India Achieves Current Account Surplus: What Does It Mean?

India Achieves Current Account Surplus

After nearly a decade, India registered a Current Account Surplus of $600 million in the January-March 2020 quarter. However, experts do not consider it much significant or fruitful for India. Let’s check out why!

Crux of the Matter

Reasons And Impact Of Surplus
In the same period last year, the current account of India was in deficit of $4.6 billion or 0.7% of GDP. Amidst Coronavirus crisis, India’s economy came to a grinding halt and due to a slump in consumption, both, imports and exports were low. Moreover, lower prices of crude oil brought the import bill down.

In addition to that, income from Services increased in the quarter and remittances by Indians employed overseas and other private transfers rose 14.8% from a year ago. Experts say that this surplus is not a result of the economic growth of the country but due to the above factors which were circumstantial. When a country grows economically with an increase in exports and a gradual decrease in imports, then the surplus is considered to be good.

In theory, for developing economies, a current account deficit is considered good if it imports machinery or goods and services to grow. But a persistent deficit, however, is a red signal. The current account balance also affects the nation’s currency. Current Account Surplus usually results in appreciation of the country’s currency, whereas deficit results in depreciation.

Understanding Different Accounts Of The Government
So far we have talked about current account surplus and deficit but you might think what does the current account of a nation actually include? Or you might wonder that, are there any other national accounts? The answer is yes!

There are three types of national accounts i.e. Current account, Financial account, and Captial account.

i) Current Account has three components i.e. good and services, income, and current transfers. The goods and services measures the exports and imports of goods and services, income accounts for the government’s income and spending on financial investments, and current transfers include one-way gifts and remittances made in the country. If the sum of these three components is less than zero then the current account is in deficit and if greater than zero then the current account is in surplus.

ii) Capital account refers to capital transfers between foreign entities and domestic entities.

iii) Financial account refers to investment by foreign entities in domestic entities and by domestic entities in foreign entities. It consists of a reserve account, direct investments, portfolio investments, and other investments.

Current account + capital account + financial account should equal zero. Theoretically, if a current account is in surplus, then financial and capital accounts are in deficit and vice-versa. When a country’s current account is in deficit, it borrows money from other nations – financial & capital accounts are hence in surplus. And when a country’s current account is in surplus, it generally lends money – financial and capital accounts hence are in deficit.

  • Adam Smith was a Scottish economist, philosopher, and author as well as a moral philosopher, a pioneer of political economy, and is also known as “The Father of Economics”. His classic work, “The Wealth of Nations”, is considered his magnum opus and the first modern work of economics.
  • The balance of trade or commercial balance, is the difference between the monetary value of a nation’s exports and imports over a certain time period. Sometimes a distinction is made between a balance of trade for goods versus one for services.
  • Modern banking in India originated in the last decade of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829–32; and the General Bank of India, established in 1786 but failed in 1791. The largest and the oldest bank which is still in existence is the State Bank of India.

Gold Futures Rally In 2020: All You Need To Know

Gold Futures Rally In 2020: All You Need To Know

After a few days of the RBI issuing Sovereign Gold Bonds on behalf of the government, August Gold Futures hit an all-time high of ₹48,871 ($646.66) per 10 grams in India. Moreover, Gold Futures touched $1800 per ounce in the US – highest since October 2012 – in the backdrop of less than 1% interest rate and fear of increasing Covid-19 cases. So what do gold futures means? Should you invest in gold? Let’s find out.

Crux of the Matter

To understand futures, options, and forwards, first, we will need to understand what does derivative mean? A derivative is an instrument whose value is derived from the value of one or more underlying asset, that can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options, and Swaps.

A forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at a price agreed today. The contract has to be settled by delivery of the asset on the expiration date. In case the party wishes to reverse the contract, it has to compulsorily go to the same counterparty.

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller. Here we are concerned with Gold Futures. Gold Futures of August means a Futures contract for buying or selling Gold that expires in August. In India, a Futures contract expires on the last Thursday of the expiry month – in our case last Thursday of August.

