Economic Survey Volume 2 Chapter 6 (Latest)
CHAPTER – 6
GLOBAL ECONOMIC ENVIRONMENT
- The global economy is gathering pace and is expected to accelerate from 3.2% in 2016 to 3.6% in 2017 and 7% in 2018.
- It is supported by better than expected results in the first half of 2017 in Euro Area, Japan, emerging Asia and Russia even though there are downward revisions in USA and UK.
- World trade volume is projected to increase from 2.4% in 2016 to 4.2% in 2017 and 4.0% in 2018.
- According to the IMF,
globalrecovery is not yet complete as inflation is still below the target in most advanced economies and commodity exporters (particularly fuel exporters) have been hit due to fallin oil prices.
INDIA’S BALANCE OF PAYMENTS DEVELOPMENTS
- India’s balance of payments situation, which has been benign and comfortable since 2013-14, continued to be so in the first half of 2017-18.
- On a cumulative basis, India’s CAD increased from US$ 3.8 billion (0.4% of GDP) in H1 of 2016 -17 to US$ 22.2 billion (1.8% of GDP) in H1 of 2017-18 – due to higher trade deficit brought about by a larger increase in merchandise imports (gold and oil) relative to exports.
- While trade deficit widened in H1 of 2017-18 compared to H1 of 2016-17, the improvement in
invisiblesbalance and the net capital flows dominated by foreign investment and banking capital was more than sufficient to finance the CAD leading to accretion in foreign exchange reserves in H1 of 2017-18.
- In H1 of 2017-18, there has been an increase in net
invisiblessurplus to US$ 52.5 billion from US$ 45.7 billion in H1 of 2016-17, with increaseobserved in net services and net private transfers.
|Net services receipts (on YoY basis during H1 of 2017-18)||Reasons||Net private transfers (on YoY basis during H1 of 2017-18)||Reasons|
|14.6 %||Rise in net earnings from travel & communications, computer services||10.0 %||Remittances by Indians employed overseas increased|
- India has remained one of the major recipients of
cross borderremittances and according to World Bank, India will remain a top remittance country in 2017, followed by China, the Philippines andMexico. However, among the structural factors, tightening norms of hiring foreign workers in USA, labourmarket adjustment in GCC countries and rising anti-immigration sentiments in many source countries pose considerabledownside risk.
- Notwithstanding a decline in FDI inflows in H1 of 2017-18, net foreign investment recorded a growth of 17.4% owing to a sharp rise in portfolio investment to India.
COMPOSITION OF TRADE
FTP- Mid Term Review and subsequent
- MEIS incentives for two sub-sectors of Textiles i.e. Ready Made Garments and Made Ups increased from 2% to 4% involving additional annual incentives of Rs. 2743 crore.
- Across the board increase of 2% in existing MEIS incentive for exports by MSMEs /
- To provide an impetus to the services trade, the SEIS incentives have been increased by 2% for notified services such as Business, Legal, Accounting, Architectural, Engineering, Educational, Hospital, Hotels
andRestaurants amounting to Rs. 1140 crore.
- New trust based Self Ratification Scheme introduced to allow
duty freeinputs for export production under duty exemption scheme with a self-declaration.
- The validity period of the Duty Credit Scrips has been increased from 18 months to 24 months to enhance their utility in the GST framework. GST rate for transfer/sale of scrips has been reduced to zero from the earlier rate of 12%
- A professional team envisaged to handhold, assist and support exporters with their
export relatedproblems, accessing export markets and meeting regulatory requirements.
- New Logistics Division created in the Commerce Department to develop and coordinate implementation of an Action Plan for the integrated development of the logistics sector.
- For clarity, a negative list of capital goods which are not permitted under the EPCG (Export Promotion on Capital Goods) scheme has been notified.
- The concept of Domestic Tariff Area (DTA) sale from Export Oriented Units (EoUs) on concessional and full duty has been removed and hence, the limit on
entitlementof DTA sale has also been removed. Issueof working capital blockage of the exporters due to upfrontpayment of GST on inputs has been
Under advance authorization Export Promotion for Capital Goods (EPCG) Scheme, 100% EoU’s, exporters have been extended the benefit of sourcing inputs/capital goods from abroad as well as domestic suppliers for exports without upfront payment of GST.
Special package for employment generation in leather and footwear sector:
- The Eleventh Ministerial Conference (MC11) of World Trade Organization (WTO) ended without a Ministerial Declaration or any substantive outcome (led to a deadlock without any outcome on agriculture or even a work programme for the next two years).
