- While policy has lofty goal of doubling Indian exports to $900 billion by 2020. But US/EU protectionism could derail target.
- 2019-Oct: Government planning to launch new foreign trade policy as existing policy will expire on 31 march 2020.
- Although 2020-March: economist and experts believe due to the new policy may be postponed due to Coronavirus slowdown.
- 2018: Commerce Ministry launched a separate policy for Agriculture Exports.
Tax Credit for Exporters: MEIS/SEIS and RoDTEP
- Nodal – Commerce Ministry
- They provide tax credit to exporters, which they can use for paying Union’s Customs Duty.
Tax Credit for Exporters: RoDTEP
- Nodal – Commerce Ministry
- 2020-March: govt announced Remission of Duties and Taxes on Exported Products (RoDTEP).
|Goods Exporter gets Input tax credit for:||Customs Duty
|Following taxes he paid in previous stage:
1. Customs Duty
2. Transport fuel, Excise and VAT
3. Agriculture raw material, State Mandi tax (it’s not a ‘tax’ but rather a fees charged by APMC Mandi.)
|No, so WTO ordered to stop it||Yes. RoDTEP will replace MEIS scheme.
|Economic Survey 2020: “Assemble in India” -Talks about doing “assemble in India for network products” to encourage our exports.|
Port Logistics: Authorised Economic Operator (AEO)
- An importer/exporter/cargo company can apply to the Central Board of Indirect Taxes and Customs (CBIC) to get this ‘status’.
- Subject to conditions like:
- Minimum 3 years experience
- Never filed bankruptcy
- Never caught in fraud / smuggling etc.
- Benefits – Faster clearance times, fewer physical examinations on cargo etc.
- At International level, World Customs Organization (WCO, HQ: Brussels, Belgium)’s “SAFE Framework” guides this program.
CAPITAL ACCOUNT: FDI / FPI
Foreign Portfolio Investors (FPI)
- It is a foreign entity registered with SEBI, and who buys upto 10% in equity / shares of an Indian Company.
- For Corporate Bonds and G-Sec these percentages are different.
- Originally, these were called Foreign Institutional Investor (FII) and Qualified Foreign Investors (QFIs), but in 2013 SEBImerged them all into a single category- FPI, based on the recommendations of M. Chandrasekhar committee.
- FPI’s primary objective is make money from buying and selling of shares through the capital market / share market. They even help the SEBI-non-registered foreign investors by issuing them Participatory notes (P-Notes).
- FPIs are not involved in the actual operations / production / management / business policy making of a company (unlike Walmart is for Flipkart).
- If FPI investor is hopeful to get better returns in the other countries’ share/bond market, he may quickly sell his Indian securities and run away. The flight of such money is called ‘hot money’, It results into weakening of Indian Rupee and falling of Sensex.
|Before Budget-2019||The aggregate limit of all FPIs in an Indian company was 24%. Otherwise if 10 different FPIs invest 9-9% each in a company then 90% of company’s shareholding will be owned by foreigners, even though a given industrial sector may not be open for 90% foreign direct investment.|
|From Budget-2019||24% cap is removed. Now, aggregate limit of all FPIs in an Indian Company = total foreign investment sectoral cap for that industry e.g. Broadcasting of News TV-channels =49% Foreign investment allowed. So, FPI cap will be 49%. So, NDTV India ltd could be FPI-I (upto 10%) + FPI-II (upto 10%)+…. As long as 51% shareholding is with Indians.|
Foreign Direct Investment (FDI)
- FDI is the (more than 10% equity / share) investment made by a foreign entity into an Indian company, with the objective to getinvolved in the management / production of that Indian company.
- g. 2018: Walmart-USA bought 77% stakes in Flipkart at $16 billion.
Foreign Investment is prohibited in atomic energy, railway operations (except Metro & infra dev.); Tobacco Products, Real Estate Business, Farm Houses, Chit Funds, Nidhi Companies, Betting Gambling Casino & Lottery.