An Options contract is similar to futures but the buyer does not have an obligation to perform. Options seller, however, has the obligation to sell if the Option buyer exercises the Option.

What Is A Long Position?
Let’s say you want to buy sugar 3 months from now. 1 kg of sugar costs ₹50 today. But after 3 months, the price is expected to rise to ₹60. Now you make a contract, fixing the price of the sugar at ₹50 that you will buy three months from now. This contract of buying an asset or security at a future date is called taking a long position.

What Is A Short Position?
Let’s say you own a sugar processing industry and want to sell sugar 3 months from now. 1 kg of sugar costs ₹50 today, but after 3 months, the price is expected to fall to ₹40. Now you make a contract, fixing the price of the sugar at ₹50 that you will sell three months from now. This contract of selling an asset or security at a future date is called taking a short position.

Gold A Safe Haven?
The current price for Gold in India (as on 2nd July 2020) is ₹46,540. A higher price of August Futures and an increasing price suggests that investors think that the price of gold will increase in August owing to it being a safe bet in times of uncertainty.

Gold has always been considered good for investment. But there was one anomaly: In 1979 the global gold price increased by 120% and next year it railed some more than 29%. But the gold price took an ugly turn in 1981. In 1981 gold lost 32% and didn’t recover till 2006. In 2006 it retained the price of $594/ounce. This sudden drop happened at that time dollar price went high resulting in the downfall in the prices of the gold.

However, investors are currently trodding safely on the stock market because of fears of rising cases of Covid-19, and even interest rates in most countries have fallen – interest rate in the US is below 1%. Well, if this does not make Gold a safe haven, what does!

  • A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
  • The Giving Pledge is a campaign to encourage extremely wealthy people to contribute a majority of their wealth to philanthropic causes. Most of the signatories of the pledge are billionaires, and their pledges total over $1 trillion. Warren Buffett founded The Giving Pledge in 2009 with Bill Gates.
  • The carat is a fractional measure of purity for gold alloys, in parts fine per 24 parts whole. In 309 CE, Roman Emperor Constantine I began to mint a new gold coin solidus that was ​1⁄72 of a libra (Roman pound) of gold equal to a mass of 24 siliquae, where each siliqua (or carat) was ​1⁄1728 of a libra. This is believed to be the origin of the value of the carat (or karat).

Chinese Companies Face Brunt Of American Sanctions

Chinese Companies Face Brunt Of American Sanctions

Amidst increasing number of accounting frauds by listed companies, the US recently passed a bill to delist listed firms that do not comply with its auditing norms – a move that experts say is aimed at Chinese companies. Similarly, with the passing of the Hong Kong Security Bill by China, US has pushed for a bill to sanction lenders associated with the officials of that Bill.

Crux of the Matter

Holding Foreign Companies Accountable Act
In March 2020, the US Senate passed a bill titled ‘Holding Foreign Companies Accountable Act’. Under the ambit of this bill, companies are required to comply with the Public Company Accounting Oversight Board’s (PCAOB) audits for three years in a row. If a company fails to do so, it will be delisted from all US exchanges. Moreover, public companies are required to disclose holdings by foreign governments in them.

Under the provision of this bill, Chinese companies – even the likes of Alibaba – are afraid of being delisted. Currently, 224 companies listed on US stock exchange are located in countries where PCAOB audits are not allowed – most of these companies happen to be in China. These companies have a combined capitalization of over $1.8 trillion

Many Americans invest in the US stock exchange as part of their retirement savings, and dishonest companies operating on the exchanges put Americans at risk. This legislation protects the interest of hardworking American investors by ensuring that foreign companies traded in America are subject to the same independent audit requirements that apply to American companies.

