 Good afternoon everyone. So we had done almost five chapters so far, is it not? We finished our basics on income, public finance, money, banking, inflation, those were the things which we have completed so far. So as part of our core economics subjects, we will be looking at the external sector first today, which is actually almost towards the end of the economic survey. Then we will get back to the sectoral perspective. Two sectors we will be covering today, agriculture and the services. What will be remaining is industry and infrastructure. We have bulked those chapters together. So industry and physical and digital infrastructure for social infrastructure, varieties of infrastructure, they have divided two chapters. So those two chapters and the industry related thing will be the last session which we will be holding in the next week. So today we are going to see three chapters. I can understand that you have a feeling that this is never ending. But if I rush a bit then you will say that we didn't understand anything because madam went fast. And then already economic survey is one such thing where there is lot of data, facts, figures. You will feel very unconnected between two different slides. So I didn't want to complicate the situation further. So let's keep things as simple as whatever we do, we do today. And then the rest of the three chapters, the industry and social, physical, digital, all those things and the subsequent class with that we will finish. There is one chapter on climate change which we wouldn't be teaching much as a classroom session. So that chapter alone you may have to read on your own. Out of the 12 chapters we are discussing 11. So one chapter alone you will have to read. So mostly environment based things and they would have taught you in other classes also. I wouldn't feel that it would be mostly economics to tell you. So you will be able to read that particular chapter which is on the climate change. The rest of the things we will see today and then. So before getting into the external sector I also want to refresh your whatever you have studied the basics of it. You would have studied about the balance of payment, the current account, the capital account and the details of it. And you would have studied about FDI, FBI, all those things and certain topics on foreign exchange reserves and current account convertibility, capital account convertibility external that all these things have been covered in the class, right? We have heard all these words. So there was a discussion on the balance of payment with the certain details on the current capital and the components of it. We know how to balance the balance of payment. We are all familiar with it. We know what is current account deficit, current account surplus, capital account deficit, capital account surplus, VOP deficit, VOP surplus. All of these things and balance of balance of payments. You have heard this word also, right? So if you are thorough with all these words we will go ahead in case if we find any difficulty in relating that to the present data and the status. I have got that original the PPT which you would have undergone in the class. If it is required you stop me if we are not able to link between the data and the graphs. You can ask me to explain again. I will go back to the conceptual slide then I will get back to the right. We have been taught with the near everything nominal effective exchange rate, real effective exchange rate, currency appreciation, depreciation, currency appreciation, depreciation has been taught. Near and rear we have done any formulas on it. Explanation, interpretations. So that part alone there is a question which is getting repeated from that area not repeated but it's being asked in the area. So we will slow down a bit to look at the concepts and we'll get back. So they have given the title for this chapter as a watchful and hopeful. So we know there were lots of difficulties which we explained in the first chapter itself. Sequential things. COVID followed that there was soil crisis followed that there was war followed that again now we are having inflationary situation. So different types of economic turmoil are happening across the countries at the global level. So we are going to look at now in terms of numbers. See when we are saying trade, we have to assume two keywords below that exports and imports. The moment you say exports and imports, you have to add two more words to it which is goods and services. So as long as we are discussing growth in global merchandise trade, when you hear to the word merchandise trade, you have to remember only about the goods. We heard merchandise trade means all the things which you can touch and feel. You are not supposed to talk about though it's written as trade, exports, imports, all those things. Don't put services into this merchandise means physically touch and feel things. So which means it is all about the goods. So you can see first of all there is an introduction about the global level trade. So the expectation is obviously that there is a shrinkage in the global level trade, mainly because of the difficult situations. You can see the years of discussion is from 2018 till up to 2023. The black and the red line is about the projection. So what has actually happened is all the green and the blue line. So 2020, obviously, you can see that there was a dip coinciding with our co videos and slowly it is recovering. But what they are forecasting is it will actually decline. Right? So we saw the inflate inflationary condition we saw the monetary tightening happening at different situations, locations and countries. So therefore, there was already a warning which was given that everything will slow down in terms of growth. The growth slowing down is also being extended to the trade. Right? So therefore, we are giving a very lower level of this growth, which is somewhere between three to 3.5%. So this is where the trade organizations are projection. We have to be watchful, but slowly we have to become hopeful. That's what they want to convey. This is a comparison between world and India. You can see India is in blue colored line and then the world picture is given above. Whenever you see this data given as percentage of GDP, I want to give you a caution. Right? Anything which is presented as percentage of GDP in external sector is only to convince ourselves it is not true. I'll tell you the meaning of it. Assume that India has to pay some $500 to some country. Then they will say they will multiply this $500 with Indian rupees. Say for example, 882 rupees, they will multiply and they will arrive at a value because denominator GDP is in Indian rupees. We are following what we are talking. If I have to say what is the percentage of imports expenses to India's bill, then I have to put how much we are spending on the imports divided by GDP. GDP will be in INR Indian rupee. Humorator is a conversion of the dollar into Indian rupee. Can you pay any of these payments? Maybe some countries they are slowly accepting us to pay the INR. But can you treat Indian currency as an international currency? As long as India's currency is not becoming international currency, any of this data know whichever is given as percentage of GDP is only to understand the volume. None of this data should give you the confidence that India will be able to pay the import bill. India can print currency, but India cannot meet import bill with printed Indian currency. You understood the context? Yes or no? Pana iru ku kudukamudi aadu. Kudukkaratku denominator inga podala. The denominator should always be 4x reserves. To that only you should actually put to this as percentage, but they won't do it. I'm going to show you several indicators today which will be given as percentage of GDP. This is only an indicative number to understand if India is earning 100 rupees, how much rupees is it earning or spending through trade? To that extent you register this data into your mind. This doesn't mean any capability for India. And this was the reason you remember in 1991 we had one balance of payment crisis. Have you heard about BOP crisis in 1991? What was the crisis all about? We were not able to do what? Not, we don't go up to the dates. First you have to talk about we were not able to repay the imports. Interest is up and on. First to the major commodities have to be imported and what would have been the major commodity all time? Oil, fuel. So we didn't have dollars to pay even for two weeks of imports. That was the situation when India declared BOP crisis. Why it could have printed currency and given back the money? You are doing so much during COVID, you are creating so much of backup for it. Why were you not able to print currency and give it back to other countries? Because India's currency is not an international. Therefore, understand the significance of the graph. So what is going to come? So now we can see that total trade as percentage of GDP. If I say it for the world, it means something else. For the world out of the dollars, if you say $100 is the total learning of US, if you keep this graph as US, 56% of them, it is being earned through trade. That's what is being meant for US and it means it because dollars are traded. Is it not? But that's not the meaning for India. We have 45% of our GDP getting represented through the trade. But it doesn't exactly mean what it wants to say. But at least the volume wise, we can appreciate India that it is following the trend, what the global trend is. It's not our announcement of globalizing. It is the acceptance of the global level countries to take Indian rupees. We want to be very strong and powerful. And we want to carry that pride. But if I give see money's role is only this, no, whichever is getting accepted as a medium of exchange, that becomes money. But our thing, the moment they get INR in their hand, other country people should have the confidence that they'll be able to spend it back somewhere else. Unless and until that confidence is there, we may aspire for greater things. But it has to be achieved only when our currency appreciates, when our debt level goes down, when we have very good foreign exchange resources, when we have very good, you would have studied that BOP surplus and deficit at that time, you would have even studied about the develop the country's scenario. So now I as we go ahead, I'll tell you about that point also. But aspirations are there, we want to become and it's also written in economics survey that we want to become this wanting to become will happen one day when countries accept Indian rupees. Right. So as of now, we are giving a good picture that we are catching up with the global level trade levels. This diagram or this graph is actually trying to tell about the export and import performance and India's rank in world trade. So you can see that when you say merchandise exports, you have to assume it as goods. The rest of the things are all services. The third line will be showing both the goods plus the services. So in case of the goods, our rank or the export performance has slowly improved, we can say that we have marginally increased in the export of the goods. Whereas in the services, we remind the same. So both together, there is a marginal increase. When we come to the import performance, you can see that in import of the goods also we