- For the remaining sectors, Foreign Investment is permitted either through:
|Automatic Route||Foreign entity doesn’t require Indian Govt’s approval.|
|Government Route||Prior to investment, they’ve to get approval from the Govt of India’s respective Administrative Ministry/ Department (and Commerce Ministry).|
100% Foreign Investment by Automatic route permitted in:
- Agriculture, Animal Husbandry, Plantation Sector, Food Processing companies
- Asset Reconstruction Companies (ARC), Credit Information Companies, Core Investment Company, White Label ATM Operation and Other Financial Services
- Pharma & Biotechnology(Greenfield), Healthcare (Greenfield), Medical Devices
- Satellites, Broadcast of non-NEWS TV Channels, Printing of scientific and technical magazines; Wholesale Trading, Single Brand Retail, E-Commerce (market-place)
- IT and Business process management (BPM); Township Construction, Housing, Infrastructure; Gems & Jewellery, Duty Free Shops, Tourism & Hospitality
- Leather, Textiles & Garments, Manufacturing, Capital Goods, Industrial Parks
- Mining and Exploration of metal and non-metal,
- Petroleum & Natural Gas, Chemicals, Coal & Lignite, Thermal & Renewable Energy
- Civil Aviation (**Selected services), Airports (Greenfield & Brownfield)
- Ports and Shipping, Railway Infrastructure, Roads & Highways
|2019-Jul||Insurance intermediaries (agents, brokers, surveyors, 3rd party admin etc)|
|2019-Sept||Coal mining, coal sale & associated activities; Contract manufacturing.|
Difference Between FDI & FII
Any Foreign investment is to bridge the gap between the saving and investment rates. These Foreign investments occur for different time period and of differing amount. One attempt to differentiate between was made by Arvind Mayaram Panel on FDI & FII.
|Any investment in unlisted Company. Investment more than 10% for listed companies.||Below 10% in listed firms. Its also called the “Hot Money”. Ex. Fed Taper- Tantrum
Sectors and Foreign Investment limits in India
|Banking – Public Sector
|Printing / Publishing newspaper, current affairs magazines; uploading/ streaming of News & Current Affairs through Digital Media||–||26%|
|Broadcasting of News TV-channels||–||49%|
|Multi Brand Retail Trading||–||51%|
|Insurance, Pension, REITs / InvITs Infrastructure Companies||–||49%|
|Petroleum Refining (by PSUs), Power Exchanges||–||49%|
|Banking (Private Sector), Telecom Services, Defense, Private Security Agencies, Air Transport Services||49%||Above 49%
|Brownfield – pharma, healthcare, Biotech||74%||Above 74%
|Budget 2019: Insurance Intermediaries:
-Banks selling insurance (Bancassurance)
-Third Party Administrators (e.g. Hospital where treatment is given for health insurance)
Budget-2019 : FDI
- Insurance intermediaries: 100% FDI through automatic route.
- will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC: Animation, Visual effects, Gaming and Comics) and insurance sectors after consulting with all stakeholders.
- Presently,100% FDI allowed in a Single Brand Retail, but with condition they must procure at least 30% of their requirements from Indian MSME. We will relax this norm.
Economic Survey 2019 : observed in 2018-19 there was net ‘outflow’ of FPIs (i.e. more FPI money left India than the amount of FPI money that came into India)
India’s new FDI rules for E-Commerce
Definition – E-commerce means buying and selling of goods and services over digital & electronic network. Two subtypes:
|Inventory based model||Company sells the inventory of goods and services, which is owned by them to consumers directly. E.g. primeabgb.com (A computer hardware site). FDI is not permitted here.|
|Marketplace based model||Company merely provides a web portal/app to act as a facilitator between buyer and sellers. E.g. Amazon, Flipkart. 100% FDI allowed here.|
- Marketplace E-Commerce companies were engaging in Anti-Competitive behaviourg. Flipkart / Amazon would enter in exclusive partnerships with top smartphone brands such as Xiaomi and Oppo- Prohibiting them from selling their mobile phones through other online or offline channels → offline mobile shops suffer.
- Flipkart / Amazon run “Marketplace E-Commerce model”e. they allow any merchant to list their products on their website. However they will also have their own merchant company (e.g. Amazon’s cloudtail pvtLtd) who would offer deep discounts / cashbacks to the customers. So Other online merchants on the same web platform will suffer. Offline brick and mortar shop merchants will also suffer.
