Balance of Payments
Government Budget and Balance of PaymentsMEP2015 Finance AShamim
S. Mondal1Govt. BudgetShamim S. Mondal2Govt. BudgetAnnual statement
of revenue and expensesReceipts fromTaxesDirectCorporate
taxesIncome TaxesWealth TaxesIndirect TaxesSales/excise
TaxesService TaxesCustoms dutiesShamim S. Mondal3Revenue from other
sourcesInterest receiptsDividends and ProfitsCapital Receipts from
debt recoveriesLoans (borrowings)Shamim S. Mondal4ExpensesPlanned
expenditure (comes from money spent through Planning Commission of
India)Revenue AccountCapital Account (expenditure on infrastructure
building etc.)Unplanned expenditureRevenue Account (Interest
payment, subsidies, pensions, health/social services)Capital
Account (Defence, loans to public enterprises)
Shamim S. Mondal5Budget DeficitFiscal Deficit = Revenues earned
(net of borrowings) expensesPrimary Deficit = Fiscal deficit
Interest earningsCurrent deficit = Fiscal Deficit Govt.
Investment
Shamim S. Mondal6Tax Policy Reduce or increase Taxes?Laffer
Curve: Arthur Laffer, an economist is credited with the ideaIf
taxes are decreased, does it lead to increase in tax revenue?If
output remains constant, then no.If output increases, then depends
on by how much does output increase in response to tax reduction.
It then has a positive effect on tax collectionLaffer posited that
the output effect dominates, and reduction of taxes increases tax
collectionShamim S. Mondal7Balance of PaymentsShamim S.
Mondal8Indian EXPORT TRANSACTION
Exchange Rate: Assume Rs50 = $1Rs. 3,000,000 in Indian garments
purchased by an American buyer for $60,000$60,000 check drawn on
American bank to pay for garments$60,000 check is exchanged for
Rs.3,000,000 at a New Delhi bankNew Delhi bank sends $60,000 check
to American bank for future sale to buyers who need dollarsShamim
S. Mondal9Indian IMPORT TRANSACTION
$60,000 in American car purchased by an Indian buyer for
Rs.3,000,000$60,000 check purchased from Indian bank to pay for car
for Rs.3,000,000$60,000 check is exchanged for car purchase from
supplierCar manufacturing firm deposits $60,000 check to American
bankShamim S. Mondal10Exports and Imports Impact on Foreign
CurrencyIndian exports create a foreign demand for rupees which
creates a supply of foreign currencies which are available to
Indian buyers.Financing an Indian export reduces the supply of
foreign currencies available and increases the domestic money
supply.
Shamim S. Mondal11Balance of paymentsCurrent AccountBalance on
Goods & ServicesBalance on Current Account Trade Deficits &
Surpluses
Shamim S. Mondal12Capital AccountCapital AccountBalance on
Capital AccountOfficial ReservesBalance of Payment Deficits &
Surpluses
Shamim S. Mondal13Market for Foreign ExchangeRupee price of one
dollarRupeedepreciatesRupeeappreciates75
50
25Quantity of DollarsQPShamim S. Mondal14Exchange rate
RegimesFixed Exchange RateHere, the Govt. intervenes in the market
to maintain a fixed exchange rate relative to the foreign currency
(usually, USD)Was prevalent earlierComes on the way of independent
conduct of monetary policyShamim S. Mondal15Flexible Exchange
RateFlexible Exchange RateHere, the Govt. does not intervenes in
the forex marketThe exchange rate that occurs is the interplay of
supply and demand for currenciesThis is what India follows today,
but not completelyCalled a managed, or dirty float
Shamim S. Mondal16Purchasing Power ParityReal Exchange Rate: The
ratio of foreign to domestic prices measured in the same currencyR
= ePf/PE = exchange ratePf - Foreign pricesP Domestic Prices
Shamim S. Mondal17
