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Trade, Capital Flows and the Balance of Payments

Author

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  • Nagesh Kumar

    () (United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) South and South-West Asia Office)

Abstract

The reforms pursued since 1991 have deepened global integration of the Indian economy in terms of a rising share of trade and an even more dramatic transformation of services trade as well as the emergence of the country as one of the most attractive destinations for and important source of FDI flows. Analysis shows however that opportunities for product and market diversification remain to be fully exploited to sustain growth and create more jobs. Despite healthy trade surpluses earned by services as India emerged as a global hub for ICT outsourcing, the balance of payment situation has again entered into a period of stress due to a dramatic widening of the merchandise trade deficit. While India now has the comfort of sizeable foreign exchange reserves unlike in 1991, this is an important policy challenge needing an immediate response. Export competitiveness needs to be strengthened through appropriate exchange rate management and opportunities for strategic import substitution need to be exploited by leveraging India’s large domestic market size using industrial policy measures. Revival of manufacturing to substitute lumpy imports of manufactured goods will not only help in addressing the current account deficits but also create jobs for skilled and unskilled workers helping in poverty reduction. While farsighted policies have led India becoming a part of emerging broader regional economic arrangement, Indian industry has to learn to exploit the opportunities provided by preferential access to East Asian markets rather than passively grant market access.

Suggested Citation

  • Nagesh Kumar, 2013. "Trade, Capital Flows and the Balance of Payments," Development Papers 1303, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) South and South-West Asia Office.
  • Handle: RePEc:eap:sswadp:dp1303
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    File URL: http://www.unescap.org/sites/default/files/SSWA_Development_Papers_1303_March2013_2.pdf
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    References listed on IDEAS

    as
    1. Panagariya, Arvind, 2011. "India: The Emerging Giant," OUP Catalogue, Oxford University Press, number 9780199751563.
    2. Theodore H. Moran, 2001. "Parental Supervision: The New Paradigm for Foreign Direct Investment and Development," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa64, January.
    3. Jonathan David Ostry & Atish R. Ghosh & Karl F Habermeier & Marcos d Chamon & Mahvash S Qureshi & Dennis B. S. Reinhardt, 2010. "Capital Inflows; The Role of Controls," IMF Staff Position Notes 2010/04, International Monetary Fund.
    4. Rodrik, Dani, 2004. "Industrial Policy for the Twenty-First Century," CEPR Discussion Papers 4767, C.E.P.R. Discussion Papers.
    5. Montek S. Ahluwalia, 2006. "India's Experience with Globalisation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 39(1), pages 1-13, March.
    6. Nagesh Kumar, 1998. "Multinational enterprises, regional economic integration, and export-platform production in the host countries: An empirical analysis for the US and Japanese corporations," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(3), pages 450-483, September.
    7. Isher Judge AHLUWALIA, 2008. "Rapid Economic Growth: Contributing Factors and Challenges Ahead," Asian Economic Policy Review, Japan Center for Economic Research, vol. 3(2), pages 180-204, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Trade Policy; International Investment; Current Account Adjustment;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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