have increased. All you have to do is compare this first line with this first line. So with the world merchandise exports, when we have improved by 0.2 percentage in the world merchandise imports, we have improved by 0.4 percentage, which means that we have actually started importing more than the exporting. Right. Looking at the world commercial services imports here also we have increased though in the exports we remind the same, but services imports we have increased. So overall picture has also improved. This is not actually okay, but this is actually, this is services imports. You will be always thinking that India is very good in services, we may be importing less than we may be exporting more, which is also true in one sense. But this commercial services is getting dominated with the transportation services. That's one of the reasons why we are importing more when compared to the exports. Right. Exports, we are very good in IT. I'm going to show you the services chapter immediately after finishing external sector so that there will be a connect between the chapters. But of course, we have imports also here. India's rank in world trade. So in merchandise exports, we have improved from 18 to 21. Should I call it as an improvement is a question. merchandise imports, we have definitely improved over there because we are importing a lot. Service exports are almost reminding the same service imports are also almost reminding the same. Right. Maybe we are becoming better off in service exports one rank we have gone ahead. Whereas in terms of imports, we are reminding the same. This trade, you know, the rank, don't take it in absolute sense. Again, it is economics. If some other country performed bad, we will become better off, though we have comparatively less bad, something like that. So somebody is falling down very much. We are falling down a little bit. So in the ranking, the order will be still maintained. So don't just get carried away by the ranking. This share is a good thing for us to remember, like, just to have an idea. And now this data will be actually asked in the examination, but you need to know how India is performing in middle of all this situations. Right. Now a bit more of detail on the exports and imports, whatever we said as the overall picture. The moment we'll say exports, you should now think about all the commodities what India can export. At the back of your mind, you should now dig out examples. What is India exporting? What is India exporting? Refine the petroleum. Right. So that's why they have given you only two categories here, POL and non POL. Right. Non POL will be bulking up. Can you give me some example for the non POL? Other than the refined petroleum, is India exporting anything else at all? Karma products? Gems. Gems and jewelry. Yeah. We do export. Then iron and steel. Nobody is from the subsistence sector here or urban allies. Example could iron and steel verbal. Yeah. Palm oil. Processed. Processed to palm oil. Okay. Okay, like the petroleum thing, we are processing it and then doing it. Okay. Any agricultural product we are exporting? No subsistence sector representation in the class. Spices we are exporting. Then coffee, tea, condiments, textiles, rice, onion, tea. Yeah, of course. So all of them we are getting it bulked under the non POL exports. Now look at the color of the graphs. We'll first look at the petroleum and oil thing, the green colored thing. In the recent past, we are actually doing well in it. But of course, in quarterly, there was a based upon the price of the oil, obviously, there will be fluctuations because if we import only first of all, we'll be able to process it and then export it. But in case of the non POL exports, that segment is actually very big when compared to this POL. But why we always say that petroleum oil is the major item which is exported because as a single item, it will be having a major share. If you look at this blue thing, it will be having a number of items into it. None of them will be taking up as much share as the POL. That's why the diagram is given like this. Right. So we can see that this is all the volume of money what it has earned. So it's all written in US dollar billion. So through the non POL exports, there's a slight downfall. Again, when we are talking about exports, you have to remember it as the global consumption. Whenever the consumption is getting into trouble, people won't import. So we won't be able to export. So we may be having things ready in our hands. But if there are no takers, we won't be able to export. It doesn't mean that we don't have items to export. People don't demand. Then we won't be able to export. So there was a demand slump and now only to slowly improving. So accordingly, when the demand improved, we did export a lot. Is it not after 2020 in 2021, you can see that it gradually increased. And then now again into the difficult situation. Look at the merchandise imports now. Again, you are having three categories POL, gold and silver imports. And non POL, non gold, which means other than these two items, they have clubbed it in the third graph. So again, petroleum and oil imports, you can see that the bars is taller than the previous slide. Obviously, for the domestic consumption, we are importing it. A part of it, we are processing it and then we are exporting it. So the bars are standing taller, the orange colored bars. And you have the yellow color for the gold and silver imports. Obviously, they would have made this yellow color for us to remember the gold, right? So you can see that the color is actually fluctuating. If you think that gold and silver import is for domestic consumption, you have to have an alternate idea also. Gold is not imported all the time for consumption by women. Gold is imported by men because they think it as a method of savings or investment. So always they will relate gold and women in terms of consumption. So this is not a consumption graph what I have given here. This is a different type of an economics graph where we want to say that whenever people feel that the financial situation is in trouble, they will look for physical assets to go and put their savings. One of which is gold. Whenever share market is in trouble, you will see gold will do well. Gold's demand will increase at that time. That is what is the meaning of this particular graph. And then we look at the green colored thing. What are the other items which we are importing? What will be there in that green bar? Petroleum is out, gold and silver is out. Restarting commodities. Automobiles of course, semi-conductor, semiconductor things. We had a lot of struggle, electronics, edible oil, exactly, definitely, petroleum and edible oil. Both are in trouble in India. That's all. Raw materials for farmers. Any examples? Sugar we are importing. No, fertilizers. We are importing fertilizers. So there are lots of chemicals, fertilizers, drugs, high order drugs. We are very good people in the generic drugs, but we are not very good people in high order antibiotics kind of thing. So still there is a larger chunk in the imports from the pharmaceutical side. electronics, automobiles, there are lots of other things. So we have a larger bill for the imports. And you can see that the import US dollar billion is all above 100. You can see the export US dollar billion didn't even touch 100 in the exports slide. Whereas the import slide had, apart from the two key items, the one green bar itself is crossing above 100. So this itself is going to give us evidence that we are ending up with deficit. So they have combined both of these two graphs into one graph in this where you can see first one by one one color we'll pick up at a time total imports is the blue bar that 100 and above and all what we mentioned right now it's again written in US dollar billion. The orange colored bar is talking about the total export. So it's obviously there is a deficit which we mentioned a few minutes before. What is there on the right hand side? Mercantile trade balance. So that's what is the difference between these two bars which is being represented here, which is running as a low colored line. So the difference between the exports and the imports, all the values are written in negative. Right? Now this is about the resilient performance of services trade. Of course, in the next chapter also, we are going to talk a lot about the services related thing. They are very particular to talk about the services here because you remember in the last class we mentioned two categories of services. Contact and contact less things, right? So contact intensive services, contact less services, contact less services survived, contact intensive services fell into trouble. That is why the title of this table as a resilient. We hope we know the meaning of that. And you can see that resilience coming back on the transportation. You will be able to categorize, right? Manufacturing is a contact-based thing. Maintenance, transport, travel, construction, all of these things are requiring contact, contact intensive services. And you have to see the difference in the numbers across the table, how they have gradually improved. You can see it moved from 21 to 32.7 and all, 19.8 to 35.8. So this is half only thing. But these two columns you can compare and you can see the first few of the services which we want to call as the contact intensive services. They have all improved a lot and which is what they want to call it as a resilient thing. These things they would have performed earlier also as the same thing, contact less. You can see that financial services 4.3, 4.8, 5.5, 5.6. You won't see a much difference because across the time it was performing the same. But you will see a very good jump in the upper part of the table. So that is another thing and you will also see that in terms of telecommunications, computer and information services also there is a substantial jump in terms of the exports. Why are we talking about maintenance, transport, travel and construction in services? I hope you are now very clear upon the components which you want to call as the manufacturing and components what you want to call as the services. If I say computer is here, should I call it as a manufacturing sector item or should I call it as a services sector? It is a service though it is physically tangible. You can touch it and feel it. Still you want to call it as the benefits what is derived out of it is the services. Similarly, when you say about the construction, there will be lots of things which will be services like the architectural thing, the interior thing. Many things will be services in telecommunication. If you put up that tower, which could be belonging to the manufacturing sector, but what is the benefit which is derived out of it will be counted upon in the services. So there will be always a mixing and the division of the manufacturing and services. So we have a larger list here. Now we are getting into this. We talked about the goods that word merchandise in the first two three slides. We are now talking about the services. You know any other word like merchandise for the services comparable word invisibles. You have to call it as balance of trade for the merchandise trade balance of invisibles for the services, right? So here when we are talking about the services, export and import and net of