US Government

Chinese Companies Involved In Accounting Fraud
Luckin Coffee, a Chinese coffee-chain with 4,500 stores across China in just 3 years, listed on US exchange NASDAQ in 2019 with a $600mn IPO. It was found doing an accounting fraud. The company showed a higher number of orders per day by jumping order numbers on receipts. Muddy Waters Research, an investigative research and investment company, brought the matter into light. It shares plummeted 80% after it was found of $310 million fraud.

Another Chinese company which is in talks nowadays is GSX Techedu, an ed-tech company. GSX is accused of inflating its revenue by fabricating users. Research report published by Muddy Waters says that only 19% of its users are real. GSX reported a 432% revenue growth in a single year. Citron Research warned the US Securities and Exchange Commission (SEC) in the hope of investigation by authorities.

Sanctions After Hong Kong Security Law
China passed the contentious Hong Kong Security Bill. To put pressure on China, the US has introduced a bill to put sanctions on le ders associated with Chinese officials involved in the Hong Kong Security Bill. With this move, around $1.1 trillion of Chinese banks are at stake.

  • The China Hustle is Netflix documentary that depicts systematic securities fraud that continues to occur in the United States, wherein small nondescript Chinese companies with possibly links to the CCCP, the Chinese Communist Party are hyped up and sold by American investment banks to U.S. based investors.
  • The Chinese Repository was a periodical published in Canton to inform Protestant missionaries working in Asia about the history and culture of China. It was the brainchild of Elijah Coleman Bridgman, the first American Protestant missionary appointed to China.
  • The Boxer Rebellion was an anti-imperialist, anti-foreign, and anti-Christian uprising in China between 1899 and 1901, toward the end of the Qing dynasty. It was initiated by the Militia United in Righteousness, known in English as the Boxers because many of their members had practiced Chinese martial arts, also referred to in the Western world at the time as Chinese Boxing.
  • The Singles Day, or Double 11, is a Chinese shopping holiday that originated as an unofficial holiday for bachelors. The holiday has become the largest offline and online shopping day in the world, with Alibaba shoppers exceeding $38.4 billion in purchases last year.

Why Are Petrol Prices Rising?

Why Are Petrol Prices Rising?

In the last few days prices of petrol and diesel have rocketed in India. Let us understand what is causing the fuel prices to rise at a time when crude oil prices are low due to the pandemic.

Crux of the Matter

Components Of Oil Price
Oil price is divided into many components. The first component is the base price at the international crude price. Then the cost of transport and ocean freight charges are added in the base price. After this, the cost of refinery transfer is added to the price of oil and is sold out to the dealers. Now the central government of India imposes central excise duty and cess on petrol and diesel prices.

Dealers add their commission in the total price of oil. Dealers will transport fuel to different states and every state imposes state-specific Value Added Tax (VAT) on the fuel. Finally, the customer pays the final price of fuel.

The central government earns 58% of excise duty and 100% of Cess. States earn 42% of Excise Duty and 100% of VAT.

Understanding The Paradoxical Price Rise
In theory, price of Petrol & Diesel should be determined by the crude price. Crude has fallen in 2020 but fuel prices have increased in India. The price rise is because of an additional duty imposed by the government. This could be to compensate for revenue loss due to the pandemic.

  • The earliest known oil wells were drilled in China in 347 CE. These wells had depths of up to about 240 metres (790 ft) and were drilled using bits attached to bamboo poles. The oil was burned to evaporate brine and produce salt. By the 10th century, extensive bamboo pipelines connected oil wells with salt springs. The ancient records of China and Japan are said to contain many allusions to the use of natural gas for lighting and heating. Petroleum was known as burning water in Japan in the 7th century.
  • According to Herodotus, more than four thousand years ago natural asphalt was employed in the construction of the walls and towers of Babylon, great quantities of it were found on the banks of the river Issus, one of the tributaries of the Euphrates, and this fact confirmed by Diodorus Siculus. Herodotus mentioned pitch spring on Zacynthus (Ionian islands, Greece). Also, Herodotus described a well for bitumen and oil near Ardericca in Cessia
  • The earliest oil wells in modern times were drilled percussively, by repeatedly raising and dropping a cable tool into the earth. In the 20th century, cable tools were largely replaced with rotary drilling, which could drill boreholes to much greater depths and in less time.
  • The 2010s oil glut is a serious surplus of crude oil that started in 2014–2015 and accelerated in 2016, with multiple causes. They include general oversupply as US and Canadian tight oil (shale oil) production reached critical volumes, geopolitical rivalries amongst oil-producing nations, falling demand across commodities markets due to the deceleration of the Chinese economy, and possible restraint of long-term demand as environmental policy promotes fuel efficiency and steers an increasing share of energy consumption away from fossil fuels.