- So, Consumer Affairs ministry updated norms on (Marketplace) E-Commerce WEF 1st February 2019, using the powers under Consumer Protection Act,1986:
- Such E-commerce companies can’t have exclusive agreements with sellers. E.g. Flipkart can’t compel Xiaomi ‘not to’ sell Mi phones on other online/offline platforms.
- Tightened the technical norms related to cashback and discounts.
- Tightened norms on E-commerce company who were using their own subsidiary companies/shell companies as “Online Merchants” to sell products at deep discount.
India’s new rules for E-Commerce (2020-Jul)
- These rules applicable to all types of electronic retailers (e-tailers) registered in India or abroad – whenever they’re offering goods and services to Indian consumers.
- E-tailers must mention the ‘expiry date’, ‘country of origin’ of goods, its policies on return, refund, exchange, warranty and guarantee, delivery, shipment, cancellation policy. E-tailer must display sellers’ geographic address, customer care number, rating etc.
- Penalties – Consumer Protection Act, 2019.
Chinese FDI need Govt approval
- Govt decided this because à Corona-led slowdown impacts Indian companies which are suffering from losses. China may mis-use this opportunity to takeover such Indian companies at very low share price which will harm our strategic & economic interests.
- Criticism à China says this is violation of WTO norms related to foreign investment. Although Australia and Germany also announced similar restrictions with similar reasons.
|If any FDI proposal coming from Pakistan and Bangladesh, it required approval from Government of India.
|If any FDI proposal from any country that shares border with India → Indian Govt approval required.
Means, Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar
|Q. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?(CSE-2011)
Yearbook: Ministry of Commerce and Industry:
MoCI looks after Internal and External Trade, WTO, Dumping, SEZ, FDI related issues.
|Attached offices||1. Directorate General of Foreign Trade (DGFT) for promotion of foreign trade.
2. Directorate General of Trade Remedies (DGTR) to impose anti-dumping duty on foreign products.
|1. Export Credit Guarantee Corporation of India (ECGC: NIRVIC scheme)
2. MMTC Ltd.(Gold-coin)
3. Invest India: A ‘not for profit’ company by commerce ministry + FICCI + NASSCOM + other in 2009. Technical Name: National Investment Promotion and Facilitation Agency of India.
|Agricultural and Processed Food Products Export Development Authority (APEDA), under its statutory act.
– Indian Institute of Foreign Trade (IIFT)- a “Deemed University” that offers MBA, PHD & other programs.
– Statutory Commodity Boards: Coffee, Rubber, Tea, Tobacco, Spices Board
FIPB Abolished in 2017
- Foreign Investment Promotion Board (FIPB) was an inter- ministerial body in the Department of Economic Affairs in the finance ministry.
- FIPB processed the FDI applications where government approval was required. If investment amount exceeded ₹ 5,000 crore then application forwarded to Cabinet Committee on Economic Affairs (CCEA).
- FIPB was chaired by the economic affairs secretary,& members from other depts.
- 2017: Govt announced FIPB’s abolition. Now, individual ministries/departments are empowered to clear FDI proposals in consultation with Commerce Ministry. e.g. FDI in Pen-drive factory → MEITY + Commerce Ministry. (if proposal above ₹5kcr →CCEA)
- FIPB’s web-portal was renamed into “Foreign Investment Facilitation Portal” and transferred to Commerce ministry.
- However, Only Home Ministry will clear FDI proposals coming from Pakistan and Bangladesh; and FDI proposals related to private security agencies, small arms manufacturing.
|finalizes the name for top level appointments like Cabinet Secretary, Indian ambassadors for each nation etc.
|Giving house allocation to politicians, top officials
|FDI approval, Agri-MSP approval, Bank merger,disinvestment etc grand things
|Defense Minister Rajnath Singh made boss for his acumen in parliamentary matters|
|Political Affairs, Security||Prime Minister||Self-explanatory. If PM is in a cabinet Committee, he automatically becomes its chairman.|
|Cab. Committee on Investment and Cab. Committee on Growth Employment and Skill Development||Prime Minister||These two are new committee formed after 2019’s General Election.