services. Green color is given for export. You can see in all the places in all the quarters we have done very good in the services export. Services import has been increasing. You have to notice that services import did not remind the same. It kept increasing and net of services that one of the reasons why net of services actually may be fluctuating or not increasing as much as exports is increasing because there is an increase in the import of services, mainly in terms of your the previous slide, whatever we have given data on the imports also you can see transportation. The value you was dollar billion 35.8 telecommunications, computers and other other business services. It's lumped up, but travel and transportation. These are the two major items which you can see billing a lot in the services import, right? So that's another reason why we are not able to improve the net of services. There is one small box item given in the economic survey. I am going with the survey pages. It may be looking like I'm jumping into concepts, but I don't have an option. I'm going with the pages of survey. There is a representation about the free trade agreements. You would have studied about regional trade agreements, preferential trade agreements, free trade agreement, common market, monetary union, economic union, higher and higher levels of economic integrations. Yes or no? What is free trade agreement? If two countries agree for free trade agreement, there will not be customs duties or the restrictions will all be removed, mostly price based restrictions. We also have quantity based restrictions that won't be removed completely and all. We know what is the difference between price and non price restrictions. If I impose a sanction, it is non price. But if I increase the custom duty, it is price. You know the meaning of the word sanction? Who is imposing sanctions on who? US will be always imposing sanction on various countries, like China, like North Korea, like Pakistan. Okay, so we have different types of restrictions which will be removed between two countries for improving the trade between the two countries. That is a free trade agreement. India gives a bit more of names to this. It just doesn't stop itself saying it as the FDA. We have key words like SICA and SIPA, which is something like comprehensive economic cooperate, cooperation, partnership, kind of different words. So you will be seeing all the history of whatever has been given here, regional comprehensive partnership agreement, African continental free trade area. So they design or putting key words into this. This is only to say that countries should be able to freely trade so that trade creation and trade diversion can be improved. We know the difference between these two things. Trade creation and trade diversion, which is the impact of your regional trade agreements. Yes or no? We have heard these two words. Assume that we are doing one FDA with Sri Lanka. Examples, okay. So when you do an agreement, then you have to freely trade. So what I'll do is I'll go and see what I wouldn't have a trader in one particular item at all. But it's Sri Lanka is suddenly offering me a new trade item. I will accept it. But in which case, I will call it as a trade creation because I got into FDA because I suddenly feel that that item is cheaper. I will import into my country. Trade diversion is because FDA has been signed with Sri Lanka. I used to take a coffee from Kenya. But now I am stopping the coffee from Kenya and I am diverting that trade towards Sri Lanka. So I am stopping elsewhere and I am diverting it. So two activities will happen as a result of trade creation and this FDA trade diversion. So India is trying to say that this multilateral trade negotiations are actually becoming difficult. You know, now everywhere there is regional things happening. So WTO's major agenda is every country should trade with every other country. But because of these regional agreements, it is all again getting localized. And obviously regional agreements will happen only with the neighbors, which means that globalization of the trade agenda itself is sometimes getting into trouble. But at least we should participate in the regional trade agreements so that this kind of exchange between the countries will improve. So that's one of the tables which is being given here. Now again, we are getting back to the core of our external sector where we want to talk about current account balance and as a percentage of GDP. Again, as a percentage of GDP, it's a cautious measure to look at. But we can definitely look at the current account balance. What is there inside current account balance? Now you have to answer. Otherwise, we are not finishing this life. Current account balance like balance of trade and balance of invisible because this is current account balance. Balance of trade will be usually negative. Balance of invisible will be in positive. What is there inside this balance of invisible? Services one, that is three. I want to call your remittance as the transpose. What is here? Second item. Is it only the interest? I want two more components. Dividends, one more component. Louder. Interest agreed. Dividends agreed. I want one more component. Profit on all of these three things will be called as investment income. Do we know that services will be in positive? Transfers will be in positive, but investment income will be negative. You have to answer. 3 o'clock afternoon after lunch. Please help me. There are three components in services. Balance of invisibles is positive. Agreed. Why is it positive? You have to first tell me that answer. Balance of trade negative. You all agreed. Why? So you have to tell with mathematics. Okay. You always write it as X minus M. You never write it as M minus X. X minus M. It is negative and answer, which is why you said balance of trade is negative. Agreed. Now I have to write X minus M for balance of invisibles. Is it not? Yes or no? But balance of invisibles, there are three things. Services X minus M will be positive or negative. That will be positive. Services, it will be positive. Okay. Transfers, the third thing which you wanted to mention. What is the example in transverse? Remittances and some official exchange between the government governments, the charitable donations, grants, all those things will come into it. This is what is called as a secondary income. In the first chapter, somebody was asking a doubt. I don't know the online also. There was some division of primary income and secondary income. Primary income will be this thing, our investment income. Secondary income will be about the transverse. Right? So let us come back to the point. So transverse will be positive. Investment income. What is there in investment income is interest and dividends and profits. Right? So now you have to tell interest is related to debt, dividends and profits is related to FDI and the FIA, whatever we have taken in the capital account. I think we had a discussion about this in the last class. Investment income components, do we know why we are writing interest and investment dividends and profits here? You remember our budget? Public finance class? Two accounts? Budget two accounts? Revenue account and capital account. Under revenue, we had revenue receipts, revenue expenditure, capital receipts, capital expenditure. When you said capital receipts, you had two types. Debt creating, non-debt creating. Whenever you said debt creating, you mentioned all the types of borrowing of the government under DCR. Whenever you borrow, you have to give back interest, is it not? You will come and keep that interest whatever you have to give under revenue expenditure because you have taken the borrowings under the capital account, you have to pay the interest back to it under the revenue account and it is you have to give back. Giving back is an expenditure for the government. So it was placed under revenue expenditure. You can also give loans that was also placed under your capital account where you would have said as the capital expenditure. Loans to the states, loans to the schemes. So when government gave the loans, it will receive the interest which was placed under revenue receipts, non-tax revenue receipts. Agreed? Everybody is clear in this. Same picture you put into your mind here when you study current account and the capital account. FDI, FII, they are all to be placed as non-debt creating capital account. We heard the word similar sounding, non-debt creating capital account under the capital account. The loans, whatever you borrow from the other countries or from the international organizations or from IMF, World Bank, whatever it is, you place it under the capital account will be the DCR here for which you have to pay back the what? Interests. So debt creating, you have to pay back the interest. Can India give loans to other countries? Do you believe in that? Rarely it happens. So you will also get some interest. The one point here between the capital account and the current account is in the budget, we had two headings to deal with this revenue receipts and revenue expenditure, but here you have only one heading to deal with it, which is called as the investment income. You are able to understand what I am telling. If you write this interest here, you have to do this X minus M. What is X minus M in interest? Parallels. What is X minus M in interest? Interest received is X. Interest paid is M. From today onwards, you have to put one more meaning to this X and M. It is not exports and imports. It is receipts and payments for the country. Now, you have to stand inside RBI. Country is Selava. Everybody heard? X and M is not exports and imports from today. It is only whether the country is earning or it is spending. Whatever it is spending, it could be interest, it could be dividends, it could be profits, whatever it is, they are all YAM. Whatever is earned, interest, dividends, profits, everything is X. Now, you tell me. Interest received will be bigger or interest paid will be bigger. So, X minus M will automatically become into negative. That's one part for the DCR. Now, you tell for the dividends and profits. Now, India is receiving FDI, FYI for which it has to share back the dividends and the profits. Now, the question is India doing FDI with other countries? Do you have any hope on India? Is India going and doing FDI and FYI in other countries? Some people are still not convinced. India is also going and doing FDI and FYI in other countries, but RBI will always try to control them. Why? You want to go and do business in Dubai. If you want to put establishment in Dubai, I have to give you dollars. I am RBI. I don't have dollars to give even for my input. So, I won't encourage it. So, now, come back to the question. When I am doing FDI in another country, what should I get back? FDI, I didn't know this. When I do FDI, I should get back profits. When I invest in the other countries' shares, FYI, when I do it, I Indian do it in other countries, I will get back dividends. FDI means you get profits. FYI means you will get dividends. So, these two things coming back to us. So, those two things, what you are getting as the dividends and the profits will be kept in exports. What you have to give us the dividends and the profits, you have to keep it under imports. Now, this X minus M, will it be positive or