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Balance Of Payments (BOP)

Situation

in India

By:

Santosh K. Rena

Nirmal Kumar

Ashok Anand

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What is BOP?

BOP is a systematic record of all economic

transactions made between one particular

country and all other countries during

a specified period of time.

-ve BOP:- more money is flowing out of the

country than coming in, and vice versa.

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Significance ofBOP

The BOP includes-1. Trade balance,

2. Foreign investments and

3. Investments by foreigners

Indicator of economic and

political stability.

Monitor all international monetary

transactions

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Balance of PaymentsThe difference between receipts and payments

Costs of goods exported.

Money spent by foreign

tourists.

Transportation.

Payments of dividends and

interest from fdi abroad.

New foreign investments

Money Coming In

Costs of goods imported.

Spending by touristsabroad

New overseas investments.

Cost of foreign aid.

Money Going out

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Balance of PaymentsThe Balance of Payments includes three accounts:

(1) Current account (2) Capital account

(3) Financial account

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What are These A/c s ?

Current account is used to mark the inflowand outflow of goods and services into acountry.

Capital account is where all internationalcapital transfers are recorded.

In the financial account, international

monetary flows related to investment inbusiness, real estate, bonds and stocks aredocumented.

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TRENDS IN INDIAS BALANCE OF

PAYMENT

Period I: 1956-57 TO 1975-76

Large trade deficit

2 wars- a) 1962 with china

b) 1965 with pakistan

First oil shock in 1973

Large scale imports of foodgrains, machinery,

ships & aircrafts etc. IMF borrowings increases current account

deficit.

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Period II: 1976-77 TO 1979-80

BOP is somewhat comfortable-

Rapid increase in private remittance from oil

exporting countries. Strong growth in exports.

There was a substantial expansion in the

activities ofIndian firms in oil exportingcountries

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Period III: 1980-81 TO 1990-91

Second oil price hike.

In 1981-82 , imports almost doubled.

Increase in POL imports. Repayment ofIMF put added pressure on

BOP.

Discovery of crude oil in Bombay High.

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Period IV : 1991-92 ONWARDS

In 1990, Gulf crisis causes sharp increase in oil

prices.

Annexation of Kuwait.

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Way ForwardWay Forward

GOI introduced measures of Fiscal Correction

& Trade & Industrial Policies.

Liberalised ForeignInvestment Policy.

Key lies in consistently stepping up exports.

On the import front, POL will require special

attention if the country has to be protectedfrom external-price hike-shocks

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BALANCINGBALANCING

MECHANISMS/ADJUSTMENTSMECHANISMS/ADJUSTMENTS

AutomaticAdjustment mechanism

Change in exchange rate

Adjusting internal prices & demand

Rules based rebalancing mechanism

Monetary union system

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AUTOMATIC ADJUSTMENTAUTOMATIC ADJUSTMENT

MECHANISMMECHANISM

changing the level of foreign exchange supply and demand:

Flexible exchange rate:

Deficit

Domestic Currency Depreciation

q D for & oS of foreign exchange

Balance-of-Payments Equilibrium

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-Fixed exchange rate:

through price changes

through changes in aggregate expenditures

Balance-

of-

payments

deficit

Fall in

aggregateexpenditu

res

Fall in

supply of

money

Decrease in

GDP

Lower

rate of

inflation

Improved

competitiveness

relative to other

countries

Decreased

imports

Increasedexports

Decreased

imports

Increased

exports

Multiplier

Marginal

propensity to

import

Decrease in

domestic

demand

Price

elasticity

Decreas

e in the

deficit

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CHANGE IN EXCHANGE RATECHANGE IN EXCHANGE RATE

Done by Govt.

When countrys Export > Import

The demand for its currency will tend to increase

The extra demand tends to cause a rise of the countrys price relative toothers

When countrys Import > Export

The supply of its own currency on the international market tends to

increase

This extra supply results in price fall

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ADJUSTING INTERNAL PRICESADJUSTING INTERNAL PRICES

& DEMAND& DEMAND

In case of Gold standard - mechanism is largely

automatic

When export > Import

Net inflow of gold

natural effect

Money supply which leads to increase in pricetends to make its goods less competitive so will

decrease its trade surplus

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Cont..Cont..

