balance of payment adjustment

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TABLE OF CONTENTS

Topics

BALANCE OF PAYMENTS2

BALANCE OF PAYMENTS ADJUSTMENT5

BOP ADJUSTMENT POLICIES7

BALANCE OF TRADE 8

BALANCE OF CURRENT ACCOUNT 9

THE OFFICIAL SETTLEMENT CONCEPT 11

THE CAPITAL ACCOUNT 12

ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS14

BALANCE OF INVISIBLE TRADE 15

CAPITAL ACCOUNT CONVERTIBILITY (CAC) 19

IN THE ACCOUNTING SENSE THE BOP ALWAYS BALANCES! 22

DETAILED OUTLINE OF THE BOP STATEMENT & SUB ACCOUNTS 23

A DEFICIT IN THE BASIC BALANCE IS DESIRABLE OR

UNDESIRABLE!27

OFFICIAL RESERVES ACCOUNT 30

CONCLUSION 31

Bibliography 32

Annexure 33


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BALANCE OF PAYMENTS ADJUSTMENT

CONCEPT QUESTIONS

BALANCE OF PAYMENTS

The balance of payments of a country is a systematic record of all economic transactions

between the residents of a country and the rest of the world. It presents a classified record of all

receipts on account of goods exported, services rendered and capital received by residents and

payments made by theme on account of goods imported and services received from the capital

transferred to non-residents or foreigners.

- Reserve Bank of India

The above definition can be summed up as following: - Balance of Payments is the summary of

all the transactions between the residents of one country and rest of the world for a given period

of time, usually one year.

The definition given by RBI needs to be clarified further for the following points:

A. Economic TransactionsAn economic transaction is an exchange of value, typically an act in which there is transfer of

title to an economic good the rendering of an economic service, or the transfer of title to assets

from one economic agent (individual, business, government, etc) to another. An international

economic transaction evidently involves such transfer of title or rendering of service from

residents of one country to another. Such a transfer may be a requited transfer (the transferee

gives something of an economic value to the transferor in return) or an unrequited transfer (a


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unilateral gift). The following are the basic types of economic transactions that can be easily

identified:

1. Purchase or sale of goods or services with a financial quid pro quo cash or a promise topay. [One real and one financial transfer].

2. Purchase or sale of goods or services in return for goods or services or a barter transaction.[Two real transfers].

3. An exchange of financial items e.g. purchase of foreign securities with payment in cash orby a cheque drawn on a foreign deposit. [Two financial transfers].

4. A unilateral gift in kind [One real transfer].5. A unilateral financial gift. [One financial transfer].B. ResidentThe term resident is not identical with citizen though normally there is a substantial overlap.

As regards individuals, residents are those individuals whose general centre of interest can be

said to rest in the given economy. They consume goods and services; participate in economic

activity within the territory of the country on other than temporary basis. This definition may

turnout to be ambiguous in some cases. The Balance of Payments Manual published by the

International Monetary Fund provides a set of rules to resolve such ambiguities.

As regards non-individuals, a set of conventions have been evolved. E.g. government and non

profit bodies serving resident individuals are residents of respective countries, for enterprises, the

rules are somewhat complex, particularly to those concerning unincorporated branches of foreign

multinationals. According to IMF rules these are considered to be residents of countries in which

they operate, although they are not a separate legal entity from the parent located abroad.

International organisations like the UN, the World Bank, and the IMF are not considered to be

residents of any national economy although their offices are located within the territories of any

number of countries.


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To certain economists, the term BOP seems to be somewhat obscure. Yeager, for example, draws

attention to the word payments in the term BOP; this gives a false impression that the set of

BOP accounts records items that involve only payments. The truth is that the BOP statements

records both payments and receipts by a country. It is, as Yeager says, more appropriate to

regard the BOP as a balance of international transactions by a country. Similarly the word

balance in the term BOP does not imply that a situation of comfortable equilibrium; it means

that it is a balance sheet of receipts and payments having an accounting balance.

Like other accounts, the BOP records each transaction as either a plus or a minus. The general

rule in BOP accounting is the following:-

a) If a transaction earns foreign currency for the nation, it is a credit and is recorded as a plusitem.

b) If a transaction involves spending of foreign currency it is a debit and is recorded as anegative item.

The BOP is a double entry accounting statement based on rules of debit and credit similar to

those of business accounting & book-keeping, since it records both transactions and the money

flows associated with those transactions. Also in case of statistical discrepancy the difference

amount is adjusted with errors and omissions account and thus in accounting sense the BOP

statement always balances.

The various components of a BOP statement are:

A. Current AccountB. Capital AccountC. IMFD. SDR AllocationE. Errors & OmissionsF. Reserves and Monetary Gold


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Balance Of Payments Adjustment

Balance of Payments Adjustment Policies for the appropriate adjustment of imbalances of

payments, in connection with policies for international liquidity, have been widely discussed

since the end of World War I. Prior to that time it had been assumed that the gold standard

provided the necessary adjustment mechanism automatically. In recent years the issue has

acquired a particular urgency and has attracted a great deal of attention. However, in contrast to

the intensive investigation of the liquidity issue, there have actually been very few studies of the

state of adjustment policies. In view of the importance of this area for the conduct of

international economic relations by the United States as well as other countries, the National

Bureau has chosen adjustment policies as one of the topics for analysis in its program of

international economic studies.' This report investigates the recent pattern of balance-of-

payments adjustment policies. Determining the pattern of policies in actual use is an essential

part of evaluating the policies, arrangements, and institutions needed to improve the international

monetary mechanism and assure an optimal flow of international transactions. In particular, the

experience of other countries may help to indicate the potential of various policies which the

United States might employ, in its effort to reconcile maximum utilization of economic capacity

and a rapid rate of growth with the compelling need for balance-ofpayments adjustment. The

overall plan of the study, of which this is a preliminary report, is twofold. First, each individual

country will be analyzed separately in order to identify the policy reactions in the country.Following this, a synthesis of the individual studies will be attempted, in order 1 See Hal B.