negative? Are we doing more FDI or are we getting more FDI? We are getting more FDI. When we are getting more FDI under capital account, we have to give more dividends and profits under current account, agreed or not. Therefore, whether it is interest, whether it is dividends, whether it is profit, our X minus M will be only, don't be very happy that you are getting lot of FDI. If you are getting lot of FDI, you should go and do things which will be import substituting. You are following what I am telling. You have to go FDI, you have foreign dollars in your hand and you have to do a business. What should you do the business in is, either you have to do export promotion or you have to do import substitution. What is the meaning of import substitution? If I am getting this Pena from China, I should not get any further. I should do this pen in Chennai itself with the FDI. Do you understand? Otherwise, if you get FDI, it will result in sharing more of profits to the foreign countries and it will result in current account deficit widening. Don't assume it is only because of merchandise imports India is suffering from current account deficit. India is suffering because we are getting money under capital account. So, every action has a consequence to it. Therefore, this connection, this investment income is a very, very important component between the current account and the capital account. We followed this. So, now you look at the slide, current account balance, the components of it is given. Current account has become into deficit. Whenever the bar is toppling below zero, it is deficit. Can we interpret this now? This line is zero. If you see the bar falling down, it is all deficit. India had one or two, some small time period when we had had surplus. We should be proud of it. Once in a while we should become proud of ourselves. But quarterly, you can see that the deficit is actually widening. The deficit widening, the main culprit will be the petroleum oil imports on one side. The other side, this kind of investment income also pulling us down. So, if we are borrowing more under capital account, we have to give back more interest under the current account. So, that is also there. So, this graph is exactly what we discussed so far. You can see that what are all the things above, they have a dissipated this current account balance. The tallness of this bar is less, but the depth of this bar is high, which is why overall we have ended up in negative. That's the first observation. The second thing is, LO is net to transfers. Net to transfers is basically the remittances what we receive and the they make use of the word net to say that received minus the paid x minus m. Can remittances go out of our country? Possibility. Foreigners will also come and work here in India and send some money back to their country in terms of dollars. So, they make use of the word net, but still that is positive. That's why it's all on the other side of zero. And then net services. So, we had in the services. So, services, investment income on the transfers. Services on the transfers are on the good side. Then we had this balance of trade, which was obviously on the bad side, right? Net to merchandise trade balance, which is the light green area. This is the BOT negative. This is services. This is the transfers. Now comes this net investment income, the dark colored. This is where all your three components are staying. What are they? Interest, dividends and profits. They are also on the negative side, which is pulling down the positivity of the services on the transfers. But B O I overall will be positive. B O T will be negative. This positive will not be able to cover this negative, which is why overall, it results in negative. My problem is they have put two items of services on the top and one small item of that service was on the bottom because that is on the negative side. So, basically, you have to see that this green bar, no, the light green bar, which is the trade merchandise trade, will be bigger than 1, 2. This will reduce the height of this. So, this this part, you know, this will go and reduce the height of this like this. So, this tallness will not be sufficient to deal with this depth. Therefore, the result becomes overall negative. That is why our current account falls into deficit. Are we done with this graph? This is again one unrealistic or non-realistic data for India. Current account balance as percentage of GDP. India versus select countries. Of course, for other countries, it may be some meaning. Let us see that they have given two colors here. Consider this Q to 2022 as post COVID for you to easily remember and read the interpretations. Q for 2019 as pre COVID, that was just the beginning of the COVID. So, you can see that India, we have highlighted the data. Slightly, it was on the circular side. Current account balance as percentage of GDP. But now, it is on very much on the negative side. Mainly to indicate that we have to pay a lot for the imports. You remember our formula C plus I plus G plus X minus M, right? So, in that, that X minus M will become negative. X minus M as a whole, it will become negative. It is negative. So, that is going to go on reduce the national income. What should you want to call it as domestic income? Income of the country. How much is that value? To get total GDP is what they want to calculate. So, that's the calculation which they have presented here as minus 3.5. There are countries which are having very different different scenarios. Everywhere, you have to look at the graph whether post COVID, that's the blue thing. Whether they have come on to the positive side, except for China, is it not? Indonesia? Yeah, that is pre COVID. Blue color line. China, Indonesia, they are the two countries who are actually doing a surplus in their current account. And China's story is very different. They had a very difficult period even before every country fell sick. So, therefore, Q4 itself was COVID for them. So, at that time, their surplus was less, but now they are doing very well, right? So, that's one observation from the thing. Composition of net invisibles. Now, you all know what we are talking about. Is it not? We are talking about the services and they have given the diagram without the trade into this. This is obviously that services thing. This is the transfers. This is the investment income. Right? So, the positivity of the services account is being pulled down by the negativity of the investment income. Services as such may be vibrant, but your behavior in the capital account will have a say upon the current account, particularly your balance of invisibles. Right? But as such, whether the services for this area has increased, definitely it has increased. Which means that we are exporting more and we are also getting lot of remittances. I'm going to show you another graph where we are going to declare that India is one of the countries on the top receiving lot of remittances across the world. Right? This is that remittance related data as shown by World Bank. You can see India is on the top. Indians don't work for India. Is it not? There is a heavy brain brain happening. Brain is getting brain, but financially we are becoming better off because we are sending it back to the country. Lots of implications to this graph, but we should be happy that at least remittances are coming back to the country. So, we have a very strong foundation family based life still continuing, which is why they are sending it back to the families here. Coming to the second account of the current account balance, we finished the CA. Now, we are looking at the capital account balance. Capital account surplus is narrowing amid global uncertainty. What are the items under capital account? Can somebody list them down? FDI, FII, loan, loan from where? There will be short-term loans, which we will be even borrowing from other countries, banks and other things. Then there will be loans from other governments. Then there will be loans from international organizations, right? So, there are varieties of loans which are there. FDI, FII loans, all these items has another side also. When I say you these components, you have to work out in your mind, we are doing FDI in other countries. You heard what I said. We are doing FII in other countries. We are giving loans to other countries. So, the other side of the coin is also there. Whatever we receive FDI, FII, loans received will all be placed under what? Between X and M. I gave you two meaning to X and M. Is it not? What is X? What is M? X means X4. Second meaning? Whatever is received is X. Whatever is spent is M. So, FDI received is X or M. Still the resolution is not coming. German person coming and investing in India and doing FDI. What should I call it as? X or M. Why is it M? I am asking in capital account, some German companies coming and doing FDI inside India. What should I call this? Implication of this will come under current account later. First you tell me for this. It is X. Everybody agrees with me. So, FDI received, FII received, loans received, short-term loan received, external commercial borrowing received. Do you know the meaning of the word external commercial borrowing? External commercial borrowing ECB? Yes or no? If you say yes, you have to tell me what it is. Private sector people will go and borrow internationally from international banks. Government can borrow, private sector can also borrow. Registered companies can borrow. When registered companies borrow, that will be called as external commercial borrowing ECB. These are the components in the capital account. And ECB is one of the major items under the debt creating capital account. Similar sounding. Question has been repeatedly asked about capital accounts and non-debt creating items. The answer is FDI and FII. We heard non-debt creating capital account. You know the components of capital account. You have to answer it as FDI and FII. Sometimes they ask it also as FTI. You know the meaning of FPI? Portfolio investment. Both are I am using here in a similar context. Portfolio investment is going to mean that basket of decisions. I do in Summon Shack, Summon, different kinds of instruments. Risk taking, less risk taking, long-term, short-term, different companies, derivatives. Its portfolio is kind of a wealth management. So either it can be called as FPI or it can be called as FII. Whatever it is they are to be called as non-debt creating capital account. The rest of the things ECB, the loans, everything will be DCR of the capital account. So now that you have said that whatever you receive is all placed under reacts and whatever we do as FDI, we do as FII. And we give sometimes loans to the other countries. All of those things will be placed under M. So H-M will be what? Capital account will be mostly in surplus for India. It has to be in surplus for India. If it is not in surplus for India, what will happen? Current account is already in deficit. So VOP will also become into deficit. We don't want VOP deficit. We want a VOP surplus. That surplus is achieved through capital account. That is the title here. Now can you read this title? Narrowing surplus amid global uncertainty. We have a surplus in capital account but it is narrowing. Now you can go on assume why is it narrowing? FDI is coming is less. FPA coming is becoming less. When whatever