Effect of Liberalisation on India’s Current Account

Presented by :

Name Roll Number

Sreejoyee Roy 29

Souvik Saha 44

Archisman Neogi 34

Budhaditya Banerjee 32

Balance of Payments (BOP)—is an accounting record of a country’s trade in goods, services, and financial assets with the rest of the world during a particular time period (year or quarter).

The BOP is divided into three main categories: • The current account, • The capital account and,• The financial account.

Balance of Payments

Current Account

• The current account includes the value of trade in merchandise, services, income from investments, and unilateral transfers.

• Merchandise—tangible goods.• Services—include travel and tourism, royalties, transport

costs, and insurance.• Income from investments—interest and dividends.• Unilateral transfers—include foreign aid, gifts, and

retirement pensions.

Capital Account

Financial Account

The financial transactions include:Direct InvestmentPurchases of Equity and Debt SecuritiesBank Claims and LiabilitiesGovernment Assets AbroadForeign Official Assets in the country in consideration

The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

Balance of Trade• The trade balance is identical to the difference between a country's

output and its domestic demand. • The balance of trade forms part of the current account. If the current

account is in surplus, the country's net international asset position increases correspondingly and vice-versa.

• Factors that can affect the balance of trade include: The cost of production (land, labor, capital, taxes, incentives, etc.) in the

exporting economy vis-à-vis those in the importing economy The cost and availability of raw materials, intermediate goods and other

inputs Exchange rate movements The availability of adequate foreign exchange with which to pay for

imports

Difference between Balance of Trade and the Balance of Payments

Balance of Trade• The Balance of Trade includes only visible

imports and exports, i.e. imports and exports of merchandise, the difference of imports and exports is called Balance of Trade.

• Balance of Trade includes revenues received or paid on account of imports and exports of merchandise. It shows only revenue items.

• Balance of Trade can be favourable or unfavourable. If imports are more than exports, it is unfavourable balance of trade. If exports exceeds imports, it is favourable balance of trade.

• In case of Balance of Trade, there is no deficit or surplus balance. The balance shows favourable or non-favourable. So, external assistance is not required.

Balance of Payment• The Balance of Payments includes all those

visible and invisible items exported from and imported into the country in addition to exports and imports of merchandise.

• Balance of Payments includes all revenue and capital items whether visible or non-visible. Balance of Trade thus form a part of Balance of Payments.

• Balance of Payments is always balanced just like Trading and Profit and Loss A/c of a business.

• In case of Balance of Payments, any balance, deficit or surplus is to be financed by external source or assistance or be utilised.

Export, Import and Trade Balance in India from 1986-2014

Export Import Trade Balance

1986-87 124.52 200.96 -76.44

1987-88 156.74 222.44 -65.7

1988-89 202.32 282.35 -80.04

1989-90 276.58 353.28 -76.7

1990-91 325.58 431.93 -106.35

1991-92 440.42 478.51 -38.09

1992-93 536.88 633.75 -96.86

1993-94 697.51 731.01 -33.5

1994-95 826.74 899.71 -72.97

1995-96 1063.53 1226.78 -163.25

1996-97 1188.17 1389.2 -201.03

1997-98 1301.01 1541.76 -240.76

1998-99 1397.53 1783.32 -385.79

1999-00 1595.61 2152.37 -556.75

2000-01 2035.71 2308.73 -273.02

2001-02 2090.18 2452 -361.82

2002-03 2551.37 2972.06 -420.69

2003-04 2933.67 3591.08 -657.41

2004-05 3753.4 5010.65 -1257.25

2005-06 4564.18 6604.09 -2039.91

2006-07 5717.79 8405.06 -2687.27

2007-08 6558.64 10123.12 -3564.48

2008-09 8407.55 13744.36 -5336.8

2009-10 8455.34 13637.36 -5182.02

2010-11 11429.22 16834.67 -5405.45

2011-12 14659.59 23454.63 -8795.04

2012-13 16343.19 26691.62 -10348.43

2013-14 18941.82 27141.82 -8200

Objectives• To study India’s current account position in the post

liberalization period.

• A view of India’s import intensity in the post liberalization period.

• To study the relationship between India’s degree of openness and GDP in the post liberalization period.

• To study the dependency of India’s import of Oil and Non Oil products on its GDP.

Trends• The global slowdown had its impact on the economy of most of the countries,

including India. As a result, the trade deficit abruptly increased from Rs. 3,56,448 crores in 2007-08 to Rs. 5,33,681 crores in 2008-09, an increase by almost 50%.