Lary, Problems of the United States as World Trader and Banker, New York, National Bureau of

Economic Research, 1963; particularly pp. 113117.2 Balance-of-Payments Adjustment

Policies to search for any general pattern, or patterns, in the international monetary system as a

whole and to analyze the reasons for similarities or differences among countries. This latter part,

or over-all study, will take up such questions as whether the policies undertaken to adjust deficits

and surpluses in the balance of payments are symmetrical to each other, or whether deficits and

surpluses provoke different kinds of reactions; whether or not countries employ any strategy or

strategies which assign certain policy instruments to balance-of-payments adjustment while

reserving others for domestic targets; whether any general change in the policy pattern was

discernible over the period under consideration; and if variables such as the size of trade or

recent experiences with inflations and depressions explain differences in policy patterns among


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countries. Other questions of a similar nature will also be investigated. It must be emphasized

that the study of individual countries is subordinated to the ultimate purpose of an over-all

analysis of the international monetary system. The separate studies will thus follow a uniform

method, making it possible to incorporate them into a wider analysis later. In the process, much

specific information about each country will inevitably be lost. In particular, each individual

study does not purport to be a comprehensive description and analysis of all the policy actions

taken by the country in question to adjust balance-of-payments disturbances. Such a

comprehensive study of any single country would require much more attention than could be

given to individual cases in an analysis of the present nature. In the present study, the individual

patterns are, rather, presented with the aim of demarcating the most salient features of the

system. This approach involved selecting certain policies for observation and excluding others: it

led to a concentration on aggregative monetary and fiscal measures, with only scant attention to

other policies. The study may thus be described as being, essentially, the identification and

analysis of the pattern of use of financial policies for balance-of-payments adjustment. It is,

basically, a statistical undertaking. The analysis is aimed at discovering causal connections in

one direction: from imbalances of payments to policy measures. It starts out with the assumption

that, over time, a consistent association in the occurrence of a certain Introduction and Summary

3 development, or position, of the balance of payments (or of any other economic target), with

the movements of a policy variable indicates a causal relationship rather than a coincidence. The

study of time series of variables which indicate balance-of-payments disturbances and those

which represent policy instruments may thus reveal the policy reactions be they automatic

policy responses or ad hoc decisionsto imbalances of payments. The investigation of possible

associations is conducted by a number of methods; all of these are rather crude, primarily owing

to the small number of observations in each country and the large coverage of the study. Yet in

combination they appear to yield meaningful results. The present paper is an interim report on

the over-all study. It discusses, in Chapter 2, the methods and techniques of analysis, the

meaning of balance-of-payments "disturbances" and their identification, the nature of the policy

variables used for adjustment and the interpretation of an adjustment policy, and the possible

limitations of the study, its major deficiencies, and the qualifications which must be attached to

its conclusions. Chapters 3, 4, and 5 present, as a sample, the analyses of three countries: Japan,

Germany, and the Netherlands. At this stage of reporting, no similar sample could be offered of


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the analysis which will follow in the final report. International comparisons and implications for

the international monetary system as a whole must await the completion of all the intended

individual country studies. Of the three countries presented here, oneGermanydoes not

appear to have conducted any systematic policy of balance-of-payments adjustment. During

about half of the period coveredthroughout most of the 1950'sGermany had a practically

uninterrupted surplus in its balance of payments. Yet economic policy does not seem to have

responded by taking an expansive directiona response that would have been required to restore

balance-of-payments equilibrium. The continuous and substantial accumulation of foreign-

exchange reserves was apparently regarded as a favorable development rather than as a

disturbance which should be corrected. In other periods too, fluctuations in the balance-of-

payments position do not appear to have triggered adjustments of policy measures with any

consistency. In Germany financial policy thus seems to have been unresponsive, by and large, to

balance-of-payments developments.

Balance-of-Payments Adjustment Policies

In Japan and the Netherlands an entirely different pattern is revealed. Here, monetary policy

appears to be geared quite closely to fluctuations in the balance of payments. The working of the

monetary mechanism is not entirely similar in the two countries, but they share two major

elements: the discount rate and money supply react in a consistent way to balance-of-payments

disturbances. In times of a deficit, the discount rate is raised and the rate of expansion of money

supply tends to fall; with balance-of-payments surpluses, the tendencies are reversed. These are

responses which work in the direction of balance-of-payments adjustment. Although changes in

the discount rate are of course decided upon directly by the respective central banks, the changes

in money supply take place automatically as a result of movements of foreign-exchange reserves.

Commercial banks partly offset the automatic impact on the credit basis by increasing their

borrowing from the central bank when foreign-exchange reserves fall and repaying their debts

when reserves rise. In the Netherlands,this offsetting is even helped by a policy of lowering theminimum-reserve ratio of commercial banks when the balance of payments is in deficit, and

raising the ratio at times of surpluses. Both in Japan and in the Netherlands, commercial bank

credit thus fulfills only a minor role in the adjustment process, and central bank credit even

tends, almost invariably, to move contrary to the direction of movement of foreign-exchange

reserves. By some definitions, this may be termed a "disadjusting," or "neutralizing," monetary


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policy, yet the discount rate and money supply do tend to move in an adjusting direction. By the

definition suggested in this study, this outcome amounts to an adherence to the classical "rules of

the game."

In neither Japan nor the Netherlands does fiscal policy appear to be attuned to balance-of-payments adjustment. In all three countries, fiscal policy is apparently considered a tool which

cannot, or should not, respond to balance-of-payments fluctuations. Nor does fiscal policy appear

to form generally part of a policy "mix," by which domestic targets are assigned to fiscal policy

whereas monetary policy is reserved for balance-of-payments adjustments, although a few

episodes in Japan and the Netherlands do tend to follow this pattern. In the main, the principle of

a balanced budget was followed in all three countries, and budgetary policy does not appear to

have been generally used for short-term targets.

BALANCE OF TRADE

Balance of trade may be defined as the difference between the value of goods and services sold

to foreigners by the residents and firms of the home country and the value of goods and services

purchased by them from foreigners. In other words, the difference between the value of goods

and services exported and imported by a country is the measure of balance of trade.

If two sums (1) value of exports of goods and services and (2) value of imports of goods and

services are exactly equal to each other, we say that there is balance of trade equilibrium or

balance; if the former exceeds the latter, we say that there is a balance of trade surplus; and if the

later exceeds the former, then we describe the situation as one of balance of trade deficit. Surplus

is regarded as favourable while deficit is regarded as unfavourable.

The above mentioned definition has been given by James. E. Meade a Nobel Prize British

Economist. However, some economists define balance of trade as a difference between the value

of merchandise (goods) exports and the value of merchandise imports, making it the same as the

Goods Balance or the Balance of Merchandise Trade. There is n doubt that the balance of


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merchandise trade is of great significance to exporting countries, but still the BOT as defined by

J. E. Meade has greater significance.

Regardless of which idea is adopted, one thing is certain i.e. that balance of trade is a national

injection and hence it is appropriate to regard an active balance (an excess of credits over debits)

as a desirable state of affairs. Should this then be taken to imply that a passive trade balance (an

excess of debits over credits) is necessarily a sign of undesirable state of affairs in a country?