is coming inside the country is becoming lesser, obviously my surplus will be lost. No. We are able to relate concept with the news. FDI, FII, everything became lesser because of the monetary tightening elsewhere. So when things are coming in less are kept under X for us, so that surplus is actually falling. So that's the meaning of this. We have we have had good surplus net capital account balance. Capital account as percentage of GDP we are reserving for our comments. But at least we can see that whether the capital account was in surplus. You can see there is a very little surplus in the recent past because of the global uncertainties. Right? And there is when you're talking about this FDI and FII, you have to also be familiar with the word capital flight. I told you two things. FDI, FII, we receive FDI, we do FII and FDI in other countries. But this FII will fly away any type. Yes or no? German company coming and investing in business in India is FDI. German company coming and buying shares from Indian share market is FII. If something goes wrong at the global level, he will not be able to pull back the FDI immediately but he will pull back FII. Then also the surplus will come down. That is why I told you whatever goes out of the country is all yuck. We heard whatever comes inside the country is all yuck. Whether it is going into the pocket of RBI or is it going out of the pocket of RBI is the matter. Right? Why am I saying RBI? Can we make use of dollars? Assume by remittance your cousin or your brother sister is sending from America to you. Can you take dollars, go to Santoshu for market, buy commodities? Are we allowed to do it? Somebody was asking about international level of Indian currency. This all should happen. This is where we were talking about the capital account convertibility, which is not there in India. We are still in partial, full current account convertibility but partial capital account convertibility. We will not be allowed to hold dollar denominated accounts. Remittance the dollar varum but we can't open a savings account which can be dollar denominated. Every single rupee which is earned as dollar inside the country goes into the pocket of RBI. The moment you hear the word foreign exchange you immediately remember RBI. It doesn't go to government. Be very, very careful in the interpretation. Dollars don't go to government. Dollars go only to even if government is getting funding from abroad, from World Bank, from IMF it has to go and give it to RBI. RBI is the only person who will be able to control and make use of foreign exchange reserves. So coming on to right hand side diagram composition of capital account balance like the current account balance we are going to look at. Laws of things on the above side you can see that right? Mainly because all the things what we are receiving we are placing it under. That's why it is positive. What are all there? One color brown net other capital including RDS. Other capital is it could be banking capital or the external commercial borrowing and other things can be placed here. Between the banks the low color thing in the recent past it has been in negative. I'll tell you an interpretation for this banking capital. If I am a business company I go and borrow from the international banks which means borrow means I get the money. As soon as I get the money they'll come and keep it as a loan they'll place it under RDS. But you will be sometimes seeing it to be negative. Then you should not assume that foreigner came to Indian bank. You will never assume such things I know that but still because I'm asking you to do the reverse things. We receive FDI, we do FDI. We receive FIA, we do FII. So I go and borrow from international banks the foreigner should come and borrow from my bank no? Am I not? That will not happen. This negative is not because of that. I'll tell you why this negative comes. This negative comes when we repay back the loan. Followed what I said. Like how the FIA goes out of the country and we called it as capital flight. Whenever you give something put it under YAM. When you see something in negative you are giving. When you are seeing something in positive you are receiving. So this yellow color though it is called as the net banking capital. The word net banking capital which means that I borrowed less this year but I had to give that a lot of loan which I had borrowed earlier. Which is why negative. Then what? We have the net loans. Loans is also having difference in their placement. We have received more loans and the net foreign investment. This is FDI and FII. So we have received more FDI and FII. Then we have done as FDI and FII. Therefore the positive and the negative things. So the negative side is lesser. The positive side is bigger. Therefore we have capital account surplus. Done with the basics. POP no. In a similar way. We can we actually have BOP surplus. What is the meaning of the BOP surplus? How do you arrive at BOP? Current account plus capital account. Current account is in. Capital account is in. Overall we are having positive which means what? We have a positive capital account which is bigger than negative current account. So we have some positive and what do we do with this positive? RBI will take it definitely. No doubt in it. RBI will take and do what? It has to place it in reserves. So if you want to write. I have some space here okay. Current account is capital account. Negative account and this is positive and I have some surplus. What do I do with the surplus? What do I do with this surplus? I am RBI. What do I do with this? I have to go and keep it in the foreign exchange. How is India earning in foreign exchange reserves? Now you tell me. How did BOP became surplus? Capital account. India is earning dollars through capital account not through current account right. So they will write this thing itself as a formula current account plus capital account plus what? 4x. That's why you said balance of payment will be always zero. Positive and negative should get managed. Follow? That is called as balance of balance of payment. BOP can become deficit. BOP can become surplus. You agree to that? Depending upon capital account, current account balance. BOP can become deficit. BOP can become surplus. Surplus Vanda Kaila if you get 100 dollars in a year what do you do? You have to go and place it in the foreign exchange reserves. So you put that also into the equation and the equation will become zero. Fine. When there is a balance of payment deficit what will you do? $100 is deficit. Capital account la pano illa current account deficit is becoming larger. Then what will happen? You have to take it from the foreign exchange reserves. At that time you have to write plus 100 here when you placing it in the surplus you have to write it as minus 100 here. We followed what we said. Yes or no? I'll give some random numbers. Current account deficit is minus 5. Capital account surplus is plus 9. What will be the answer? When I bring this to the other side of the equation it will be written as minus 4 no? You all agree? This then it will become zero. Appa balance of payment is balanced. But minus 4 even though the meaning of this minus 4 is this minus 4 is actually placed in the foreign exchange reserves positive. It was a surplus that is why you minused it on the other side no? You have minus 9 and plus 5. Answer will be minus 4. If you want to make this equation into zero, you have to write it as plus 4 on the other side. There will be a balance of payment table in the economic survey. Whenever you have the balance of payment surplus situation they will write minus in the foreign exchange reserves. You followed or not? Like your naming fiscal deficit and giving it a positive number 4 percent. Yes or no? There you swapped the formula. Do you remember how you write the deficit formula? Revenue deficit? Revenue deficit? Louder. Revenue expenditure minus revenue receipt. Do we write formulas like that? Only government will like that. Write like that. See here the formula is x minus m. Income minus expenditure but government will write it as expenditure minus income. You understand how the numbers are being played? There it will write fiscal deficit 4 percent. Here we are going to write balance of payment as the original thing. Income minus the spending and deficit or surplus but to balance the balance of payment you have to write it in the opposite way because you want to make the equation into zero. Therefore if you look at the balance of payment table in the budget they'll write every item. Services, transfers, investment income, all your FDI, FII everything they'll write and in the year if India is in a BOP surplus they will write that amount whatever is going into the foreign exchange reserves as minus. We followed what we are talking. Everybody is following. We are balancing the balance of payment by making it into zero and data interpretation from the table should be very very clear. I have not put the table here but you should understand it will be written plus when we have a BOP deficit here minus when we have BOP surplus here. Are we done? Any doubts? Okay this they're talking about the FDI you are seeing the title net. You should assume that the X minus M is already over. You followed? Title X minus M of FDI is already over. That's why the title but still we are positive which means that we are receiving more FDI than we are doing the FDI. That's the meaning of this positive thing. So we have towel bars over here. Of course that's a quarterly bar the last two things. So one whole year we have had a good US dollar billion of FDI. This is about foreign portfolio investment that's that FII what we were referring to. You're seeing that something toppled. What is the meaning of this? FPI getting into negative is not that we are doing more FPI in other countries. It's because the flight of the capital is happening. People were withdrawing their capital from our country mainly because of inflationary pressures followed by the monetary tightening complicated with this war conditions and everything. So slowly towards now end of it now we are seeing some positivity in the foreign portfolio investment. The two colors given here is about the debt and the equity. I'm sure in the share market class they would have taught you about the shares and the derivatives. We know the differences some basics of it. Yes or no? You've heard about the word debentures. Debentures they are all negative instruments. It's like taking loan. If I take loan from you I have to give you back interest. If I make you invest in my share I have to give you back dividends. Yes or no? You're able to see the color difference here. Equity is all share related. Debt is all some examples are like the debentures. So based upon the underlying instrument the colors have been given here. So still debt related thing is in negative. We are not getting good amount through that but equity people are coming forward to come and invest in the shares in Indian companies. So this is your overall BOP the surplus in the balance of payment and adequate forex reserves and import cover. The blue color is all current account the green color is all capital account and then they have also presented BOP as percentage to GDP. You know the meaning of it. So I am just going to tell you about current account on the capital account