DIPP becomes DPIIT (2019)
- Interim-Budget-2019: Govt renamed Commerce Ministry’s Department of Industrial Policy and Promotion (DIPP) asDepartment for Promotion of Industry and Internal Trade (DPIIT).
- It’ll function under Ministry of Commerce and Industry
- Objectives of DPIIT – Promotion of internal trade, including retail trade; welfare of traders and their employees; matters relating to ease of doing business; and start-ups.
International Financial Services Centre (IFSC)
- In such centre, a nation will not apply its local taxation and investment norms.
- g. UAE → Dubai’s IFSC centre: 100% FDI allowed in any sector. 100% Capital Account Convertibility (i.e.Invest&pull-out money as & when you please in any currency of your choice!), 0% income tax for 50 years. DTAA with most countries. Independent judiciary not bound with local laws. Quick Visa etc.
- Result – Such place becomes a hub / base of operation for international financial companies and investment bankers. It also creates trickle down benefits for local people e.g. Chartered Accountants, Hoteliers, Golf club owners, Taxi operators etc.
- London, New York, Hong Kong and Singapore to have also grown by setting up such centres. Taking their example, India too has set up Gujarat International Finance Tec (GIFT) city international financial services centre (IFSC) near Ahmedabad. (2015)
- Although it not yet attracted good number of international financial companies because the tax benefits are not as great as Singapore, Hong Kong etc.
- This ‘greenfield’ GIFT city was developed by 50:50 Joint venture of (the infamous) IL&FS + Gujarat Urban Development Company Limited (GUDCL). Together they were responsible for the construction, electricity, water, sanitation and other responsibilities of running this city. But post IL&FS crisis, Government of Gujarat has decided to buy IL&FS’s 50% shareholding.
Full-Budget-2019: Companies operating in operating IFSC were given additional benefits / tax holidays in the direct taxes (with the hopes that it’ll attract more companies here).
IFSC Authority Act, 2019
- IFSC (such as GIFT city) are setup under the SEZ Act.
- IFSC get relief / exemption in the Indian tax laws. Further, RBI, SEBI, IRDAI and other regulators’ norms also apply in relaxed manner. E.g. Bank branches in GIFT-city-IFSC are exempted from RBI’s CRR-SLR-PSL etc. norms.
- 2019’s Act aim to setup a statutory International Financial Services Centres Authority (IFSC):
- One Chairperson
- One member each nominated from RBI,SEBI, IRDAI, PFRDA + few other members from Finance ministry etc
- Tenure – 3 years.
- Re-appointment – Yes, possible.
- The IFSC Authority will regulate all financial services, products, institutions in International Financial Services Centres of India.
- 2020-April: Government announced its headquarter will be at Gandhinagar, Gujarat. (Since Gandhinagar is the only place with an IFSC at present, i.e. GIFT City)
- Controversy – Maharashtra political outfits demanding HQ should be in Mumbai.
Capital Account and Misc. Concept: NIIP
- Net International Investment Position (NIIP) – value of overseas assets owned by a nation minus the value of domestic assets owned by foreigners. Positive NIIP value = creditor nation.
- Negative value = debtor nation. USA highest, India at 8th position (in 2018)
- Positive NIIP value = creditor nation
Budget-2019: Indian Development Assistance Scheme (IDEAS) provides concessional loans to developing countries. We’ll revamp this scheme.
|Q. Which of the following constitute Capital Account? (CSE – 2013)
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2, 3 and 4
(d) 1, 3 and 4
Composition of India’s external debt
- External borrowing by Pvt. Sector >> Government.
- Further, majority of India’s external debt is denominated in USD currency > Indian Rupee > IMF’s SDR > (Yen, Euro, Pound Sterling, etc)
|Q. Find correct statement(s): (CSE-2019)
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
If there is a BoP situation, wherein RBI has to sell ₹ to buy $ to get the net answer zero, but then then…
- Such RBI action would result in increased supply of rupee currency in the Indian market which can cause inflation if there is not sufficient supply of goods for purchase.
- So, RBI must ‘absorb’ that excess rupee currency back. RBI will it through Open Market Operation (OMO) → sell government securities to buyback Indian rupees. This entire process is called Sterilization.