- However, the existing mandates and decisions ensure that work will go forward and members will continue to work on issues such as the permanent solution on public stockholding for food security purposes, agricultural Special Safeguard Mechanism
andagricultural domestic support.
- India stood firm on its stand on the fundamental principles of the WTO, including multilateralism, rule-based consensual decision making, an independent and credible dispute resolution and appellate process, the centrality of development, which underlies the Doha Development Agenda (DDA), and special and differential treatment for all developing countries.
- The Indian logistics industry is estimated to be worth around US$ 160 billion in 2016-17 and has grown at a compound annual growth rate (CAGR) of 7.8
per centover the past five years.
- The Indian logistics market is expected to reach about US$ 215 billion in 2019-20, growing at a CAGR of 10.5%.
- Improved logistics have huge implications on increasing exports, as a 10% decrease in indirect logistics cost can contribute to around 5-8% of extra exports.
- India has improved its ranking in the “Logistics Performance Index” (LPI) from 54 in 2014 to 35 in 2016.
An anti–dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping is a process where a company exports a product at a price lower than the price it normally charges on its own home market.
- In 2016, 300 anti-dumping investigations were initiated by all countries with India leading at 69 investigations followed by USA (37).
- Products wherein anti-dumping duty has been imposed fall in the products group of Chemicals & Petrochemicals, Products of Steel & other metals and Rubber or Plastic Products.
- Major products were found to have been dumped from China.
FOREIGN EXCHANGE RESERVES
- Within the major economies running CAD, India is among the largest foreign exchange reserve holder and sixth largest among all countries of the world.
- Foreign exchange reserves grew by 14.1 percent on a y-
o-ybasis from end-December 2016 (US$ 358.9 billion) to end-December 2017 (US$ 409.4 billion) and it grew by 10.7 percent from end-March 2017 (US$ 370.0 billion) to end-December 2017.
- The level of foreign exchange reserves can change due to change in reserves on BoP basis as well as valuation changes in the assets held by the Reserve Bank of India.
|Increase in Foreign exchange reserves-|
H1 of 2017-18
(US$ in billion)
H1 of 2016-17
(US$ in billion)
|Nominal terms(including valuation effects)||30.3||11.8|
- Valuation gain, that mainly
reflectthe depreciation of the US dollar against major currencies, amounted to US$ 9.3 billion during H1 of 2017 as against a loss of US$ 3.7 billion during the same period of the preceding year.
- The import cover of India’s foreign exchange reserves was 11.1 months at end-September 2017 as compared with 11.3 months at end-March 2017.
Apr- Dec2017, rupee appreciated against most other major currencies on the back of significant capital flows, both foreign portfolio flows and FDI.
Improved macroeconomic conditions coupled with reforms initiated by the Government were mainly responsible for the buoyant capital flows.
|Currencies||Appreciation of rupee (in %)|
- In terms of the NEER (
trade weighted) rupee appreciated by 4.3% against a basket of 36 currencies in April-December 2017-18. In terms of the REER ( trade weighted) against a basket of 36 currencies, the rupee appreciated by 5.2 per centin April-December 2017.
- Though the rupee continued to be broadly stable, the appreciation of REER indicates that India’s exports might have become slightly less competitive.
India’s External Debt stock increased to US$ 495.7 billion at
- The long-term debt also showed growth, though its share remained almost same at 81.3%. The increase was primarily due to the increase in foreign portfolio investment in the debt segment.
Short termdebt grew by 5.4% due to increase in trade relatedcredits.
- Share of Government (sovereign) debt in total debt increased to 21.6% end-September
2017 (from 19.4% at end Mar 2017) mainly due to other Government external debt component reflecting the increased level of foreign portfolio investments in Government securities.
- Foreign exchange cover
tototal external debt also improved to 80.7% at end Sep 2017 (as compared to 78.4% at end Mar 2017).
International comparison of external debt situation based on World Bank data shows:
The prospects for India’s External Sector in this and coming year look bright with world trade projected to grow at 4.2% and 4% in 2017 and 2018 respectively from 2.4% in 2016; trade of major partner countries improving and above all India’s export growth also picking up. The downside risks lie in the rise in oil prices.
However, this could also lead to higher inflow of remittances. The supportive policies like GST, logistics and trade facilitation policies of the government could help further.