Effect of liberalization on eco

LPG reform

Foreign borrowing

• Commercial & public entities of country borrow from other countries to fill shortcoming of domesting financing
• Pvt sect - ecb
• Reduce borrowing cost, provide fund for investment

• Systemic risk - unexpected change in interest rat - fed rate rising-- increasing borrowing cost in India
• Exchange rate risk - dollar denominated loan
• Sovereign debt risk - 1991 crisis
• Political risk - unexpected policies change - china us trade war

• Masala bond - rupee denominated debt securites issued outside by indian companies , investor take currency risk , more secure

Sovereign external borrowing

• • Budget 19 -20 - sovereign bond floated in foreign country denominated in foreign currency 
• • Solve problem of crowding out investment
• • Allow interest rate to fall , (as inflation reduce)
• • India -sovereign external debt/ gdp - 5% low
• • Provide yield curve - benchmark - ind corporate to raise money in foreign market
• •  globally interest rate low - win - win situation

• • Volatility in india's exchange rate > yield of ind gsec
• • Unpleasant exp of other emerging eco
• • Small in beginning - later increase in dire situation
• • More dependent on foreign CRAs
• • Bad fiscal health - foreign investor will pull plug on foreign investor
• • Rajan - foreign borrowing will not reduce govt bonds in ind market , rbi will sell more bond to counter forex flow, inflation and rate increase

BOP

• • Captures Foreign exchange transaction, 3 acct
• • Financial acct - trade in stocks, bonds, commodities , real estate etc.
• • Current account - export , import , interest payment , pvt remittance
• • Cap acc - net change of asset & liabilities, external lending & borrowing, foreign currency deposit of bank , external bond of goi , fdi etc

• • Currency convertibility
• • Full current acc convertibility in 1994 , cap acct not fully convertible
• • Ease with which currency converted in gold , foreign currency
• • Cap convertibility  - ease with which foreign investor buy ind asset such as bond , equity & vice-versa
• • Factor for adverse BOP
• • Eco factor - high import than export - BOP deficit, high inflation in domestic eco , foreign goods bcom relatively cheaper as compared to domestic good, cyclical fluctuation - recession & depression
• • Political factor - instability - reduce cap inflow
• • Social factor - high popu growth in developing country
• • Remedies - export led growth , susidies , incentives   duty drawback , logistic improvement
• • Control unnecessary import like gold in times high CAD
• • Control inflation , check currency manipulation & arrest volatility in currency exchange market - encourage  - Fdi , FII , cap flow

 Capital acc liberalization

•  Capital control - rbi , govt , regulatory bodies
•  limit on total fpis in domestic securities , with separate limit on different kind
• • Cap on ecb , masala bond together
• • Restriction on investor such as PF, insurance firm
• • Restriction on maturity on underlying investment
• • Only high credit quality companies can go for ecb

• Against -
•  lead to export of domestic saving,
• • Tax avoidance - weaken tax auth to tax domestic financial activities , income , wealth
• • macroeconomic instability, volatile capital movement
• • Ineffective MP - speculative investment , movement of capital 
• • Financial bubble - investment in real estate & equity market by unbridled foreign borrowing
• • Rise in external liabilities, pressure on Forex reserve
• • Banking system not strong enough - NPA

• Favor - 
• Bring financial efficiency , innovation , specialization due to global competition
• • Attract foreign cap - can supplement domestic saving
• • Resident have greater choice of investment
• • Help  complement current acc- capital control not effective with current acc convertibility
• • Changed global scenario - eco not insulate from external development - cap control ineffective
• • Tarapore com, 1997, 2006 rbi - full convertibility in phased manner , subj to condition
• • Fiscal stability low fd, price stability - low inflation
• • Stability of financial inst & market, low NPA

Current account deficit (cad)

• • CAD - 2.4 % of GDP(18-19)
• • Trade deficit - 6-6.5% gdp
• • Main factor for Rupee volatility
• • Rise in crude , x merchandise export , increased remittance offset deterioration
• • Govt step - attract dollars- enable ecb, removal of limit on fpi , masala bond(18-19) exempted from withholding tax
• • Swap for bank ,  with japan - $75 bn , BRICS CRA
• • Recapitalization of exim bank

• • Exim bank - Lend for export firm in India
• • Support oversea buyers, Indian supplier for export of development & infra project, equipment & g&S
• • Concessional finance scheme - goi support ind bidder in strategic infra pro
• • Extend LOC - 233 covering 60 country with $25 bn credit commitment
• • Grass root initiative & development - GRID - grassroots exporters

• • Swap facility provided - $5bn dollar - rupee swap by rbi for bank to support liquidy
• • Reduce interest by bank - cope with double financial repression
• • Increase RBI forex reserve - help dealing in hot money outflow , BOP crisis
• • Control appreciation of Rupee (increase flow of rupee)
• • Decrease financial stress on NBFC

Foreign trade policy - 2015-20

• • 20 Categories - 80% export (x diversification )
• • Inverted duty structure
• • US pharmaceutical generic drug rule tightening
• • MEIS, SEIS
• • N Committee on trade facilitation
• • 2nd generational reform
• • Open economy further
• • Allow Indian companies to make acquisition abroad

Devaluation/ depreciation

• • Devaluation - fixed / semi- fixed exchange sys
• • depreciation  - floating exchange sys - global demand- supply determine countries exchange
• • If import inelastic like crude , the depreciation may worsen BOT thus depreciation can be both +ve, -ve
• • Depreciation lead to Inflation
• • Competitive devaluation of currency (beggar-thy-Neighbor policy) - adverse effect on economy of other - no gainer if all devalue - Great depression (1929-33)