INDIA’S BALANCE OF PAYMENT CRISIS (1991)
- In the pre-1991’s Nehruvian Socialist Economy, many sectors were nationalised (banking insurance) and / or reserved for the public sector companies only àmismanaged & inefficiency.
- Widening of trade gap due to rise in imports against a small growth in exports and increased cost of imports.
- The sharp rise in crude prices due to the Gulf crisis
- Deterioration in the Exchange Rate of Rupee
- Rising Current Account Deficit.India’s current account deficit (CAD)had already touched 2.7% of the GDP in 1988-89. From mid-1990, financing the CAD became arduous. Traditional sources of financing started drying up. The main factor contributing to the rising current account deficit was decline in the growth of net invisible earnings.
- Decline in migrants’ remittance from abroad
- Non-resident deposits, which contributed significantly to bridge the CAD, had also started flowing out.
- Private sector industrialists were allowed only in selected sectors, and were subjected to Licence-Quota-Inspector Raj → low level of competition, low innovation = low exports.
- And our policy makers restricted foreign investments (FDI /FPI) fearing that:
- It’ll bring USA-CIA’s invisible hand in Indian Affairs,
- Our Swadeshi industries & our ‘Non-Alignment Movement (NAM)’ will be harmed.
- By end-December 1990, foreign exchange reserves were enough for only three weeks of imports.
End result –
- High level of “Deficit” in Current Account and not enough surplus in Capital account to counter/offset that Deficit. The situation could be like this:
- In 1991, RBI didn’t have enough forex reserves to get India’s BoP zero → we had to pledge our gold to IMF to borrow dollars.
- IMF also imposed certain conditions which required India to open up its economy through LPG reforms.
Measures taken by the then govt. to overcome the crisis:
- The first decisive action of the new government was with respect to the exchange rate. In 1991, rupee was devaluated.
- The RBI shipped about 47 tonnes of gold to the Bank of England as security to raise foreign currency from England and Japan. The government also sold 20 tonnes of gold to a Swiss Bank for acquiring foreign currency, with the condition that it would be repurchased after six months.
- In the short run,to relieve the pressure of foreign exchange, imports were compressed through certain monetary measures.
- Licenceraj was liberalized.Many industries were delicensed.
- Import tariffs were lowered.
- Import restrictions were eased.
- Market determined exchange rate system was introduced.
- Foreign investment was encouraged.
RBI’s Forex Reserve:
- Consists of Foreign Currency assets (in the form of foreign currency and foreign G-Sec) > Gold > (SDR & its Reserve Tranche Position).
- Total Value: $480+ billion as of 2019. India is 8th largest after China ($3 Trillion)> Japan > Switzerland > Saudi Arabia > Russia > …
- The Forex Reserve component(s) in decreasing order of size à
- Foreign Currency Assets (includes foreign currencies & G-Sec/bonds of foreign Govts
- Reserve Tranche Position (RTP) in the IMF.
- Special Drawing Rights (SDRs)
Total Forex reserves of India = about 480 million USD(2020-April)
Note – USA is not in the top-10 list, it barely keeps about $125 billions in reserve.
|Q. Which one of the following groups of items is included in India’s foreign- exchange reserves? (CSE-2013)
Factors responsiblefor disequilibrium in BoP
When Credit (Receipt, income money) = Debit (Payment, outgoing money) then BoP will be zero. If, not then BoP is in disequilibrium. This can happen because of:
- Development disequilibrium:poor nations have to import more grains, medicines etc. = adverse BoP.
- Secular or Long-term Disequilibrium: newborn nation is usually poor & backward so imports >> Export. E.g. Nehru’s India until it matured in the 90s.
- Consumerism and Demonstration Effect: Rich Indians try to copy westernized lifestyles. So, increased import of Switzerland wristwatches, Sports Cars àadverse BoP.
- Structural Disequilibriumàif transport, electricity infrastructure is poor or Technological Backwardness = exports can’t improve.
- Cyclical Disequilibrium: When two countries may be passing through different phases of business cycle (Boom, slowdown…) , so there will be mismatch in imports, exports, FDI etc.