PPT: Economic Survey- 2 Notes | EduRev

Indian Economy for UPSC CSE

UPSC : PPT: Economic Survey- 2 Notes | EduRev

 Page 1


Economic Survey 
2019-20
Volume 2 Chapter 3 
“External Sector”
Page 2


Economic Survey 
2019-20
Volume 2 Chapter 3 
“External Sector”
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
Page 3


Economic Survey 
2019-20
Volume 2 Chapter 3 
“External Sector”
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
Introduction
India’s external sector gained further stability in 2019-20 H1, witnessing 
improvement in Balance of Payment(BOP) position. 
India’s Foreign Reserves are comfortably placed at US$ 461.2 billion as on 10th 
January 2020. 
This improvement in BOP was mainly due to narrowing of Current Account 
Deficit(CAD) from 2.1% of GDP in 2018-19 to 1.5% of GDP in 2019-20 H1. 
This narrowing of CAD was mainly driven by easing crude oil prices. 
Export growth remains subdued with external demand weakened by slowdown in 
global investment, output and heightened trade tensions, notwithstanding resilient 
service exports. 
Increase in Service Imports is inevitable with increasing FDI and “make in India”. 
Our External Debt to GDP ratio is in a comfortable position as of September 
2019(20.1% of GDP). 
India’s External Liabilities(Debt+Equity) to GDP has increased at the end of June 
2019, primarily due to increase in FDI, ECBs and FPI.
Page 4


Economic Survey 
2019-20
Volume 2 Chapter 3 
“External Sector”
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
Introduction
India’s external sector gained further stability in 2019-20 H1, witnessing 
improvement in Balance of Payment(BOP) position. 
India’s Foreign Reserves are comfortably placed at US$ 461.2 billion as on 10th 
January 2020. 
This improvement in BOP was mainly due to narrowing of Current Account 
Deficit(CAD) from 2.1% of GDP in 2018-19 to 1.5% of GDP in 2019-20 H1. 
This narrowing of CAD was mainly driven by easing crude oil prices. 
Export growth remains subdued with external demand weakened by slowdown in 
global investment, output and heightened trade tensions, notwithstanding resilient 
service exports. 
Increase in Service Imports is inevitable with increasing FDI and “make in India”. 
Our External Debt to GDP ratio is in a comfortable position as of September 
2019(20.1% of GDP). 
India’s External Liabilities(Debt+Equity) to GDP has increased at the end of June 
2019, primarily due to increase in FDI, ECBs and FPI.
Importance of BOP Surplus
For an open and emerging economy like 
India, improvement in BOP position is 
critical. 
It ensures financing of essential imports 
like Crude oil and other such 
“manufacturing inputs” that are critical for 
providing livelihoods to crores of people 
in India. 
India has mostly remained in Current 
Account Deficit(Leakage > Injection). 
Therefore, a continuous improvement in 
our BOP is a reflection of global 
sentiment that continues to believe in 
India’s growth story. 
This sentiment is important if India wants 
to access “foreign savings” for investments 
for pushing India towards the path of 
becoming a $5 Trillion economy.
Undercurrent of Vulnerability 
Improvement in BOP for the period 
2014-19, was driven by easing crude 
prices and increased FDI inflows. 
Unlike 2014-19, improvement in 
2019-20 is driven by fall in imports 
which followed fall in GDP growth 
and some easing in crude. 
If we continue on the path of low 
growth, our future FDI & FPI inflows 
might get reduced, weakening the BOP 
position in the future. 
So, the components that have 
contributed to strengthening of BOP 
need to be further enhanced and those 
that have not will need to be re-
energised with an effective policy mix.
Page 5


Economic Survey 
2019-20
Volume 2 Chapter 3 
“External Sector”
Balance of Payment
Current 
Account
Capital 
Account
Trade  
Balance
Invisibles 
Balance
Goods 
Import
Goods 
Export
Services  
Trade
Transfer  
Payments
Factor  
Incomes
Foreign  
Investment 
(FDI & FPI)
ECBs, 
NRI deposits 
Etc.
External  
Assistance
Introduction
India’s external sector gained further stability in 2019-20 H1, witnessing 
improvement in Balance of Payment(BOP) position. 
India’s Foreign Reserves are comfortably placed at US$ 461.2 billion as on 10th 
January 2020. 
This improvement in BOP was mainly due to narrowing of Current Account 
Deficit(CAD) from 2.1% of GDP in 2018-19 to 1.5% of GDP in 2019-20 H1. 
This narrowing of CAD was mainly driven by easing crude oil prices. 
Export growth remains subdued with external demand weakened by slowdown in 
global investment, output and heightened trade tensions, notwithstanding resilient 
service exports. 
Increase in Service Imports is inevitable with increasing FDI and “make in India”. 
Our External Debt to GDP ratio is in a comfortable position as of September 
2019(20.1% of GDP). 
India’s External Liabilities(Debt+Equity) to GDP has increased at the end of June 
2019, primarily due to increase in FDI, ECBs and FPI.
Importance of BOP Surplus
For an open and emerging economy like 
India, improvement in BOP position is 
critical. 
It ensures financing of essential imports 
like Crude oil and other such 
“manufacturing inputs” that are critical for 
providing livelihoods to crores of people 
in India. 
India has mostly remained in Current 
Account Deficit(Leakage > Injection). 
Therefore, a continuous improvement in 
our BOP is a reflection of global 
sentiment that continues to believe in 
India’s growth story. 
This sentiment is important if India wants 
to access “foreign savings” for investments 
for pushing India towards the path of 
becoming a $5 Trillion economy.
Undercurrent of Vulnerability 
Improvement in BOP for the period 
2014-19, was driven by easing crude 
prices and increased FDI inflows. 
Unlike 2014-19, improvement in 
2019-20 is driven by fall in imports 
which followed fall in GDP growth 
and some easing in crude. 
If we continue on the path of low 
growth, our future FDI & FPI inflows 
might get reduced, weakening the BOP 
position in the future. 
So, the components that have 
contributed to strengthening of BOP 
need to be further enhanced and those 
that have not will need to be re-
energised with an effective policy mix.
Current Account Deficit
Current Account Deficit is generally financed by surplus in Capital Account. 
Therefore, increasing CAD as a ratio of GDP worsens the BOP by drawing on 
the Forex Reserves or building the potential to worsen it by increasing the 
external debt burden. 
But India’s CAD/GDP ratio has been significantly improving since 2014. 
The backup to CAD is the “Forex Reserves” with increase in the CAD/Forex 
ratio reflecting the decreasing strength of the backup. 
This decreasing strength depreciates the “Nominal Exchange Rate(NER)”. 
Ceteris Paribus(keeping all else equal), depreciation in NER makes imports 
costlier besides discouraging FPI, which increases the pressure on BOP to 
further worsen. 
CAD/Forex ratio increased from 10.6% in 2013-14 to 13.9% in 2018-19 and 
depreciated the rupee from Rs 60.50 to Rs 69.92.
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