The answer is no. Because, take for example, the case of a developing country, which might be

importing vast quantities of capital goods and technology to build a strong agricultural or

industrial base. Such a country in the course of doing that might be forced to experience passive

or adverse balance of trade and such a situation of passive balance of trade cannot be described

as one of undesirable state of affairs. This would therefore again suggest that before drawing

meaningful inferences as to whether passive trade balances of a country are desirable or

undesirable, we must also know the composition of imports which are causing the conditions of

adverse trade balance.

BALANCE OF CURRENT ACCOUNT

BOP on current account refers to the inclusion of three balances of namely Merchandise

balance, Services balance and Unilateral Transfer balance. In other words it reflects the net flow

of goods, services and unilateral transfers (gifts). The net value of the balances of visible trade

and of invisible trade and of unilateral transfers defines the balance on current account.

BOP on current account is also referred to as Net Foreign Investment because the sum represents

the contribution of Foreign Trade to GNP.


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Thus the BOP on current account includes imports and exports of merchandise (trade balances),

military transactions and service transactions (invisibles). The service account includes

investment income (interests and dividends), tourism, financial charges (banking and insurances)

and transportation expenses (shipping and air travel). Unilateral transfers include pensions,

remittances and other transfers for which no specific services are rendered.

It is also worth remembering that BOP on current account covers all the receipts on account of

earnings (or opposed to borrowings) and all the payments arising out of spending (as opposed to

lending). There is no reverse flow entailed in the BOP on current account transactions.

BASIC BALANCE

The basic balance was regarded as the best indicator of the economys position vis --vis other

countries in the 1950s and the 1960s. It is defined as the sum of the BOP on current account

and the net balance on long term capital, which were considered as the most stable elements in

the balance of payments. A worsening of the basic balance [an increase in a deficit or a reduction

in a surplus or even a move from the surplus to deficit] was seen as an indication of deterioration

in the [relative] state of the economy.

The short term capital account balance is not included in the basic balance. This is perhaps for

two main reasons:

a) Short term capital movements unlike long term capital movements are relatively volatile andunpredictable. They move in and out of the country in a period of less than a year or even

sooner than that. It would therefore be improper to treat short term capital movements on the

same footing as current account BOP transactions which are extremely durable in nature.

Long term capital flows are relatively more durable and therefore they qualify to be treated

along side the current account transactions to constitute basic balance.


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b) In many cases, countries dont have a separate short term capital account as they constitute apart of the Errors and Omissions Account.

A deficit on the basic balance could come about in various ways, which are not mutuallyequivalent. E.g. suppose that the basic balance is in deficit because a current account deficit is

accompanied by a deficit on the long term capital account. The long term capital outflow will, in

the future, generate profits, dividends and interest payments which will improve the current

account and so, ceteris paribus, will reduce or perhaps reduce the deficit. On the other hand, a

basic balance surplus consisting of a deficit on current account that is more than covered by long

term borrowings from abroad may lead to problems in future, when profits, dividends etc are

paid to foreign investors.

THE OFFICIAL SETTLEMENT CONCEPT

An alternative approach for indicating, a deficit or surplus in the BOP is to consider the net

monetary transfer that has been made by the monetary authorities is positive or negative, which

is the so calledsettlement concept.

If the net transfer is negative (i.e. there is an outflow) then the BOP is said to be in deficit, but if

there is an inflow then it is surplus. The basic premise is that the monetary authorities are the

ultimate financers of any deficit in the balance of payments (or the recipients of any surplus).

These official settlements are thus seemed as the accommodating item, all other being

autonomous.

The monetary authorities may finance a deficit by depleting their reserves of foreign currencies,

by borrowing from the IMF or by borrowing from other foreign monetary authorities. The later

source is of particular importance when other monetary authorities hold the domestic currency as


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a part of their own reserves. A country whose currency is used as a reserve currency (such as the

dollars of US) may be able to run a deficit in its balance of payments without either depleting its

own reserves or borrowing from the IMF since the foreign authorities might be ready to purchase

that currency and add it to its own reserves. The settlements approach is more relevant under a

system of pegged exchange rates than when the exchange rates are floating.

THE CAPITAL ACCOUNT

The capital account records all international transactions that involve a resident of the country

concerned changing either his assets with or his liabilities to a resident of another country.

Transactions in the capital account reflect a change in a stockeither assets or liabilities.

It is often useful to make distinctions between various forms of capital account transactions. The

basic distinctions are between private and official transactions, between portfolio and direct

investment and by the term of the investment (i.e. short or long term). The distinction between

private and official transaction is fairly transparent, and need not concern us too much, except for

noting that the bulk of foreign investment is private.

Direct investment is the act of purchasing an asset and the same time acquiring control of it

(other than the ability to re-sell it). The acquisition of a firm resident in one country by a firm

resident in another is an example of such a transaction, as is the transfer of funds from the

parent company in order that the subsidiary company may itself acquire assets in its own

country. Such business transactions form the major part of private direct investment in other

countries, multinational corporations being especially important. There are of course some

examples of such transactions by individuals, the most obvious being the purchase of the second

home in another country.


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Portfolio investment by contrast is the acquisition of an asset that does not give the purchaser

control. An obvious example is the purchase of shares in a foreign company or of bonds issued

by a foreign government. Loans made to foreign firms or governments come into the same broad

category. Such portfolio investment is often distinguished by the period of the loan (short,

medium or long are conventional distinctions, although in many cases only the short and long

categories are used). The distinction between short term and long term investment is often

confusing, but usually relates to the specification of the asset rather than to the length of time of

which it is held. For example, a firm or individual that holds a bank account with another country

and increases its balance in that account will be engaging in short term investment, even if its

intention is to keep that money in that account for many years. On the other hand, an individual

buying a long term government bond in another country will be making a long term investment,

even if that bond has only one month to go before the maturity. Portfolio investments may also

be identified as either private or official, according to the sector from which they originate.

The purchase of an asset in another country, whether it is direct or portfolio investment, would

appear as a negative item in the capital account for the purchasing firms country, and as a

positive item in the capital account for the other country. That capital outflows appear as a

negative item in a countrys balance of payments, and capital inflows as positive items, often

causes confusions. One way of avoiding this is to consider that direction in which the payment

would go (if made directly). The purchase of a foreign asset would then involve the transfer of

money to the foreign country, as would the purchase of an (imported) good, and so must appear

as a negative item in the balance of payments of the purchasers country (and as a positive item

in the accounts of the sellers country).

The net value of the balances of direct and portfolio investment defines the balance on capital

account.