colors. You can see that 2021 they have split it across the quarters. So overall you actually see current account mostly being in the deficit in this graph toppled below this zero and capital account has been in surplus side except for one quarter of this 2021-22 where the FBI flight happened so much that even the capital account got into the deficit side. You can see this particular small green area. So the rest of the time we always see the capital account being surplus on the other side. This capital account surplus is what is actually covering the current account deficit and overall we are getting the surplus in the balance of payment. That's this diagram and by making this a surplus in the balance of payment we have accumulated dollars into the foreign exchange reserves. This is one of the reasons why India is still not becoming an international currency with INR. We are not earning money into foreign exchange reserves yet. We are only receiving capital and accumulating it into the foreign exchange reserves. Today we can boast ourselves like we have 550 US dollar billion this much of money with us. We are the sixth largest foreign exchange reserves holding in the whole world. All those boasting is not the real boasting because the underlying fact how did you accumulate foreign exchange reserve is not being answered through the current account but it is answered through the capital account. Capital account means any one day we have to give it back. So therefore we are not actually very happy about the way how the forex reserves have been accumulated but we can be happy on the other side. What is the other side? At least we are getting some investments and somebody is trusting us and giving us loan. Is it not? They trust that we will give it back to them. So at least we have earned the trust of the global level countries. So therefore to that question we can be happy about ourselves. Now you are seeing on this right hand side 563 US dollar billion that's the latest data about the foreign exchange reserves. For some reason you please remember this number. Because this is a essential macroeconomic data for us to they won't ask you the data but it is essential for us to understand this magnitude of foreign exchange reserves in the country for any discussion for the main fighting later. So you can see that India has accumulated 563 US dollar billion and you see one green color graph running over the foreign exchange reserves which is trying to talk about the import cover. So as I mentioned to you in 1991 we had the balance of payment crisis and we had money to give only for two weeks of imports which is why that's one of the major measures to see whether we have adequate foreign exchange reserves. So this is all mentioned in months the right hand side this right hand side is very very important for us in this graph. So you can see that whether we have money till four months or eight months or one months or sixteen months you can see that in some part of the 2020 before that and all we have had cover even up to 18 months and all but now we are having cover up to maybe say up to 10 months cover. So now we are going to ask ourselves a question whether we have adequacy of foreign exchange reserves. There are different measures by which globally countries satisfy themselves if we have coverage for three months if we have coverage for six months if we have coverage for one year so like that they put to different levels of coverage and they see that whether we have adequacy of foreign exchange reserves. So here it is foreign exchange reserves as percentage of annual imports. You can see that India again the two periods know this is pre-COVID this is post-COVID it's almost coming back or bouncing back to the same situation foreign exchange reserves as percentage of annual imports. What is there in the numerator or X what is there in the denominator? Imports. So you should have the answer at least one is it not? Is or no? Makes sense right? If you have one dollar in the reserves you will be able to spend that one dollar towards the imports. So how much percentage? If it is closer to percentage I'll be happy that is what is this one means. If it is not then we are not even covering the annual imports right? There are different different countries which are having the different percentages you can see that China is having a very high percentage of foreign exchange reserves. If this data goes up this answer will go up you understand that and the numerator goes up or the denominator goes down then the answer becomes higher. Simple maths? So this number if you have to move from 25 to 75 75 to 125 either your import should come down or your foreign exchange should increase. China was able to achieve both probably therefore we import cover is if I am importing for hundred dollars do I have that much of dollars in my foreign exchange reserves because that is what is essential for me to pay back to the other country. That's done on monthly basis because we can't the situation of import differs from quarterly, monthly, everywhere. So all the months won't be having the same amount of imports it's not just a POL there are other items which also seasonally on several situations it will change. So they'll always see whether we have foreign exchange reserves adequate to cover for one year based upon the previous history they will try to cover it and they'll try to see the projection. If we have for it then we are on a safer side. So that is the data what we are trying to present. This is the discussion which we mentioned three months or six months or one year. Then we have this total foreign exchange reserves in excluding gold. On the other day I mentioned you components of foreign exchange reserves. Can you recall back what is there in foreign exchange reserves, foreign currency assets we have to call it as FCA, foreign currency assets, special drawing rights and reserve tranche position four things. So this excluding gold they have mentioned how much of the value is there. So here it is India in US dollar billion. We have substantially increased from where we were right. We don't see China in the list right. I wanted to see the volume. Imagine how America will feel about China. US dollars sitting in foreign exchange reserves of China large volume. US prims gets accumulated in China. China has a major trading partner to many countries. It's not just a major trading partner to US itself but it's also major trading partner. So everybody pays in dollars to China. So therefore China is a threat to US. Right so now we come back to the exchange rate of Indian rupee as well as against this major currencies. Now you have to tell me what is appreciation and what is depreciation before we get into this graph. India gives 80 rupees to get one dollar as you. If 80 becomes 85 what is the meaning of it? 80 becomes 75 appreciation right. So you can now interpret this graph in this side to get one dollar or one pound. We just don't call it as one yen. The yen is all in larger numbers so we call it as 100 yen and one euro. It's easy for us to understand with the dollar and phone sterling. Okay so you can look at this orange colored graph. This one this is for the US dollar. What is happening to Indian currency? If it is gradually increasing like this what is the meaning? Depreciation because we have to give more money to get the same one dollar and are you seeing somewhere there is a decline in Japanese and there is a decline euro there was a decline again it is increasing. Decline means it is going to mean appreciation for us and the pound sterling differently we appreciated against it but now again we are depreciated right. So depreciation has its own impact. What is it? Depreciation helps who? Helps exports and hurts the imports appreciation is on the other side. So based upon this you can make the interpretations. If depreciation has happened provided volume of trade is also increasing. You have to combine with that. The moment that the depreciation happens we will want to export but somebody should be ready to import only then we'll be able to send our exports. So combining the interpretation we can look at it. What do you want the currency to happen? Appreciate or depreciate? What do you want? Why you are not answering? What do you want to happen to our Indian currency? Appreciate or depreciate? Appreciate. Appreciate. One segment is waiting to see what the answer is. Why do you want it to appreciate? It will hurt the exports is it not? It will help the imports. Why do you still want it to appreciate? Then only India will become an international currency. Your pride lies in appreciation of the currency not in the depreciation. If you're a developed country you have to have appreciation. It's not depreciation. Right? Imagine one day you can give one rupee and get one dollar. Very proud moment for Indian is it not? Now we are giving 80 rupees to get one dollar. If we can give one rupee and get back one dollar that's when we are really they're developed country. So we'll see the other types of exchange rates other than what we have seen as the first two things. Exchange rate. What is the type of the exchange rate system which we have? What do you mean by mixed? It's floating exchange rate with the central banks intervention. That's how there is no word called as mixed. There is either fixed or floating. So floating exchange rate system with the central banks intervention. Right? So now we get back to the rear and near which is what we asked. Do we know the meaning of this word near nominal effective exchange rate? What is this nominal effective exchange rate? So what we are going to do is we are going to compare ourselves first of all with SDR Indian currency and we will take some major trading partners of India. Major trading partners can you mention some countries whom you know as major trading partners? China, US, Europe, Australia, UAE, oil producing countries. So we have varieties of trading countries. So they'll see the bilateral trade. The meaning of bilateral trade is both of us exporting and importing and in that they will find out the top 36 countries that was older thing. Now they are finding out top 40 countries. When you see the word trade you should assume both exports and imports in that volume. When you see the export only India doing export to them. So we are going to do one particular calculation. Leave this trade, export all those things but we are going to say based upon I am India you are all the foreign countries. I am going to pick up 40 of you and because you are the major trading partners to India and I'm going to do one weighted average. Why am I going to do this weighted average? I am going to see whether I am internationally competitive or not. Internationally am I appreciating or depreciate? For doing this exercise what they are asking us to do is India should compare itself with SDR. All 40 countries you are all there know every one of you your currency should be compared with SDR first of all because we both have to have one common measure. Say whenever you are going for comparisons you need to have standard things is it not? When I say that one area is in acre and another area is in square feet how will you compare these two things? You understand the comparison problem? When I say the comparison first of all both of us should come on to the common platform. So