External Sector of India

Trade, forex investment, budget deficits, the balance of payment, capital account, current account, and other economic operations in foreign currency fall within India’s external sector. However, the most potent elements driving economic cooperation are trade and forex. 

The phrase ‘trade’ involves the exchange of products, commodities, or commerce between individuals. Also, the forex exchange reserves of our nation are comparatively more huge than nations with similar external sector features. Thus, our country is set as an external sector example. Let us understand the significant activities in India’s external sector.

BOP:

A balance of payments report is a financial summary that includes all financial transactions between inhabitants and non-residents in a particular year. The word “all transactions” encompasses governmental and non – governmental transaction records. 

Double-entry bookkeeping has been used in the quantitative declaration. Every transaction is recorded doubly in a double-entry book, having two opposing entries with identical values (credit and debit). The inflow is represented by a credit balance, while a debit represents the outflow. Both entrances are maintained for every transaction. 

The current and capital accounts are the two primary components of the balance of payments. Current account activities are similar to revenue received and revenue expenditures in the financial plan. Likewise, capital account operations are identical to capital revenues and spending in the budget.

Current Account:

The current account seems to document commodities and resources and transfer payments. It encompasses international products and commercial service transactions, international service exchanges such as transportation, royalty fees, tourism, and international transfer payments such as donations and foreign aid. The following categories apply to current accounts:

• Factor revenue and non-factor revenue transactions fall under trade-in service.

• Trade flows of products come under trade in goods.

• Transfer payments represent receipts that citizens of those countries get for free, without needing to give any products or services in exchange. Endowments, gifts, and remittances are among them. They might be from the government or ordinary persons residing in other countries.

Balance on the current account happens when payments and receipts of the current account seem equal. Balance on Invisibles and BOT are primary balance elements on the current account. 

The balance of trade/trade balance is the economic gap between a nation’s economic export and import in a given fiscal year. The import of commodities is recorded as a debit element in BOT, while the export is registered as a credit element. The gap between a nation’s imports and exports of invisible which includes the services like tourism, health, education etc. during a specific period is known as net invisibles.

Capital Account:

The capital account includes economic activities such as direct investment and acquisitions of non-interest generating demand deposits and gold and interest-bearing financial assets. In addition, all overseas asset transactions are recorded in the Capital Account. 

Tax Haven Countries:

Tax haven countries are nations having an economically and politically secure climate that exclude corporations and people from paying taxes on bank deposits. They provide various tax benefits to use illicit tax avoidance strategies. 

Tax havens offer relatively cheap taxes and no residence restrictions for international organisations and people willing to put cash in their banking firms. In addition, people and corporations can hide part of their revenue from taxation in foreign countries because of loose regulation and secrecy rules.

Impacts of Tax Haven Nations:

• Some jurisdictions reduce tax responsibilities and tax bases for taxing countries, resulting in a scarcity of cash needed for economic growth.

• It leads to an inequitable allocation of tax burdens since reductions in tax liabilities for certain persons result in a rise in the government’s tax rates, putting the responsibility on individual taxpayers.

• It obstructs the government’s fulfilment of numerous economic programmes.

• It limits wealth transfer and income gap reduction, concentrating financial power and controlling a few people.

• It impedes the government’s attempt to organise resources to recover black money.

• It degrades society’s cultural and ethical fabric by encouraging bribes, pressure, interference with official records, and the presentation of forged papers, among other things.

• Tax havens foster base degradation and income shifting, causing the Indian tax authorities to waste time, labour, and resources.

Historically, tax havens functioned as venues for storing black money and as centres for tax evasion in stimulating economies. It promotes firms that engage in unethical tax evasion tactics to survive and prosper without facing any consequences. As a result, it is critical to enhance global tax agreements to deter such behaviour.

Conclusion

Trade, forex investment, budget deficits, the balance of payment, capital account, current account, and other economic operations in foreign currency fall within India’s external sector. A balance of payments report is a financial summary that includes all financial transactions between inhabitants and non-residents in a particular year. The current and capital accounts are the two primary components of the balance of payments. Tax haven countries are nations having an economically and politically secure climate that exclude corporations and people from paying taxes on bank deposits.