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ACCOMMODATING & AUTONOMOUS CAPITAL FLOWS

Economists have often found it useful to distinguish between autonomous and accommodating

capital flows in the BOP. Transactions are said to Autonomous if their value is determined

independently of the BOP. Accommodating capital flows on the other hand are determined bythe net consequences of the autonomous items. An autonomous transaction is one undertaken for

its own sake in response to the given configuration of prices, exchange rates, interest rates etc,

usually in order to realise a profit or reduced costs. It does not take into account the situation

elsewhere in the BOP. An accommodating transaction on the other hand is undertaken with the

motive of settling the imbalance arising out of other transactions. An alternative nomenclature is

that capital flows are above the line (autonomous) or below the line (accommodating).

Obviously the sum of the accommodating and autonomous items must be zero, since all entries

in the BOP account must come under one of the two headings. Whether the BOP is in surplus or

deficit depends on the balance of the autonomous items. The BOP is said to be in surplus if

autonomous receipts are greater than the autonomous payments and in deficit if viceaversa.

Essentially the distinction between both the capital flow lies in the motives underlying a

transaction, which are almost impossible to determine. We cannot attach the labels to particular

groups of items in the BOP accounts without giving the matter some thought. For example a

short term capital movement could be a reaction to difference in interest rates between two

countries. If those interest rates are largely determined by influences other than the BOP, then

such a transaction should be labelled as autonomous. Other short term capital movements may

occur as a part of the financing of a transaction that is itself autonomous (say, the export of some

good), and as such should be classified as accommodating.

There is nevertheless a great temptation to assign the labels autonomous and accommodating

to groups of item in the BOP. i.e. to assume, that the great majority of trade in goods and of long

term capital movements are autonomous, and that most short term capital movements are

accommodating, so that we shall not go far wrong by assigning those labels to the various

components of the BOP accounts. Whether that is a reasonable approximation to the truth may


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depend in part on the policy regime that is in operation. For example what is an autonomous item

under a system of fixed exchange rates and limited capital mobility may not be autonomous

when the exchange rates are floating and capital may move freely between countries.

BALANCE OF INVISIBLE TRADE

Just as a country exports goods and imports goods a country also exports and imports what are

called as services (invisibles). The service account records all the service exported and imported

by a country in a year. Unlike goods which are tangible or visible services are intangible.

Accordingly services transactions are regarded as invisible items in the BOP. They are invisible

in the sense that service receipts and payments are not recorded at the port of entry or exit as in

the case with the merchandise imports and exports receipts. Except for this there is no

meaningful difference between goods and services receipts and payments. Both constitute

earning and spending of foreign exchange. Goods and services accounts together constitute the

largest and economically the most significant components in the BOP of any country.

The service transactions take various forms. They basically include 1) transportation, banking,

and insurance receipts and payments from and to the foreign countries, 2) tourism, travel services

and tourist purchases of goods and services received from foreign visitors to home country and

paid out in foreign countries by home country citizens, 3) expenses of students studying abroad

and receipts from foreign students studying in the home country, 4) expenses of diplomatic and

military personnel stationed overseas as well as the receipts from similar personnel who are

stationed in the home country and 5) interest, profits, dividends and royalties received from

foreign countries and paid out to foreign countries. These items are generally termed as

investment income or receipts and payments arising out of what are called as capital services.

Balance of Invisible Trade is a sum of all invisible service receipts and payments in which the

sum could be positive or negative or zero. A positive sum is regarded as favourable to a country


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and a negative sum is considered as unfavourable. The terms are descriptive as well as

prescriptive.

BALANCE OF VISIBLE TRADE

Balance of visible trade is also known as balance of merchandise trade, and it covers all

transactions related to movable goods where the ownership of goods changes from residents to

non-residents (exports) and from non-residents to residents (imports). The valuation should be on

F.O.B basis so that international freight and insurance are treated as distinct services and not

merged with the value of goods themselves. Exports valued on F.O.B basis are the credit entries.

Data for these items are obtained from the various forms that the exporters have fill and submit

to the designated authorities. Imports valued at C.I.F are the debit entries. Valuation at C.I.F.

though inappropriate, is a forced choice due to data inadequacies. The difference between the

total of debits and credits appears in the Net column. This is the Balance of Visible Trade.

In visible trade if the receipts from exports of goods happen to be equal to the payments for the

imports of goods, we describe the situation as one of zero goods balance. Otherwise there

would be either a positive or negative goods balance, depending on whether we have receipts

exceeding payments (positive) or payments exceeding receipts (negative).

ERRORS AND OMISSIONS

Errors and omissions is a statistical residue. It is used to balance the sta tement because in

practice it is not possible to have complete and accurate data for reported items and because

these cannot, therefore, ordinarily have equal entries for debits and credits. The entry for net

errors and omissions often reflects unreported flows of private capital, although the conclusions


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that can be drawn from them vary a great deal from country to country, and even in the same

country from time to time, depending on the reliability of the reported information. Developing

countries, in particular, usually experience great difficulty in providing reliable information.

Errors and omissions (or the balancing item) reflect the difficulties involved in recording

accurately, if at all, a wide variety of transactions that occur within a given period of (usually 12

months). In some cases there is such large number of transactions that a sample is taken rather

than recording each transaction, with the inevitable errors that occur when samples are used. In

others problems may arise when one or other of the parts of a transaction takes more than one

year: for example wit a large export contract covering several years some payment may be

received by the exporter before any deliveries are made, but the last payment will not made until

the contract has been completed. Dishonesty may also play a part, as when goods are smuggled,

in which case the merchandise side of the transaction is unreported although payment will be

made somehow and will be reflected somewhere in the accounts. Similarly the desire to avoid

taxes may lead to under-reporting of some items in order to reduce tax liabilities.

Finally, there are changes in the reserves of the country whose balance of payments we are

considering, and changes in that part of the reserves of other countries that is held in the country

concerned. Reserves are held in three forms: in foreign currency, usually but always the US

dollar, as gold, and as Special Deposit Receipts (SDRs) borrowed from the IMF. Note that

reserves do not have to be held within the country. Indeed most countries hold a proportion of

their reserves in accounts with foreign central banks.

The changes in the countrys reserves must of course reflect the net value of all the other

recorded items in the balance of payments. These changes will of course be recorded accurately,and it is the discrepancy between the changes in reserves and the net value of the other record

items that allows us to identify the errors and omissions.


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UNILATERAL TRANSFERS

Unilateral transfers or unrequited receipts, are receipts which the residents of a country receive

for free, without having to make any present or future payments in return. Receipts from

abroad are entered as positive items, payments abroad as negative items. Thus the unilateraltransfer account includes all gifts, grants and reparation receipts and payments to foreign

countries. Unilateral transfer consist of two types of transfers: (a) government transfers (b)

private transfers.