how do I make you to come on to the common platform? I do a methodology. What is the methodology? India how much rupees should I give to get one SDR? You are all familiar with SDR. What is there in one SDR? Who is having this SDR? What is this SDR? Special drawing rights. IMF is giving the special drawing rights to whom to all the countries in the world. How much a drawing right you will get it depends upon your GDP and other things. If you are a very good performing thing I give you more quota. Call it as quota right? So India has 100 quota and another country has the 500 quota like this different different countries will have the drawing rights. But what is there in this one SDR? What is it? Is it one dollar? Is it one sterling? Is it one yen? It's one pound sterling. It is basket of all the things what I told you right? China's ruble has been included recently and we are trying to get into it. They are not accepting us. So one SDR. Five major currencies are there inside. So what I have to do is like how much money I give 80 rupees today I give to get one dollar like that I have to give some money to get one SDR no? I'll put that number on the numerator. It's called as E okay. What I? I is India. Then I ask all of you to do the same thing. You go and give some money and get SDRs. So you all give some your countries currency and get SDR and that will be taken as 40 countries value will be taken in the denominator. I means every country okay first country, second country, third country, everybody so put together 40 divided that is a value and this value is actually called as a nominal effective exchange rate. I am comparing myself with somebody else's strength. Another country may give more money to get the same SDR. I may be giving less money to get the same SDR. If I am giving less and getting more SDR then I am powerful than compared to the others. So the numerator should be good simple mathematics. E should be big. When E is becoming big then I'm going to call myself as appreciating. I give some rupees and I get back to SDR. But if I'm depreciating no if I give that money I will not be given back with the two SDR. I'll be given back with only one SDR. 40 rupees is required to give one SDR. If I give 80 rupees they'll be giving me back two SDRs. But if my currency is depreciating against those dollar pounds sterling Chinese ruble everything sitting in the SDR then I have to give more money to get the same one SDR. Are you following my logic right? So I have to give less and then get more of the SDR. I give less and I get more SDR. So in that case I'm going to call myself as appreciating. The numerator should be big. What I get back is SDR. So that should become two, three, four, five. So two, three, four, five is increasing in number. So when E is increasing in the numerator it's a good thing for the country which means that I'm appreciating. You followed what I said? I give more money but I get back less SDR than it is depreciating. So you have to say that international competitiveness is falling very much now down now because I'm having depreciating currency. If this is increasing like this and all, then you can interpret it as appreciating. Same meaning like appreciation and depreciation only. What will happen? If you are depreciating then it means that your strength of the currency is very less. You're not in a very good scenario. That's the meaning of it. But when you're appreciating we see that your international competitiveness is becoming good. No, don't go and interpret in terms of what will it have an impact on the exports and imports. But it's showing your strength in the international comparison that your currency is actually appreciating. This is why I asked you the question whether the currency should appreciate or depreciate. Don't assume that all the time depreciating is good. The reason for depreciation is bad. The impact of depreciation is expected to be good. There is a difference between both of these things. In FDA or FII goes out of the country your currency will depreciate. So the reason is bad but after the depreciation we expect the exports to improve so that it will become better off. So depreciation is always not a good thing to happen. Subsequent to that we hope something good will happen. So appreciation is the best thing to happen. When will appreciation happen? When many people are coming and investing with us? When we are doing very good exports that's when appreciation of the currency will happen. So appreciation, the cost will be good. The impact will be bad if it is a developing country. So therefore you can see that the interpretation of this goes like this. Have you understood this here? Shall I go a bit more on the rear? I'm going to add one more variable into this. Shall I? Now I am going to do this P by PI. That's nothing but the inflation index of every country. Inflation index of every country. We have our CPI combined as the major nominal anchorage. Is it not? You are all familiar with the word nominal anchorage of inflation. That is the word with which they'll ask the question. Nominal anchorage of inflation. What is the answer? CPI combined. There is no other answer to it. How do I measure inflation? In India I have WPA, CPI, CPI rural, CPI urban. Is it not? Of all the varieties of CPI and the WPA know what is the nominal anchorage of inflation. Which is the major measure which is used to measure inflation? CPI combined. You will know the answer. You will not know the question. Yes or no? Monetary policy is mostly decided based on CPI combined. You know that there is a monetary policy committee and it wants the inflation to be between what numbers? Four plus or minus two percent of what? That is what I'm asking you. Four plus or minus two percent is okay. Which should be in that range? CPI combined and that's called as nominal anchorage of inflation. Inflation is Nanguram and encourages Nanguram. Inflation is fixed based on CPI combined. Now we are going to talk about that CPI or the price index only into this formula which is why I went there to bring you back into this formula. We are going to add on to the inflation into this international competitiveness. How am I going to add on? Just look at this P by P.I. Today inflation in India any numbers, any percentage from the newspaper? Four percent, five percent, six percent? Let's have it as six percent eight and you go and compare yourself with some other country. Some like Argentina, some like US, Chile, Canada. Assume that number is ten percent eight. I'm giving you as an example okay. You write this P by P.I. There should be that 40 major trading partners. Don't go out of box. I'm still within that 40 major people. That 40 major trading partners, my inflation versus that every country's inflation. You understood? Six by ten, I am better off than them. Ten by six, I am worse than them. Do you understand? Is there no? Yes ma'am. I don't understand. Six by ten, what will be the answer what you will get? Max. Assume that this E by E.I is five okay. I'm just giving you a number so that we understand what we are talking. This alone is five okay. Now if you say into six by ten, what is this? We are better than other countries. Is it not? Opposite six by ten, 0.6 side ma'am. So when you multiply five into 0.6, it will become value lesser than five. Max. Five into 0.5, it will become value will five will become lesser than five. High becoming lesser than the original number or assume that I'm getting the answer as three. So five is becoming into three. I am appreciating. Understood what I'm talking? You topple the number here no? Ten by six. You will get more than one as the answer. Five into 1.5 or 1.8 will be more than five? Depreciation. Followed what I said. Slowly. Yes ma'am. So any number multiplied by one remains the same. Multiplied by decimal becomes smaller. Multiplied by decimal will happen only when your country's inflation is better than other country's inflation which is six by ten. Keep this example in your mind to remember. If your country's inflation is worse than other country's inflation, you will write it as ten by six. So further depreciation not only by the dollars and other things strength but also because of the price values your country's situation can become bad or better. Followed. Rear. So based upon that we had very high values of inflation in the recent past. Are you seeing that the rear is becoming bad? Yes or no? So based upon the strength of the prices, you can, where is the rear? This green color. This is here. Actually you will be seeing that the near and the rear are almost behaving the same. Is it not? In that behaviors. If this is becoming taller this is also going like this. If this is becoming lesser this is also declining. Again you see the pattern. Near and rear are almost traveling in the same direction. When appreciation happens they also both appreciate together. Depreciation happens but the intricacy of near becoming into rear is it's getting weighted by the inflationary measures. Okay one key word what you have to remember in this is both near and rear are being used for measuring the international competitiveness. Assume that there is a existing condition of depreciating which means that the E will be smaller divided by EI. The value itself will be lower. And on the right hand side assuming that our country's inflation is lesser than the other thing. I'll give you both a scenario lesser than the other thing which is 6 by 10. In which case you will have a decimal. So you will multiply these two things and you will arrive at an answer. That's how it's being done for the interpretation. The right hand side will be good. The left hand side will be bad. It is like that surplus and the deficit overall surplus in your BOP. Current account is in deficit. Capital account is in surplus. You get the overall surplus. Still we appreciate that surplus. It is something like that. The essence of the story is this. You may be appreciating or depreciating but what is the affordability of your currency to buy a commodity is what is sitting in this P by PI. I may be having like 50 rupees in my hand. I may not be able to buy one dollar with that but I may be able to buy my commodities with that because my price is less. Agree? You would have studied PPP purchasing power parity. That's the concept which is actually getting inbuilt into Rear. You may not be able to see that particular ENO. It is totally at the mercy of the complete BOP. Capital account will come. Current account will become deficit. Several things and you are applying the price upon it whereas in purchasing power parity the issue itself is different. They will put to one basket of commodities and they will say that how much Indian rupees should I give to get that one basket. How much dollar should be given to get that one basket. How much yen should be given to get that one basket. So, every country will be telling their own currencies to get the same basket. The concept is different. Purchasing power alone they see there but I'm combining the purchasing power here upon the nominal exchange rate. The wordy what you are seeing in the newspaper no 82 rupees is nominal. What you are seeing here is real. You are putting the price upon the nominal to make it into Rear. It's like nominal GDP getting deflated to real GDP. You remember our nominal GDP real GDP discussions. You will be dividing the nominal GDP by CPI to get the real GDP. It's it's something like deflating it but the point here is you just don't deflate it with your own price index. Rather you are comparing your country with 40 other trading partners. You are arriving at an index and then you are deflating it. All of these things is only to do one thing just to check your international competitiveness. Mostly what will matter internationally will be near but to a country Rear also matters because we may not have money to get that dollar but we may have money enough to buy our own things. Then prices are under control. So that side it can be depreciating but this side it can be appreciate. So this is an overall picture at least for the examination sake we should remember the word international competitiveness is being measured making use of near. This is about the external debt outstanding. More than this these are all the components of it. I'll show you the next table with this much more relevant. External debt indicators. So now we are coming on to this external debt to data. 610.5 US dollar billion. Anybody remembers the foreign exchange reserves amount what we mentioned? 