From Indo-China Face-off To Weaponizing Trade

From Indo-China Face-off To Weaponizing Trade

After the recent face-off between Indian and Chinese troops at LAC, both the countries now have engaged themselves in a trade war by blocking each other’s imports done via ports. India has tightened the scrutiny of the import from Chinese companies, but experts say the move might create a shortage of necessary raw materials.

Crux of the Matter

India’s Aggresive Stand
Bilateral border tensions have spilled over to trade. Now, Indian customs have begun physical inspection of all consignments coming from China based on intelligence inputs. Import consignments from China were halted on the Chennai and Mumbai ports. Moreover, Chinese cargo is being held up by customs at airports in Delhi and Kolkata.

Despite India’s dependence on China for raw material for the pharma, electronics, and automobile sector, there is speculation that India will continue these strict measures and tighten scrutiny of imports from Chinese companies located in Southeast Asian Nations. The Indian government may ask authorities and importers to be aware of shell companies linked to China that might be trying to benefit under the Free Trade Agreement with ASEAN.

There is no official word from the government on this matter. If India wants to be self-reliant then India will have to follow two strategies for self-reliance, i.e. boosting local manufacturing capacity and containing imports.

The automobile sector in India is likely to bear a heavy brunt as Indian companies like Bajaj Auto, Mahindra & Mahindra, TVS Motor Company, Hero Electric, and other Indian companies building electric 2 or 3 wheelers import major components and batteries directly or indirectly from China.

We don’t import because we like to, but because we have no choice.

RC Bhargava, Chairman of Maruti Suzuki

American firms with manufacturing operations in India are facing difficulties in importing from China. Currently, there are 50 US firms across sectors such as telecom, FMCG, automobile, and medical equipment, having manufacturing operations in India. Looking at the situation, the US-Indian Strategic Partnership Forum (USISPF) sought the restoration of port operations. Moreover, many companies canceled orders from China.

China’s Retaliation
China has increased the price of paracetamol and ciprofloxacin antibiotic by 25%-27%. India imports these and other such drugs in large quantities due to the insufficient domestic production of raw material. It must be noted that in times of Covid-19, Indian generic drug has been in demand and nearly 70% of Active Pharmaceutical Ingredients (APIs) used to make these drugs come from China. China also reacted by halting Indian origin shipments at Hong Kong Port. In this trade war, 200 industries have been impacted.

Top Five Ports of India

  • Kandla Port is the biggest container port in India in terms of value and amount of cargo.
  • Mumbai Port is India’s largest port by size and shipping traffic.
  • Chennai Port handles over 100 million metric tons of cargo per year.
  • Port Blair Port serves as a connection point between the Bay of Bengal and the Andaman Sea.
  • Kolkata Port is equipped with two dock systems, Haldia docks, and Kolkata docks.
  • The Gwadar Port is the deepest seaport of the world and is situated on the Arabian Sea at Gwadar in Balochistan province of Pakistan. The port is under the operational control of China.
  • In the Qin Dynasty, the First Emperor of Qin inked the northern walls to prevent invasion from northern nations. In the Han Dynasty, the emperors extended the Great Wall of China far into today’s western China to protect the Silk Road trade. It allowed the imposition of duties on goods transported along the Silk Road.
  • The Government of India’s Economic Survey 2017–18 noted that five states — Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Telangana — accounted for 70% of India’s total exports.