Foreign economic aid or assistance and foreign military aid or assistance received by the home

countrys government (or given by the home government to foreign governments) constitutes

government to government transfers. The United States foreign aid to India, for BOP 9but a debit

item in the US BOP). These are government to government donations or gifts. There no well

worked out theory to explain the behaviour of this account because these flows depend upon

political and institutional factors. The government donations (or aid or assistance) given to

government of other countries is mixed bag given for either economic or political or

humanitarian reasons. Private transfers, on the other hand, are funds received from or remitted to

foreign countries on persontoperson basis. A Malaysian settled in the United States remitting

$100 a month to his aged parents in Malaysia is a unilateral transfer inflow item in the Malaysian

BOP. An American pensioner who is settled after retirement in say Italy and who is receiving

monthly pension from America is also a private unilateral transfer causing a debit flow in the

American BOP but a credit flow in the Italian BOP. Countries that attract retired people from

other nations may therefore expect to receive an influx of foreign receipts in the form of pension

payments. And countries which render foreign economic assistance on a massive scale can

expect huge deficits in their unilateral transfer account. Unilateral transfer receipts and payments

are also called unrequited transfers because as the name itself suggests the flow is only in onedirection with no automatic reverse flow in the other direction. There is no repayment obligation

attached to these transfers because they are not borrowings and lendings but gifts and grants

exchanged between government and people in one country with the governments and peoples in

the rest of the world.


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ILLUSTRATE THE ITEMS WHICH FALL UNDER CAPITAL ACCOUNT AND

CURRENT ACCOUNT WITH EXAMPLES.

Credits Debits

Current Account Current Account

1. Merchandise Exports (Sale of Goods) 1. Merchandise Imports (purchase of Goods)2. Invisible Exports (Sale of Services) 2. Invisible Imports (Purchase of Services)

a. Transport services sold abroad a. Transport services purchased fromabroad

b. Insurance services sold abroad b. Insurance services purchasedc. Foreign tourist expenditure in country c. Tourist expenditure abroadd. Other services sold abroad d. Other services purchased from abroade. Incomes received on loans and

investments abroad.e. Income paid on loans and investments

in the home country.

3. Unilateral Transfers 3. Unilateral Transfersa. Private remittances received from

abroada. Private remittances abroad

b. Pension payments received fromabroad

b. Pension payments abroadc. Government grants received from

abroadc. Government grants abroad.

Capital Account Capital Account

3. Foreign long-term investments in the homecountry (less redemptions and repayments)

3. Long-term investments abroad (lessredemptions and repayments)

a. Direct investments in the home country a. Direct Investments abroadb. Foreign investments in domestic

securitiesb. Investments in foreign securities

c. Other investments of foreigners in thehome country

c. Other investments abroadd. Foreign Governments loans to the

home country.d. Government loans to foreign countries

4. Foreign short-term investments in the homecountry.

4. Short-term investments abroad.

CAPITAL ACCOUNT CONVERTIBILITY (CAC)


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While there is no formal definition of Capital Account Convertibility, the committee under the

chairmanship of S.S. Tarapore has recommended a pragmatic working definition of CAC.

Accordingly CAC refers to the freedom to convert local financial assets into foreign financial

assets and viceaversa at market determined rates of exchange. It is associated with changes

of ownership in foreign / domestic financial assets and liabilities and embodies the creation and

liquidation of claims on, or by, the rest of the world. CAC is coexistent with restrictions other

than on external payments. It also does not preclude the imposition of monetary / fiscal measures

relating to foreign exchange transactions, which are of prudential nature.

Following are the prerequisites for CAC:

1. Maintenance of domestic economic stability.2. Adequate foreign exchange reserves.3. Restrictions on inessential imports as long as the foreign exchange position is not very

comfortable.

4. Comfortable current account position.5. An appropriate industrial policy and a conducive investment climate.6. An outward oriented development strategy and sufficient incentives for export growth.


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DESCRIPTIVE QUESTIONS

DISCUSS THE RELEVANCE / IMPORTANCE OF THE BOP STATEMENTS?

BOP statistics are regularly compiled, published and are continuously monitored by companies,

banks and government agencies. A set of BOP accounts is useful in the same way as a motion

picture camera. The accounts do not tell us what is good or bad, nor do they tell us what is

causing what. But they do let us see what is happening so that we can reach our own conclusions.

Below are 3 instances where the information provided by BOP accounting is very necessary:

1. Judging the stability of a floating exchange rate system is easier with BOP as the record ofexchanges that take place between nations help track the accumulation of currencies in the

hands of those individuals more willing to hold on to them.

2. Judging the stability of a fixed exchange rate system is also easier with the same record ofinternational exchange. These exchanges again show the extent to which a currency is

accumulating in foreign hands, raising questions about the ease of defending the fixed

exchange rate in a future crisis.

3. To spot whether it is becoming more difficult for debtor counties to repay foreign creditors,one needs a set of accounts that shows the accumulation of debts, the repayment of interest

and principal and the countries ability to earn foreign exchange for future repayment. A set of

BOP accounts supplies this information. This point is further elaborated below.

The BOP statement contains useful information for financial decision makers. In the short run,

BOP deficit or surpluses may have an immediate impact on the exchange rate. Basically, BOP

records all transactions that create demand for and supply of a currency. When exchange rates

are market determined, BOP figures indicate excess demand or supply for the currency and thepossible impact on the exchange rate. Taken in conjunction with recent past data, they may

conform or indicate a reversal of perceived trends. They also signal a policy shift on the part of

the monetary authorities of the country unilaterally or in concert with its trading partners. For

instance, a country facing a current account deficit may raise interest to attract short term capital

inflows to prevent depreciation of its currency. Countries suffering from chronic deficits may


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find their credit ratings being downgraded because the markets interpret the data as evidence that

the country may have difficulties its debt.

BOP accounts are intimately with the overall saving investment balance in a count rys national

accounts. Continuing deficits or surpluses may lead to fiscal and monetary actions designed to

correct the imbalance which in turn will affect exchange rates and interest rates in the country. In

nutshell corporate finance managers must monitor the BOP data being put out by government

agencies on a regular basis because they have both short term and long term implications for a

host of economic and financial variables affecting the fortunes of the company.

IN THE ACCOUNTING SENSE THE BOP ALWAYS BALANCES!

