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Business Environment PGEMP Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  External Sector Policy @SPJIMR Courage. Heart  What...

Business Environment PGEMP Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  External Sector Policy @SPJIMR Courage. Heart  What is External Sector Policy? The policy that deals with the transactions of the Domestic citizens and Government with the rest of the world. What are the Goals of the external sector policy? 1. Economic Growth 2. Protecting the domestic economy 3. Managing the currency rate @SPJIMR Courage. Heart  What does the external sector policy do? GDP = C + I + G + NX GNI = C + I + G + NX +NR External Sector Policy attempts to influence NX and NR in the aggregate demand function. The government policy stand could be “Inward looking policy” ie. Protectionist “Outward looking policy” ie. Pro globalization or Pro-integration @SPJIMR Courage. Heart  External Sector Policy in India Pre-Reform (1951-1991) Post –Reform (1991-2024) “The Inward looking policy” restricted “The Outward looking policy” encouraged foreign participation through foreign participation through High Tariffs, QRs, Quotas and license Dropping the Tariffs to the ASEAN level and dominated the trade QRs, Quotas and licenses were scrapped. Restrictions on the foreign investments The economy was opened up to different Restrictions on the ownership forms of foreign investments component of the foreign firms Limits of foreign ownership enhanced, in some cases even up to 100%. The Policy of Atmanirbhar Bharat in 2020 @SPJIMR Courage. Heart  How does the External Sector Policy function? Policy Variables Target Variables Custom duties Real GDP Import Restrictions Exports Quotas Imports Export incentives Management of current account balance Opening up to foreign capital Management of foreign capital Opening up to foreign labour (Immigration) Value of currency Currency convertibility @SPJIMR Courage. Heart  What is Balance of Payment? Balance of Payments (BoP) is a systematic record of all external financial transactions between residents of a country with the rest of the world during a specific period, usually a financial year @SPJIMR Courage. Heart  The structure of BoP accounting Balance of Payments Capital Account or Current Account Financial Account Services and Portfolio Trade Balance Income Balance Direct Investment Other investment Investment (invisible balance) BoP is based on double entry system of recording and most countries of the world follo “International Transaction Reporting System (ITRS)”. @SPJIMR Courage. Heart  Disaggregated items of Current Account (Net) Current Account = Net Trade balance + Net Invisibles I. Merchandise (Trade balance) = Goods exports - Goods imports II. Invisibles (a + b + c) a. Net Services = Service exports – Service Imports Net Services includes Travel, Transport, Insurance & Miscellaneous that includes software, business, financial and communication services b. Transfers = Official and Private (NRI Remittances) c. Income = Investment income and compensation to employees Current Account Balance = (I + II) @SPJIMR Courage. Heart  Disaggregated items of the Capital Account/Financial Account Capital Account = Foreign Investment + Loans + Banking Capital 1. Foreign Investment (a+b) a. Net Foreign Direct Investment: In India and from India. Equity + Reinvested earnings b. Net Portfolio Investment : In India and from India. FIIs, ADRs/ GDRs 2. Loans (a+b+c) a. External assistance b. Commercial Borrowings c. Short term credit 3. Banking Capital (a +b) a. Commercial banks: NRI deposits b. Others 4. Other capital @SPJIMR Courage. Heart  Basic accounting practice in BoP Credit Debit Net (Inflow) (Outflow) 1. Current Account (a+b) a) Merchandise (Goods) Trade b) Invisibles 2. Capital Account a) Foreign Investment b) Loans c) Banking capital c) Other capital 3. Errors & Omissions 4. Overall Balance (1+2+3) 5. Monetary Movements Changes in Reserves (-)Increase/ (+) Decrease Currency movements (appreciate/depreciate) @SPJIMR Courage. Heart  The Current Account Deficit as an important macroeconomic indicator If total inflow < total outflow on the current account the country is said to be in current account deficit. The current account deficit has to be financed by ‘capital inflows’ if the currency has to remain stable. This dependence of foreign capital flow increases the vulnerability of the economy as capital inflows are volatile @SPJIMR Courage. Heart  How does the value of a currency get determined? In Foreign Exchange Market through forces of Supply and Demand @SPJIMR Courage. Heart  What is the foreign exchange market? The foreign exchange market (forex, FX, or currency market) is a platform where the world’s currencies are traded, on an online trading platform. It is a 24-hour trading platform in which the participants are able to buy, sell and speculate on currencies, the volume in this market is huge. The participants in the foreign exchange markets include Banks: commercial, Investment and central banks Investment managers, hedge funds, forex brokers MNCs Individual investors. @SPJIMR Courage. Heart  How is the exchange rate determined? In a free market Supply and Demand of The Central Bank intervention foreign exchange determine the The central banks ‘buy foreign exchange rate. exchange’ from the market to avoid appreciation of the currency. They When Inflows>Outflows in India, the build foreign exchange reserves. Indian Rupee appreciates or USD depreciates, the exchange rate changes from 1 USD= Rs. 80 to I USD = Rs. 70 The central banks ‘sell foreign exchange’ in the market to support the currency from depreciating. When Inflows