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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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