The BOP is a double entry accounting statement based on rules of debit and credit similar to

those of business accounting & book-keeping, since it records both transactions and the money

flows associated with those transactions. For instance, exports (like sales of a business) are

credits, and imports (like the purchases of a business) are debits. As in business accounting the

BOP records increases in assets (direct investment abroad) and decreases in liabilities

(repayment of debt) as debits, and decreases in assets (sale of foreign securities) and increases in

liabilities (the utilisation of foreign goods) as credits. An elementary rule that may assist in

understanding these conventions is that in such transactions it is the movement of a document,

not of the money that is recorded. An investment made abroad involves the import of a

documentary acknowledgement of the investment, it is therefore a debit. The BOP has one

important category that has no counter part or at least no significant counter part in business

accounting, i.e. international gifts and grants and other so called transfer payments.

In general credits may be conceived as receipts and debits as payments. However this is not

always possible. In particular the change in a countrys international reserves in gold and foreign


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exchange is treated as a debit if it is an increase and a credit if it is a decrease. The procedure is

to offset changes in reserves against changes in the other items in the table so that the grand total

is always zero, (except for errors and omissions).

A transaction entering the BOP usually has two aspects and invariably gives rise to two entries,one a debit and the other a credit. Often the two aspects fall in different categories. For instance,

an export against cash payment may result in an increase in the exporting countrys official

foreign exchange holdings. Such a transaction is entered in the BOP as a credit for exports and as

a debit for the capital account. Both aspects of a transaction may sometimes be appropriate to the

same account. For instance the purchase of a foreign security may have as its counter part

reduction in official foreign exchange holdings.

Thus it is clear that if we record all the entries in BOP in a proper way, debits and credits will

always be equal. So that in accounting sense the BOP will be in balance.

DETAILED OUTLINE OF THE BOP STATEMENT & SUB ACCOUNTS

Balance of Payments is the summary of all the transactions between the residents of one country

and rest of the world for a given period of time, usually one year. A BOP statement (revised)

includes the following sub accounts, as shown in the table below.

Items Credits Debits Net

G. Current Account1. Merchandise

a. Privateb. Government2. Invisiblesa. Travelb. Transportationc. Insuranced. Investment Incomee. Government (not included elsewhere)f. Miscellaneous


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3. Transfer Paymentsa. Officialb. Private

Total Current Account (1+2+3)

H.

Capital Account2. Privatea. Long Termb. Short Term

3. Banking4. Official

a. Loansb. Amortisationc. Miscellaneous

Total Capital Account (1+2+3)

I.

IMFJ. SDR AllocationK. Capital Account, IMF & SDR Allocation (B+C+D)L. Total Current Account, Capital Account, IMF & SDR

Allocation (A+E)

M.Errors & OmissionsN. Reserves and Monetary Gold

Current Account

The current account includes all transactions which give rise to or use up national income. The

current account consists of two major items, namely, (a) merchandise export and imports and (b)

invisible imports and exports.

Merchandise exports i.e. sale of goods abroad, are credit entries because all transactions giving

rise to monetary claims on foreigners represent credits. On the other hand, merchandise imports,

i.e. purchase of goods abroad, are debit entries because all transactions giving rise to foreign

money claims on the home country represent debits. Merchandise exports and imports form the

most important international transactions of most of the countries.


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Invisible exports i.e. sale of services, are credit entries and invisible imports i.e. purchase of

services are debit entries. Important invisible exports include sale abroad of services like

insurance and transport etc. while important invisible imports are foreign tourist expenditures in

the home country and income received on loans and investment abroad (interests or dividends).

Transfers payments refer to unrequited receipts or unrequited payments which may be in cash or

in kind and are divided into official and private transactions. Private transfer payments cover

such transactions as charitable contributions and remittances to relatives in other countries. The

main component of government transfer payments is economic aid in the form of grants.

Capital Account

The capital account separates the non monetary sector from the monetary one, that is to say, the

trading or ordinary private business element in the economy together with the ordinary

institutions of central or local government, from the central bank and the commercial bank,

which are directly involved in framing or implementing monetary policies. The capital account

consists of long term and short term capital transactions. Capital outflow represents debit and

capital inflow represent credit. For instance, if an American firm invests rupees 100 million in

India, this transaction will be represented as a debit in the US BOP and a credit in the BOP of

India.

Other Accounts

The IMF account contains purchases (credits) and repurchases (debits) from the IMF. SDRs

Special Drawing Rightsare a reserve asset created by the IMF and allocated from time to time

to member countries. Within certain limitations it can be used to settle international payments

between monetary authorities of member countries. An allocation is a credit while retirement is a

debit. The Reserve and Monetary Gold account records increases (debits) and decreases (credits)

in reserve assets. Reserve assets consist of RBIs holdings of gold and foreign exchange (in the


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form of balances with foreign central banks and investment in foreign government securities)

and governments holding of SDRs. Errors and Omissions is a statistical residue. Errors and

omissions (or the balancing item) reflect the difficulties involved in recording accurately, if at

all, a wide variety of transactions that occur within a given period of (usually 12 months). It is

used to balance the statement because in practice it is not possible to have complete and accurate

data for reported items and because these cannot, therefore, ordinarily have equal entries for

debits and credits.

HOW WILL YOU IDENTIFY A DEFICIT OR SURPLUS IN BALANCE OF

PAYMENTS? / MEANING OF DEFICIT AND SURPLUS IN THE BALANCE OF

PAYMENTS.

If the balance of payment is a double entry accounting record, then apart from errors and

omissions, it must always balance. Obviously, the terms deficit or surplus cannot refer to the

entire BOP but must indicate imbalance on a subset of accounts included in the BOP. The

imbalance must be interpreted in some sense as an economic disequilibrium.

Since the notion of disequilibrium is usually associated within a situation that calls for policy

intervention of some sort, it is important to decide what is the optimal way of grouping the

various accounts within the BOIP so that an imbalance in one set of accounts will give the

appropriate signals to the policy makers. In the language of an accountant e divide the entire

BOP into a set of accounts above the line and another set below the line. If the net balance

(credits-debits) is positive above the line we will say that there is a balance of payments

surplus; if it is negative e will say there is a balance of payments deficit. The net balance

below the line should be equal in magnitude and opposite in sign to the net balance above the

line. The items below the line can be said to be a compensatory nature they finance or

settle the imbalance above the line.


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The critical question is how to make this division so that BOP statistics, in particular the deficit

and surplus figures, will be economically meaningful. Suggestions made by economist and

incorporated into the IMF guidelines emphasis the purpose or motive a transaction, as a criterion

to decide whether a transaction should go above or below the line. The principle distinction

between autonomous transaction and accommodating or compensatory transactions.

Transactions are said to Autonomous if their value is determined independently of the BOP.