500. How much external debt are we having? Louder. India is shining. One way you'll say we have huge foreign exchange reserves. On the other way we have a huge external debt. You know you have you heard about this word India is shining? No. Between 2002 and 2007 that was the period when we were doing very well. You would have remembered the FRBM act coming into picture surfacing act coming into picture and your hung FDI becoming into a better FDI in performing well in the external sector. So external sector started giving you very good foreign exchange reserves. So every day there will be a question in newspaper what do we do with the foreign exchange reserves? You can't do anything with the foreign exchange reserves because you have a huge debt. And in that debt what is exactly which you are concerned about is this. Short on debt to foreign exchange reserves. How much money should you immediately give off? Already you made one calculation for import cover is it not? Yes or no? Few minutes ago we said adequacy of foreign exchange reserves how much money do we have against the import cover that was a calculation. So import is already ticking. And other than that there is a short on debt. What is the short on debt? This will come through the capital account. You remember capital account? Import is all sitting under current account whereas short on debt will sit under the capital account. For all of these things we have only one thing which is called as the foreign exchange reserves. Right? So now we are going to see this percentage no? 24.7 percentage to the foreign exchange reserve. This is very very important. We should actually pull it down less than 20 percentage. Then we are actually safe. What is the meaning of this? If I have 100 US dollar in the foreign exchange reserves, 25 US dollars I have to give off this year. Short term debt. Short term is one year. So within this one year I have to give back 25 rupees, 25 dollars. So I'll be left only with 75 US dollars. I have to meet with my import bills. I should not fall into crisis. There are so many things. Right? And they'll do this last column. Please don't look at this last column. Ratio of short term debt to total debt. They'll be very happy looking at this number. Because it is closer to 20 percentage. Is it not? You understand the numerator denominator here? I'll write the numerator. Short term debt divided by total debt. How much is the total debt? 610 US dollar billion. Okay, now this is this one. The right one I will write. This is the wrong indicator. This is the right indicator. Short term debt divided by foreign exchange reserves. Is it not? You are repaying capability sitting only here. Not here. Therefore, you should look at only this and you should not become happy by looking at this. Because it's closer to 20. This is bad. Don't look at this column also. Ratio of external debt to GDP means nothing to us. GDP, we won't be able to pay back the external debt. So it's actually meaningless. They'll even put the comparison across different countries. One thing you can do. You can convert all your GDP into US dollar. Agreed? Then put the percentage. No? I will agree to it. Don't convert it into Indian rupees and do this percentage. Convert the GDP into dollars. You see this depth to service ratio. What do you mean by depth to servicing? You have to give back interest. Where are you giving the interest back from? You got the loans, you are placing it under the capital account. Where are you giving the interest from? Current account under what heading? Investment income. We saw the heading a few minutes before. So in the investment income we saw that title quarters interest. That interest will be put as a ratio to what they have not mentioned. If it is a ratio to the foreign exchange reserves it is fine. Right? The ratio of foreign exchange reserves to total debt. This is the important ratio. What is this? Foreign exchange reserves in the numerator. What is the denominator? 6. This is a very very important indicator. We don't have reserves to cover our debt. That's the meaning of this. We don't have foreign exchange reserves to cover our total debt. This is ratio of concessional debt to total debt. This is okay. Sometimes a good thing to happen. Some people will give money at a lower rate of interest. Concessional debt. But that proportion is only very less. For the rest of the loan we have to give the normal rate of interest. So are we done with this? External debt indicators. Put the minus no 100 minus 24.7 will be long term. NRI deposits there are three types of it. One is NRI ordinary, NRI external and FCNRB account. There are three types of it. Foreign currency, NRI deposits. Should I tell you the details? Are we going overboard? No. You want to know what are these three types of deposits? Assume I am one person from Chennai becoming NRA going to Singapore to do some job. I become NRA. I had some savings account here in State Bank of India, Chennai. I can't maintain it anymore as a simple savings account because I have become NRA. So I have to make it into NRI ordinary account. I am there in Singapore. Whether I can put money into that I will have a question always. Why to maintain that account? My family is all here. I have gone there. I'm working there. So whether I will be able to put money into that and whether my family will be able to take money out of it. Some amount they will allow. They will not allow you larger amounts. The moment you put the money into the account they will convert it into Indian rupees. You heard? Then you have this NRA external account. Second type. There you can put more amount. Your salaries, larger part you can put into it but the moment you put again they will convert it into Indian rupees. Third type is what is mattering to us which gets connected to the capital account which is called as HCNRB account which is car in currency non-residential bank account. There I can put the money. I can maintain it as the dollars. An Indian government will pay the interest in dollars. Very interesting thing. You heard about the remittances is it not? So either you send it as the remittances or you work elsewhere but maintain one HCNRB account from which I will take that money and then make use of it for internally. This is RBI's stand. This HCNRB account when you put it here they will fix it for five years. They won't let you to withdraw it very easily. It will be mostly like a pixel deposit kind of a thing where they will say for three years for five years you have to keep it to pass. So this HCNRB account and all will come under this capital account along with the other because I'll tell you one logic today. How we said the logic about the exports and the imports. There is yet another logic for loan. Where and all you hear the word you have to give back interest all of them are your liability. You stand on the RBI side or stand on the government side. It could be called as NRA deposit. It sounds like it's a good thing. It's not because you have to give back interest on end. Sounds like FDI but you have to give back something. Is it not? That dividend is a liability to you. That profit sharing is a liability to you. That interest sharing is a liability to you. At least in case of your FDI you can say that I didn't earn profits but when you take the loans you have to give interest. Whether you earn money, you don't earn money, whether you make loss, whether you make good things. You have to give back interest which is why the difference though both are sounding like liability, debt to creating, non-debt to creating. Basics. Clear? So that kind of deposits and all which are all like for three years, five years will all get into the long term and your external commercial borrowing will also be long term. External commercial borrowing will come with a ceiling. Government RBI will come and tell you private companies you will be able to borrow only this much every year. They'll tell you some dollar millions. That much only you'll be able to borrow. The moment you borrow you have to hand it over to RBI. Right? So they're all sitting in the long term. There is no discussion on the long term here because we are worried about whether we have the adequacy of foreign exchange reserves for one year or so or whether we are having even adequacy at all. So that adequacy and all should be you should not just talk about the numerator anywhere going out and saying that India is having very good foreign exchange reserves. First of all the method how we got it is bad. Capital account not through current account. Secondly we have a huge external debt. Thirdly we have a huge import bill. So combining all the facts only we have to talk about the foreign exchange reserves. So then we have this debt ratios. This is all like across the different countries they want to compare. Short term debt as the percentage of the total debt. This is again immaterial to us. We should not talk about the total debt because we don't have foreign exchange reserves even equal into the total debt. We have only less of it. Foreign exchange reserves as percentage of total debt. This is a very very important indicator. Blue good. Total external debt as percentage of GNA. This also is not a useful indicator for us. Because we won't be able to pay with the denominator. Whether you want to convert it into dollars or you put it into Indian rupees. Denominator which numerator pay cannot be paid. So it is immaterial to us. For us not for us and other countries. For them it means. For us it doesn't mean anything. Which are the other countries which are bad? Russia is having more foreign exchange reserves than its debt. Is it not? That's good. Indonesia is bad. Brazil is okay. Vietnam is okay. Mexico is bad. Just look at the blue thing though. Because we are having 97 percent age that's why the government keeps saying that we are sustainable debt country. Debt sustainability is there for the country. First chapter it'll tell one story. That story is based upon the growth. It'll say I grow so I borrow. The last chapter it'll say another story. I have foreign exchange reserves so I have sustainability. We'll stop the class here. I'll take it in the next session.