Balance of PaymentsBy Vaishali Padake

It is a record of transactions done by resident country with the rest of world.

Resident country: India

Sources of fund for nation: exports or receipts of loans and investments, are recorded as positive or surplus items.

Uses of funds: imports or to invest in foreign countries, are recorded as negative or deficit items.

What is BOP

Structure of BOP

BOP

Portfolio Investment

s

Trade

Capital AccountCurrent Account

Transfer / factor

Payments

FDI/FIIs

Forex Reserves

Reserves

Gold Reserves

Invisibles

NRE/NRI A/cs IMF Loans

Components of BOP Current Account:-

That part of balance of payments recording a nation’s export and import of goods and services and transfer pay.

Balance of trade,

Net factor income,

Net transfer payment.

Components of BOP

Capital Account:-

That part of balance of payments that reflects net change in national ownership of assets.

Capital Account = Foreign direct investment +Portfolio investment +Other investment

Trends in India's Balance of Payments

Item / Financial Years

(April-March) (US$ billion)

2008-09 (R)

2009-10 (R)

2010-11 (R)

2011-12 (PR)

1. Exports 189.0 182.4 250.6 309.8

2. Imports 308.5 300.6 381.1 499.5

3. Trade Balance (1-2) -119.5 -118.2 -130.4 -189.7

4. Invisibles, net (receipts) 98.7 88.1 48.7 64

5. Net Income -7.1 -8 35.8 47.5

6. Current Account Balance (3+4)

-27.9 -38.1 -46.0 -78.2

7. Capital Account Balance* 7.8 51.6 62.0 67.8

8. Change in Reserves# 20.1 -13.5 -13.1 12.8

(-Indicates increase;+ indicates decrease)

     

 *: Including errors and omissions.        #: On BOP basis (i.e., excluding valuation)  P: Preliminary.       PR: Partially Revised.         R: Revised.

Trends in India's Balance of Payments

Item / Financial Years

(April-August) (US$ billion)

2011-12(PR) 2012-13 (P)

1. Exports 158.4 146.5

2. Imports 247.8 237.2

3. Trade Balance (1-2) -89.4 -90.6

4. Invisibles, net (receipts) 30.3 29.7

5. Net Income 22.8 22.4

6. Current Account Balance (3+4) -36.3 -38.6

7. Capital Account Balance* 30.9 39.1

8. Change in Reserves# -5.4 -0.3

(-Indicates increase;+ indicates decrease)    

 *: Including errors and omissions.        #: On BOP basis (i.e., excluding valuation)

 P: Preliminary.       PR: Partially Revised.         R: Revised.

Item / Financial Years

(April-December) (US$ billion)

2011-12(PR) 2012-13 (P)

1. Exports 226.6 214.1

2. Imports 363.9 169.4

3. Trade Balance (1-2) -137.3 -147.2

Trends in India's Balance of Payments

The BOP provides an extremely useful data for the economic analysis of the country’s weakness and strength as a partner in international trade.

BOP also reveals the changes in the composition and magnitude of foreign trade.

BOP also provides indications, future repercussions of countries past trade performances.

USES OF BOP:-

DISEQUILIBRIUM

Total receipts and total payments inequality shows disequilibrium of balance of payments account

B = R – PWhere, B stands for balance of payments, R denotes receipts from foreigners, P stands for payments made to foreigners A country whose balance of payments is positive is

called as surplus country (R>P) A country whose balance of payments is negative is

called as deficit country (P>R)

Types of Disequilibrium

Cyclical disequilibrium: It occurs on account of trade cycles. Cyclical fluctuations in demand are caused by changes in Income, employment, output & price.

Structural disequilibrium: It is caused because of fluctuation in the demand based on changes in tastes, fashions, habits, income, economic progress etc.

Short – run disequilibrium: When a country borrows or lends internationally, it will have short run disequilibrium, as these are usually for short period.

Long run disequilibrium: It occurs because of accumulation of deficits or surpluses over a long period.

Causes for India’s BOP deficit

• Huge development & investment programs : Due to huge development and investment programs , Import

goes on increasing , requirement of capital for rapid industrialization, while exports may not be boosted up to that extent. Thus, there will be structural changes in the balance of payments and structural equilibrium will result.

• Population growth: High population growth in poor countries has adverse impact on their balance of payments. Increase in the population increases the needs of these countries for imports and decreases the capacity of export.

• Huge external borrowing: A country will have adverse balance of payments when it borrows heavily from another country

• Inflation: Rapid economic development, increase in the income & price will adversely affect BOP position of a developing country like India.

Causes for India’s BOP deficit

The profits received from Jaguar Land Rover (JLR) in UK to Tata Motors are accounted for in India’s BoP in

a. Capital Accountb. Current Accountc. Trade Accountd. All of Above

RBI relaxed the norms that allows larger amount of External Commercial Borrowings that Indian companies can raise from abroad, the purpose is to

a. Attract inflow on capital accountb. Manage overall deficit on BoPc. Arrest rupee slided. All of above

Revision

The USD does not depreciate despite the large current account deficit because of

a. Large export incomeb. Large inflow of income c. Large inflow of capitald. None of above

The Chinese government maintains the export competitiveness of the country by keeping the Yuan undervalued through intervention in the Forex market. The central bank

a. Sells foreign currencyb. Buys foreign currencyc. Buys Yuand. None of the options

Revision