Accommodating capital flows on the other hand are determined by the net consequences of the

autonomous items. An autonomous transaction is one undertaken for its own sake in response to

the given configuration of prices, exchange rates, interest rates etc, usually in order to realise a

profit or reduced costs. It does not take into account the situation elsewhere in the BOP. An

accommodating transaction on the other hand is undertaken with the motive of settling the

imbalance arising out of other transactions. An alternative nomenclature is that capital flows are

above the line (autonomous) or below the line (accommodating). The terms balance of

payments deficit and balance of payments surplus will then be understood to mean deficit or

surplus on all autonomous transactions taken together.

The other measures of identifying a deficit or surplus in the BOP statement are:

Deficit or Surplus in the Current Account and/or Trade Account.

The Basic Balance which shows the relative deficit or surplus in the BOP.

A DEFICIT IN THE BASIC BALANCE IS DESIRABLE OR UNDESIRABLE!

The basic balance was regarded as the best indicator of the economys position vis --vis other

countries in the 1950s and the 1960s. It is defined as the sum of the BOP on current account

and the net balance on long term capital, which were considered as the most stable elements in

the balance of payments.


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A worsening of the basic balance [an increase in a deficit or a reduction in a surplus or even a

move from the surplus to deficit] is seen as an indication of deterioration in the [relative] state of

the economy. Thus it is very much evident that a deficit in the basic balance is a clear indicator

of worsening of the state of the countrys BOP position, and thus can be said to be undesirable at

the very outset.

However, on further thoughts, a deficit in the basic balance can also be understood to be

desirable. This can be explained as follows: A deficit on the basic balance could come about in

various ways, which are not mutually equivalent. E.g. suppose that the basic balance is in deficit

because a current account deficit is accompanied by a deficit on the long term capital account.

This deficit in long term capital account could be clearly observed in a developing countrys

which might be investing heavily on capital goods for advancement on the agricultural and

industrial fields. This long term capital outflow will, in the future, generate profits, dividends and

interest payments which will improve the current account and so, ceteris paribus, will reduce or

perhaps reduce the deficit.

Thus a deficit in basic balance can be desirable as well as undesirable, as it clearly depends upon

what is leading to a deficit in the long term capital account.

SHORT NOTES

BALANCE OF PAYMENTS

(Refer to Concept Questions)


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CURRENT ACCOUNT

The current account records exports and imports of goods and services and unilateral transfers.

Exports whether of goods or services are by convention entered as positive items in the account.

Imports accordingly are entered as negative items. Exports are normally calculated f.o.b i.e. cost

from transportation, insurance etc are not included whereas imports are normally calculated c.i.f.

i.e. transportation, insurance cost etc are included.

In many cases the payment for imports and exports will result in transfer of money between the

trading countries. For example a UK firm importing a good from US may settle its debt by

instructing its UK bank to make a payment to the US account of the exporter. This is not

necessarily the case however. If the UK firm holds a bank account in the US, then it may make

payment to the US exporter from that account. In the former case the financial side of the

transaction will appear in the UK BOP account as part of the net change in UK foreign currency

reserves. In the later it will appear as the part of the capital account since the UK firm has

reduced its claims on the US bank.

BOP accounts usually differentiate between trades in goods and trade in services. The balance of

imports and exports of the former is referred to in the UK accounts as the balance of visible trade

in other countries it may be referred to as the balance of merchandise trade, or simply as the

balance of trade. The net balance of exports and imports of services is called the balance of

invisible trade in the UK statistics.

Invisible trade is a much more heterogeneous category than is visible trade. It helps in

distinguishing between factor and non-factor services. Trade in the later of which shipping,

banking and insurance services and payments by residents as tourists abroad are usually the most

important, is in economic terms little different from trade in goods. That is, exports and imports


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are flows of outputs whose values will be determined by the same variables that would affect the

demand and supply for goods. Factors services, which consist in the main of interest, profits and

dividends, are on the other hand payments for inputs. Exports and imports of such services will

depend in large part on the accumulated stock of past investment in and borrowing from foreign

residents.

Unilateral transfer forms a major part of the current account. It refers to unrequited receipts or

unrequited payments which may be in cash or in kind and are divided into official and private

transactions. Unilateral transfers or unrequited receipts, are receipts which the residents of a

country receive for free, without having to make any present or future payments in return.

Receipts from abroad are entered as positive items, payments abroad as negative items.

The net value of the balances of visible trade and of invisible trade and of unilateral transfers

defines the balance on current account.

CAPITAL ACCOUNT

(Refer to Concept Questions)

OFFICIAL RESERVES ACCOUNT

Official reserve account forms a special feature of the capital account. This account records the

changes in the part of the reserves of other countries that is held in the country concerned. These

reserves are held in three forms: in foreign currency, usually but not always the US dollars,

as gold, and as Special Deposit Receipts (SDRs) borrowed from the IMF. Note that the


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reserves do not have to be held by the country. Indeed most of the countries hold a proportion of

the reserves in accounts with foreign central banks.

The IMF account contains purchases (credits) and repurchases (debits) from the IMF. SDRs

Special Drawing Rightsare a reserve asset created by the IMF and allocated from time to time

to member countries. Within certain limitations it can be used to settle international payments

between monetary authorities of member countries. An allocation is a credit while retirement is a

debit. The Reserve and Monetary Gold account records increases (debits) and decreases (credits)

in reserve assets. Reserve assets consist of RBIs holdings of gold and foreign exchange (in the

form of balances with foreign central banks and investment in foreign government securities)

and governments holding of SDRs.

The change in the reserves account measures a nations surplus or deficit on its current and

capital account transactions by netting reserve liabilities from reserve assets. For example, a

surplus will lead to an increase in official holdings of foreign currencies and/or gold; a deficit

will normally cause a reduction in these assets.

For most of the countries, there is a correlation between balance-of-payments deficits and reserve

declines. A drop in reserves will occur, for instance, when a nation sells gold to acquire foreign

currencies that it can use to meet the deficit in the balance of payments.

Conclusion:

A country can run an overall BOP deficit or surplus by engaging in the official reserve

transactions. Official reserve assets are those financial assets that can be used as international

means of payments. Currently, official reserve assets comprise: (I) gold, (ii) foreign exchanges,

(iii) special drawing rights (SDRs), and (iv) reserve positions with the IMF. Foreign exchanges

are by far the most important official reserves. For example, an overall BOP deficit can be

supported by drawing down the central banks reserve holdings. Likewise, an overall BOP

surplus can be absorbed by adding to the central banks reserve holdings.


