BALANCE OF PAYMENTS IN
INDIA
DONE BY:
AMRUTHA KUBER
ROMIKA JAIN
BALAVARSHINI
SONAM BAFNA
NEHAL JAIN
2ndB.COM(MM)
INTRODUCTION
In economics, the balance of payments, (or BOP) measures the
payments that flow between any individual country and all
other countries. It is used to summarize all international
economic transactions for that country during a specific time
period, usually a year. The BOP is determined by the country's
exports and imports of goods, services, and financial capital, as
well as financial transfers. It reflects all payments and
liabilities to foreigners (debits) and all payments and
obligations received from foreigners (credits). Balance of
payments is one of the major indicators of a country's status in
international trade, with net capital outflow.
The balance, like other accounting statements, is prepared in a
single currency, usually the domestic. Foreign assets and flows
are valued at the exchange rate of the time of transaction.
DEFINITION
The IMF definition: "Balance of Payments
is a statistical statement that summarizes
transactions between residents and
nonresidents during a period." The balance
of payments comprises the current account,
the capital account, and the
financial account. "Together, these
accounts balance in the sense that the sum
of the entries is conceptually zero."
Balance of payments identity
The balance of payments identity states that::
Current Account = Capital Account + Financial Account +
Net Errors and Omissions
This is a convention of double entry accounting, where all
debit entries must be booked along with corresponding
credit entries such that the net of the Current Account will
have a corresponding net of the Capital and Financial
Accounts:
Where:
X = exports
M = imports
Ki = capital inflows
Ko = capital outflows
HISTORY OF BOP IN INDIA
• India has a chronic deficit on current accounts.
What bridge the gap between payments and receipts are mainly
external aid (especially nonproject assistance), tourism earnings,
and remittances from Indians working abroad.
• Heavy imports of food grains and armament purchases caused a
decline in India's foreign exchange reserves in the mid-1960s. An
economic recovery from 1968–69, however, eased the problem,
and by September 1970, foreign exchange reserves amounted to
$616 million, as compared with $383 million by December 1965.
• Reserves declined to $566 million by the end of 1972 but
increased to $841 million as of December 1975, despite massive
deficits on current accounts, attributable to the quadrupling of
oil import prices during 1973–74.
• Foreign exchange reserves declined from $6,739 million at
the end of 1979 to $3,476 million as of November 1982 but
subsequently rose to $5,924 million by March 1987.
• The Gulf War crisis worsened the ratio of current account
deficit to GDP. Foreign exchange reserves plummeted
because of export losses in Kuwait, Iraq, and other nations.
• Remittances from Indian workers fell, and sudden price
increases for oil imports caused an estimated loss to India
of over $2.8 billion in earnings.
• By November 1993, however, India's foreign exchange
reserves had risen to $8.1 billion, the highest level since
1951.
• A substantial reduction in the trade deficit, increased
inflows from foreign institutional investors, a stable
exchange rate, and improved remittances all
contributed in the recovery of reserves.
• Although export growth remained strong, the current
account deficit tripled from 1993–94 to 1995–96.
• The increase was attributed to a continuing surge in
imports and higher debt service requirements.
• However, between 1995 and 1998 the current account
deficit shrank to about 1% of GDP due to increased
textile exports and a liberalizing trade regime.
• India's total external debt in 2001 was estimated at
$100.6 billion. In 2000, the external debt-GDP ratio
stood at around 20.7%, down from 41% in 1991/92.
• In the early 2000s, India's exports to East and
Southeast Asia increased, including to Japan and
South Korea.
• High growth rates were registered for textiles,
chemicals and related products, engineering goods,
and leather and manufactures.
STATISTICS AS ON 2000
Current Account -4,198
Balance on goods -12,193
Balance on services -1,582
Balance on income -3,876
Current transfers 13,453
Capital Account …
Financial Account 9,616
Direct investment abroad -335
Direct investment in India 2,315
Portfolio investment assets …
Portfolio investment liabilities 1,619
Other investment assets -1,136
Other investment liabilities 7,152
Net Errors and Omissions 670
Reserves and Related Items -6,087
Rupees crore
Item 2005-06 R 2006-07 PR 2007-08 P
1 2 3 4
A CURRENT ACCOUNT
.
1 Exports, f.o.b. 4,65,748 5,79,128 6,37,190
2 Imports, c.i.f. 6,95,412 8,65,404 9,99,286
3 Trade Balance -2,29,664 -2,86,276 -3,62,096
4 Invisibles, Net 1,85,927 2,40,933 2,91,739
a) 'Non-Factor' 1,02,611 1,43,604 1,50,923
Services
of which :
Software Services 98,678 1,31,144 1,48,887
b) Income -26,116 -29,778 -23,845
c) Private Transfers 1,08,565 1,26,088 1,63,709
d) Official Transfers 867 1,019 952
5 Current Account -43,737 -45,343 -70,357
Balance
B. CAPITAL ACCOUNT
1 Foreign 68,782 70,443 1,80,152
Investment, Net
(a+b)
a) Direct 13,425 38,553 62,339
Investment
of which:
i) In India 39,457 99,261 1,29,746
Equity 26,239 73,969 1,00,777
Reinvested 12,220 23,029 27,714
Earnings
Other Capital 998 2,263 1,255
ii) Abroad -26,032 -60,708 -67,407
Equity -16,718 -50,670 -50,179
Reinvested -4,834 -4,868 -4,363
Earnings
Other Capital -4,480 -5,170 -12,865
b) Portfolio 55,357 31,890 1,17,813
Investment
In India 55,357 31,630 1,17,154
Abroad 0 260 659
2 External Assistance, 7,592 7,937 8,465
Net
Disbursements 16,133 16,961 17,022
Amortizations 8,541 9,024 8,557
3 Commercial 10,505 72,596 89,317
Borrowings, Net
Disbursements 63,476 94,332 1,20,173
Amortizations 52,971 21,736 30,856
4 Short term Credit, Net 16,300 30,096 70,846
5 Banking Capital 5,795 8,477 47,147
of which: NRI Deposits, 12,457 19,574 706
Net
6 Rupee Debt Service -2,557 -725 -488
7 Other Capital, Net @ 5,548 17,565 38,464
8 Total Capital Account 1,11,965 2,06,389 4,33,903
C Errors & -2,332 6,143
Omissions
D. Overall Balance 65,896 3,69,689
[A(5)+B(8)+C]
E. Monetary -65,896 -3,69,689
Movements (F+G)
F. IMF, Net 0 0
G. Reserves and -65,896 -3,69,689
Monetary Gold
April-December (2008-09) (P) April-December (2007-08) (PR)
Exports 133,527 113,614
Imports 238,864
182,894
Trade Balance -105,337 -69280
Invisibles, net 68,868 53772
Current Account Balance -36,469 -15508
Capital Account* 16,089 82,682
Change in Reserves#
(+ indicates increase;- indicates decrease) 20,380 -67,174
CONCLUSION
India’s trade deficit on a balance of payments (BOP)
basis has widened significantly by 52.04 percent to $
105.33 26 billion in the nine months (April-
December) of fiscal year* 2008-09 from $ 68.28
billion in the comparable period in previous fiscal.
The widening trade deficit is attributed to significant
growth in imports. During the nine-month period
(April-December, 2008) imports were up 30.60
percent to $ 238.86 billion from $ 182.89 percent in
the comparable period in fiscal 2007-08.
