Balance of payments and Devaluation

Balance of Payments is a systematic record of all economic transactions undertaken by residents of one country i.e. households, firms and the government with their counterparts in rest of the world. It consists of:

1. Current Account,

2. Capital Account and

3. Reserve Account.

The Current Account covers transactions in goods and services and transfers during the current period. Current Account = Value of Exports- Value of Imports + Net Transfers from Abroad = Net Exports + Net Transfers from Abroad

The current account records exports and imports in goods and services and transfer payments. When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.

Directorate General of Foreign Trade (DGFT) organisation is an attached office of the Ministry of Commerce and Industry and is headed by Director General of Foreign Trade. Right from its inception till 1991, when liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation. Keeping in line with liberalization and globalization and the overall objective of increasing of exports, DGFT has since been assigned the role of “facilitator”. The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.

Foreign Trade Policy of India has always focused on substantially increasing the country’s share of global merchandise trade. Accordingly the Government of India has been taking various steps towards boosting its trade with the rest of the world by adopting policies and procedures which would help to increase and facilitate both exports and imports with the other countries of the world.

India’s exports declined by 1.3 per cent and 15.5 per cent in 2014-15 and 2015-16 respectively. The trend of negative growth was reversed somewhat during 2016-17 (April-December), with exports registering a growth of 0.7 per cent to US$ 198.8 billion from US$ 197.3 billion in 2015-16 (April-December). During 2016-17 (AprilDecember) Petroleum, oil and lubricants (POL) exports constituting 11.1 per cent of total exports.

India’s exports to Europe, Africa, America, Asia and CIS and Baltics declined in 2015-16. However, India’s exports to Europe, America and Asia increased by 2.6 per cent, 2.4 per cent and 1.1 per cent respectively in 2016-17 , while exports to Africa declined by 13.5 per cent. USA followed by UAE and Hong Kong were the top export destinations.

Value of imports declined from US$ 448 billion in 2014-15 to US$ 381 billion in 2015-16, mainly on account of decline in crude oil prices.Top three import destinations of India were China followed by UAE and USA in 2016-17.

India’s trade deficit declined by 13.8 per cent (vis-à-vis 2014- 15) to US$ 118.7 billion. Furthermore, it declined by 23.5 per cent to US$ 76.5 billion in 2016-17 (April-December) as compared to US$ 100.1 billion in the corresponding period of previous year.

The exchange rate policy is guided by the broad principle of careful monitoring and management of exchange rates with flexibility, while allowing the underlying demand and supply conditions to determine exchange rate movements over a period in an orderly manner. Subject to this predominant objective, RBI intervention in the foreign exchange market is guided by the objectives of reducing excess volatility, preventing the emergence of destabilizing speculative activities, maintaining adequate level of reserves, and developing an orderly foreign exchange market.

In modern monetary policy, a devaluation is an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency or currency basket. In contrast, a depreciation is a decrease in a currency’s value (relative to other major currency benchmarks) due to market forces under a floating exchange rate, not government or central bank policy actions.

India has been experiencing trade deficit for more than a couple of decades. The value of Indian rupee  has been fluctuating and devaluation could not bring sufficient impact to the export sector. This is because the Indian economy is heavily dependent upon imported energy and industrial goods.

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