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BIBLIOGRAPHY

Balance of Payments

- Paul Madson

International Financial Management

- P G Apte

International Economics

- Lindert


- Francis Chernuliam


- C P Kindelberger


- Geoffrey Reed


- H G Mannur

Major Items of India's balance of Payments (April-March, 2008-09)(In $ million)


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April-March (2008-09) (P)

April-March (2007-08)(PR)

Exports 175,184 166,163

Imports 294,587 257,789

Trade Balance -119,403 -91,626

Invisibles, net 89,586 74,592Current Account Balance -29,817 -17,034

Capital Account* 9,737 109,198

Change in Reserves#(+ indicates increase;- indicates

decrease)

20,080 -92,164

Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR:

Partially revised. R: revised

SOURCE: Reserve Bank of India Report

INDIAs cumulative value of exports for the period April- June, 2009 was

$ 35432 million (Rs.172762 crore) as against $ 51545 million (Rs.214808 crore)registering a negative growth of 31.3 percent in Dollar terms and 19.6 percent in Rupeeterms over the same period last year. Again, the cumulative value of imports for theperiod April- June, 2009 was $ 50936 million (Rs.248171 crore) as against$ 80187 million (Rs.334191 crore) registering a negative growth of36.5 percent in Dollarterms and 25.7 percent in Rupee terms over the same period last year.

EXPORTS & IMPORTS (April-June, FY 2009-10)

In $ Million In Rs Crore

Exports including re-exports

2008-09 51545 214808

2009-10 35432 172762

Growth 2009-10/2008-

2009 (percent)-31.3 -19.6

Imports

2008-09 80187 334191

2009-10 50936 248171

Growth 2009-10/2008-

2009 (percent)-36.5 -25.7

Trade Balance

2008-09 -28642 -119383

2009-10 -15504 -75409

Figures for 2008-09 and 2009-10 are provisional


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The trade deficit for April- June, 2009 was estimated at $ 15504 million which was lowerthan the deficit at $ 28642 million during April- June, 2008.

Source: Federal Ministry of Commerce, Government of India

Inflows & Outflows from NRI Deposits and Local Withdrawals(In $ million)

Inflows Outflows Local Withdrawals

2006-07 (R) 19914 15593 132082007-08 (PR) 29401 29222 18919

April-March 2008-09(P)

37,089 32,799 20,617

P: Preliminary, PR: Partially revised. R: revised

SOURCE: Reserve Bank of India report, 2008-09

KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

April-March

2008-09 2007-08 2006-07

Merchandize Trade

Exports ($ on BoP basis)Growth Rate (percent)

5.4 28.9 22.6

Imports ($ on BoP basis)Growth Rate (percent) 14.3 35.2 21.4

Crude Oil Prices, Per Barrel(Indian Basket)

82.4 79.5 62.4

Trade Balance ($ billion) -119.4 -91.6 -61.8

Invisibles

Net Invisibles ($ Billion) 89.6 74.6 52.2


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Net Invisibles Surplus/TradeDeficit (Percent)

75.0 81.4 84.5

Invisible Receipts/CurrentReceipts (Percent)

48.1 47.2 47.1

Services Recipts/Current

Receipts (Percent)

30.0 28.6 30.3

Private Transfers/CurrentReceipts (Percent)

13.7 13.8 12.7

Current Account

Current Receipts ($ Billion) 337.7 314.8 243.4

Current Payments ($ Billion) 367.6 331.8 253.0

Current Account Balance ($Billion)

--29.8 -17.0 -9.6

Capital Account

Gross Capital Inflows ($Billion)

302.5 433.0 233.3

Gross Capital Outflows ($Billion)

293.3 325.0 188.1

Net Capital Flows ($ Billion) 9.1 108.0 45.2

Net FDI/Net CapitalFlows (Percent)

191.3 14.3 17.0

Net Portfolio Investment/Netcapital Flows (Percent)

-153.4 27.4 15.6

Net ECBs/Net capitalFlows (Percent)

89.2 21.0 35.5

Reserves

Import Cover of Reserves (Inmonths)

10.3 14.4 12.5

Outstanding Reserves as at endperiod ($ Billion)

252.0 309.7 199.2

SOURCE: Reserve bank of India Report on Balance of Payment, December 2008

India's Merchandize Trade (2003-04 to 2008-09 (April-March)

Year Exports Growth(Percent)

Imports Growth(Percent)

2003-04 63.8 - 78.1 -

2004-05 83.5 30.8 111.5 42.7

2005-06 103.1 23.4 149.2 33.8

2006-07 126.3 22.5 185.6 24.4

2007-08 162.9 29.0 251.4 35.5

2008-09(April-March)

- 5.4 - 14.3


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SOURCE: Federal Ministry of Commerce, Government of India

Gross Capital Inflows and Outflows (In $ Million)

HEADS Gross Inflows Gross Out flows

April-March April-March

2008-09 P

2007-08

PR

2006-07 R 2008-09 P

2007-08

PR

2006-07 R

Foreign DirectInvestment

36,258 36838 23590 18,762 21437 15897

PortfolioInvestment

128,651 235924 109620 142,685 206368 102560

External Assistance 5,042 4241 3767 2,404 2127 1992ExternalCommercialBorrowings

15,382 30376 20883 7,224 7743 4780

NRI Deposits 37,089 29401 19914 32,799 29222 15593

Banking capitalexcluding NRDeposits

27,909 26412 17295 35,596 14834 19703

Short-term tradeCredits

39,734 48,911 29,992 45,529 31,728 23,380

Rupee Debt Service 0 0 0 101 121 162Other Capital 12,391 20904 8230 8,210 11434 4021

TOTAL 302,456 433007 233291 293,310 325014 188088

R: Revised; P: Preliminary; PR: Partially Revised

SOURCE: Reserve Bank of India Report on Balance of Payment, December 2008

Business Services (In $ Million)

Item Receipts Payments

April-March April-March

2008-

09 P2007-

08 PR2006-07 R 2008-

09 P2007-

08 PR2006-07 R

Trade Related 2,008 2233 1325 1,642 2285 1801


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Business &ManagementConsultancy

4,847 4433 4476 3,512 3653 3484

Architectural,Engineering & other

Technical

1,759 3144 3457 3,106 3173 3025

Maintenance ofOffices

2,980 2861 2638 3,283 3,496 4,032

Others 4,657 4100 2648 3,726 4,108 3,522

TOTAL 16,251 16771 14544 15,269 16715 15866

R: Revised; P:Preliminary; PR:

Partially Revised

SOURCE: Reserve Bank of India Report on Balance of Payment, December 2008

balance of payment adjustment

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