If a country has adverse BOP

Net loss of Gold

Automatically have a deflationary effect

Prices will reduce making its export more competitive

and thus correcting the imbalance

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RULES BASED REBALANCINGRULES BASED REBALANCING

MECHANISMMECHANISM

Nations can agree to fix their exchange rate

against each other

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MONETARY UNION SYSTEMMONETARY UNION SYSTEM

Countries completely give up their national monetary

policy and surrender it to some above-national

institution

Common currency becomes the only legal tender inall monetary union member countries

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Major Items of India's Balance of Payments

(US$ million)

(2007-08) (PR) (2008-09) (P)

April-December (2008-

09) (PR)

April-December (2009-

10) (P)

Exports 166163 175184 150520 124473

Imports 257789 294587 248967 213988

Trade Balance -91626 -119403 -98446 -89515

Invisibles, net 74592 89587 70931 59185

Current Account

Balance-17034 -29817 -27516 -30330

Capital Account* 109198 9737 7136 41630

Change in Reserves#

(+ indicates increase;-

indicates decrease)

-92164 20080 20380 -11330

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

SOURCE: Reserve Bank of India Report

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KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

2007-08 2008-09 2008-09 (Q1) (PR) 2009-10 (Q1) (P)

Merchandize Trade

Exports ($ on BoP basis) Growth Rate (percent) 28.9 5.4 43.0 -21.0

Imports ($ on BoP basis) Growth Rate (percent) 35.2 14.3 42.9 -19.6

Crude Oil Prices, Per Barrel (Indian Basket) 79.2 82.4 118.8 63.9

Trade Balance ($ billion) -91.6 -119.4 -31.4 -26.0

Invisibles

Net Invisibles ($ Billion) 74.6 89.6 22.4 20.2

Net Invisibles Surplus/Trade Deficit (Percent) 81.4 75.0 71.3 77.7

Invisible Receipts/Current Receipts (Percent) 47.2 48.1 44.2 49.9

Services Receipts/Current Receipts (Percent) 28.6 30.0 26.2 28.9

Private Transfers/Current Receipts (Percent) 13.8 13.7 13.8 17.2Current Account

Current Receipts ($ Billion) 314.8 337.7 88.1 77.5

Current Payments ($ Billion) 331.8 367.6 97.1 83.3

Current Account Balance ($ Billion) -17.0 -29.8 -9.0 -5.8

Capital Account

Gross Capital Inflows ($ Billion) 433.0 302.5 90.9 78.5

Gross Capital Outflows ($ Billion) 325.0 293.3 79.7 71.8

Net Capital Flows ($ Billion) 108.0 9.1 11.1 6.7Net FDI/Net Capital Flows (Percent) 14.3 191.3 80.5 101.4

Net Portfolio Investment/Net capital Flows (Percent) 27.4 -153.4 -37.8 122.7

Net ECBs/Net capital Flows (Percent) 21.0 89.2 13.2 -5.3

Reserves

Import Cover of Reserves (In months) 14.4 10.3 13.3 11.4

Outstanding Reserves as at end period ($ Billion) 309.7 252.0 312.1 265.1

SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First Quarter (April-June 2009) of 2009-10

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CONCLUSIONCONCLUSION The balance of payment situation started improving since 1992-93.

There was a satisfactory balance of payment position in that period; thereasons are-

High earnings from invisibles

Rise in external commercial borrowings, and

Encouragement to foreign direct investment.

The positive earnings from invisibles covered a substantial part of trade

deficit and current account deficit reduced significantly. The external

commercial borrowings was extensively used to finance the current

account deficit. The net non resident deposits were positive through out

the ten year period. There has been a growing strength in India's

balance of payment position in the post reform period inspite of

growing trade deficit and current account deficit.

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