• However, these are global slowdown effect, as after 2009-10, when the economy started picking up, both export as well as import recorded substantial growth of 34.5 % and 23.5 % respectively, resulting in Rs.5,46,503 crores trade deficit with 5.46 % positive growth in 2010-11.

• India’s trade deficit did not cross 1000 crores before 1995-96 though it has been negative throughout the time period we have taken. It crossed the 1000 crore mark just one time before that in 1990-91. This may be due to the economic liberalization of 1991. The trade deficit fluctuated quite a lot (sometimes more than 100%) from 1991-1995.

Fig.1: Export and Import as percentage of GDP at factor cost

Fig. 2: Export and Import as percentage of GDP at market price

Trends

• We can see from the above table and the figures that import intensity has raised gradually through this time period to 25%. The export intensity has also risen but to 18%. Until 2003-04, the import and the export intensity go at a same pace more or less but from 2004-05 the gap has steadily widened. Therefore the trade deficit have also widened to 82000 crore. In 2012-13 the trade deficit went up to as much as 1034843 crore, the highest in recent years.

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) -4.132 .157 -26.264 .000

Log_of_GDP_at_Fact

or_cost1.621 .037 .993 44.144 .000

a. Dependent Variable: Log_of_import_of_oil

Regression between Import of Oil and GDP at factor cost and market price

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) -4.253 .158 -26.926 .000

Log_of_GDP_at_Mark

et_Price1.635 .037 .994 44.730 .000

a. Dependent Variable: Log_of_import_of_oil

On both GDP at factor cost and market price we can see that the results are statistically significant. On both account we have rejected the null hypothesis: β=0 and the results are significant at 1% level of significance. Therefore, we can say that import of oil depends largely upon GDP.

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1.993a .987 .986 .088016

a. Predictors: (Constant), Log_of_GDP_at_Factor_cost

Model Summary

Model R R Square Adjusted R Square Std. Error of the Estimate

1

.994a .987 .987 .086879

a. Predictors: (Constant), Log_of_GDP_at_Market_Price

From the above table we can see that both R square and adjusted R square is very good which can be concluded of having a high goodness of fit.

Regression between Import of non-oil and GDP at factor cost and market priceCoefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) -2.604 .094 -27.832 .000

Log_of_GDP_at_Factor

_cost1.373 .022 .997 62.886 .000

a. Dependent Variable: Log_of_Import_of_non_oil

Coefficientsa

Model

Unstandardized

Coefficients

Standardized

Coefficients

t Sig.B Std. Error Beta

1 (Constant) -2.705 .095 -28.352 .000

Log_of_GDP_at_Marke

t_Price

1.385 .022 .997 62.713 .000

a. Dependent Variable: Log_of_Import_of_non_oil

Here also, we can see that the result is statistically highly significant. In both the cases the results are significant at 1% level and therefore rejecting the null hypothesis β=0 leading to the conclusion that import of non-oil is highly dependent on GDP at factor cost and market price.

Model Summary

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .997a .993 .993 .052339

a. Predictors: (Constant), Log_of_GDP_at_Factor_cost

Model Summary

Model R R Square Adjusted R Square

Std. Error of the

Estimate

1 .997a .993 .993 .052482

a. Predictors: (Constant), Log_of_GDP_at_Market_Price

From the above table we can see that both R square and adjusted R square is very good which can be concluded of having a high goodness of fit.

The Openness Index is an economic metric calculated as the ratio of country's total trade, the sum of exports plus imports, to the country's gross domestic product.The interpretation of the Openness Index or degree of openness is the higher the index the larger the influence of trade on domestic activities.

Year Degree of Openness at factor cost Degree of openness at market price

1986-87 11.11 10.05

1987-88 11.42 10.30

1988-89 12.23 11.09

1989-90 13.80 12.55

1990-91 14.24 12.92

1991-92 14.98 13.64

1992-93 16.63 15.11

1993-94 17.46 16.03

1994-95 18.07 16.51

1995-96 20.48 18.67

1996-97 19.80 18.16

1997-98 19.64 18.08

1998-99 19.06 17.64

1999-00 20.17 18.53

2000-01 21.71 19.95

2001-02 20.88 19.28

2002-03 23.57 21.78

2003-04 24.85 22.96

2004-05 29.49 27.03

2005-06 32.94 30.24

2006-07 35.72 32.88

2007-08 36.41 33.45

2008-09 41.77 39.35

2009-10 36.16 34.11

2010-11 38.99 36.31

2011-12 45.42 42.30

2012-13 45.84 42.55

2013-14 44.00 40.58

We have seen that the correlation between degree of openness and GDP is also very high of approximately 0.95.