Globalisation and Balance of Payment are part of RBI Grade B syllabus – Phase 2 ESI
GLOBALIZATION- OPENING UP OF THE INDIAN ECONOMY
What is globalization?
Globalization is used to describe the growing interdependence of the world’s economies, cultures, and populations, brought about by cross-border trade in goods and services, technology, and flows of investment, people, and information.
The wide-ranging effects of globalization are complex and politically charged. As with major technological advances, globalization benefits society, while harming certain groups.
Example of Globalization
- A US based car manufacturer can manufacture products in various countries, assemble them in a different country, sell the finished product in another country.
- Assembling of Iphone-11 models in India
- Increasing IT and BPO opportunities in India
Effects of globalization
Globalization helps economies to focus on their comparative advantage. It helps the economies to produce those goods in which they specialize and import other goods from rest of the world. This promotes innovation, more variety for consumers, lower costs, more availability of capital.
Globalization is like technological progress. Both disrupt some livelihoods while enlarging the economic pie and opening new and better-paying job opportunities. The internet, for instance, made many jobs obsolete but also created new higher-paying jobs and industries unheard of only a few decades ago.
Protectionism helps select groups but at a higher cost for everyone else. Imposing tariffs on steel, for instance, helps certain domestic steel producers, but many more jobs depend on businesses that need some imported steel to make goods that are affordable.
Globalization in India has been advantageous for companies that have ventured in the Indian market. By simply increasing their base of operations, expanding their workforce with minimal investments, and providing services to a broad range of consumers, large companies entering the Indian market have opened many profitable opportunities.
There are 3 types of cultural impacts of Globalization:
- Harmonization-Cultural integration, adoption of other culture
- Homogenisation– Local culture changed by foreign culture, accepting the one culture.
- Hegemonization – Domination of one culture
Factors aiding globalisation in India
1) Technology: It has increased the speed of communication manifolds. The phenomenon of social media in the recent world has made distance insignificant. It has opened up many job opportunities.
2) LPG Reforms (Liberalization, Privatization, Globalization): The 1991 reforms in India have led to greater economic liberalisation which has in turn increased India’s interaction with the rest of the world. Following steps were taken for Globalisation:
(i) Reduction in tariffs
(ii) Liberal Trade Policy
(iii) Controls on foreign trade have been removed
(iv) Open competition has been encouraged.
(v) Current account convertibility and partial Capital Account convertibility
(vi) Increase in Equity Limit of Foreign Investment
3) Faster Transportation: Improved transport makes global travel easier enabling greater movement of people and goods across the globe.
4) Rise of WTO: The formation of WTO led to reduction in tariffs and non-tariff barriers across the world. It also led to the increase in the free trade agreements among various countries.
5) Improved mobility of capital: There has been reduction in capital barriers, making it easier for capital to flow between different economies. This has increased the ability for firms to receive finance. It has also increased the global interconnectedness of global financial markets.
6) Rise of MNCs: Multinational corporations operating in different geographies have led to a diffusion of best practices. MNCs source resources from around the globe and sell their products in global markets leading to greater local interaction.
7) Cheap and skilled workforce: The presence of cheap and skilled labour force acts as an advantage for India. This helps in attracting investment.
BALANCE OF PAYMENT
What is the Balance of Payments (BOP)?
The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.
In other words, it is the record of all international trade and financial transactions made by a country’s residents.
We prepare BOP statement to know the international economic position of a country which helps in better monetary and fiscal policy decision making. It tells us whether country saves enough to pay for its imports. It also reveals whether the country produces enough economic output to pay for its growth.
BOP COMPONENTS
Current Account
The current account measures a country’s trade balance plus the effects of net income and unilateral payments.
Visibles: This records the transactions related to import and export of goods. It is the merchandise import and export. The money earned from Indian exports of goods is credited to the account and payments for imported goods are debited.
Invisible Trade: This can be studied in the form of 3 categories:
- Services: It includes a non-factor services (known as invisible items) sold and purchased by the residents of a country, to and from the rest of the world. Payments are either received or made to the other countries for use of these services. Example: The income earned from the sale of Indian services abroad is known as an invisible export
- Income: It includes Profits, dividends and interest earned by residents of India on their investments abroad and vice versa.
- Transfers: These refer to those receipts and payments, which take place without any service in return. E.g. gifts, donations, personal remittances, transfer payments.
Capital account
Capital account of BOP records all those transactions, between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government. It is related to claims and liabilities of financial nature.
- Foreign Investment: Foreign investment includes Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI or FII) including American Depository Receipts/Global Depository Receipts (ADRs/GDRs)
- FDI and FII: FDI is made to acquire controlling ownership in an enterprise but FII tends to invest in the foreign financial market. Any investment in Indian financial markets above 10% stake in a company is considered as FDI and investment equal to or less than 10% stake is termed as FPI.
- Loans and borrowings: Loans include external assistance, external commercial borrowings
- Purchase and sale of capital assets– Sale of capital assets by India is recorded as credit while purchase of capital assets is recorded as debit.
- We can classify capital inflows in the capital account as debt creating and non-debt creating. Foreign investment (both direct and portfolio) represents non-debt creating capital inflows, whereas external commercial borrowing (ECB), loans and non-resident deposits are debt-creating capital inflows.
Difference between Current Account and Capital Account
Foreign exchange reserves: Also called OFFICIAL RESERVE TRANSACTIONS
Official reserve transactions can be studied under 4 heads
What Are Special Drawing Rights (SDR)?
Special drawing rights (SDR) refer to an international type of monetary reserve currency created by the International Monetary Fund (IMF) in 1969 that operates as a supplement to the existing money reserves of member countries. SDRs augment international liquidity by supplementing the standard reserve currencies.
- The value of the SDR is calculated from a weighted basket of major currencies, including the U.S. dollar, the euro, Japanese yen, Chinese yuan, and British pound.
- The SDR is neither a currency nor a claim against IMF assets, but a potential claim against the freely usable currencies of IMF members.
What Is a Reserve Tranche?
A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes—without a service fee or economic reform conditions.
Errors and omissions: Net errors and omissions constitute a residual category needed to ensure that accounts in the balance of payments statement sum to zero.
Current account balance + Capital account balance + Reserve balance = Balance of Payments
The balance of payments should balance. All inflows of money into the country should be matched by an equivalent outflow (across all the accounts – current, capital and financial). In practice, this is simply not going to happen. There are so many transactions and they are so complex that it would be impossible to record them all accurately. As a result, a figure is added in for errors and omissions to ensure that the balance of payments balances.
This means that the relationship between the accounts is as follows:
Current account = capital account + financial account + errors and omissions
Read more in Part 2