THE BALANCE OF PAYMENT OF INDIA

Aby Abdul Rabb, Nagercoil, India

M.Com.,M.L.M., M.B.A.,M.Phil (Com)
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I. INTRODUCTION
The balance of payments (BOP) of a country is the record of all economic transactions
between the residents of a country and the rest of the world in a particular period. These
transactions are made by individuals, firms and government bodies. Thus the balance of payments
includes all external visible and non-visible transactions of a country during a given period,
usually a year. This assignment briefly explains the balance payment of India.
A. Meaning
Balance of payments (BoP) accounts are an accounting record of all monetary transactions
between a country and the rest of the world. These transactions include payments for the country's
exports and imports of goods, services, financial capital, and financial transfers.
B. Definition
The Balance of Payments of a Country can be defined as the Statistical Record of a
Country's International Trade over a certain period of time, presented in the form of double entry
Book-keeping.

II.

MAJOUR DIVISION OF THE BALANCE OF PAYMENT

The two principal parts of the BOP accounts are the current account and the capital account.
A. Current Account
The current account shows the net amount a country is earning if it is in surplus, or
spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports minus
payments for imports), factor income (earnings on foreign investments minus payments made to
foreign investors) and cash transfers. It is called the current account as it covers transactions in the
"here and now" - those that don't give rise to future claims
Balance of Current Account = [Export of goods + export of services + unrequited
receipts] [Imports of goods + Imports of services + unrequited payments] unrequited receipts
include gifts and indemnities etc. from foreigners while unrequited payments are gifts and
indemnities to foreigners.
B. Capital Account
The capital account records the net change in ownership of foreign assets. It includes the
reserve account (the foreign exchange market operations of a nation's central bank), along with

loans and investments between the country and the rest of world (but not the future regular
repayments/dividends that the loans and investments yield; those are earnings and will be recorded
in the current account).
Balance of Capital Account = Capital Receipts Capital Payments

III.

BALANCE PAYMENT OF INDIA

The Indias balance-of-payments (BoP) position improved dramatically in 2013-14,

particularly in the last three quarters. This owed in large part to measures taken by the government
and the Reserve Bank of India (RBI) and in some part to the overall macroeconomic slowdown
that fed into the external sector. Current account deficit (CAD) declined sharply from a record
high of US$ 88.2 billion (4.7 per cent of gross domestic product [GDP]) in 2012-13 to US$ 32.4
billion (1.7 per cent of GDP) in 2013-14. After staying at perilously unsustainable levels of well
over 4.0 per cent of GDP in 2011-12 and 2012-13, the improvement in BoP position is a welcome
relief, and there is need to sustain the position going forward. This is because even as CAD came
down, net capital flows moderated sharply from US$ 92.0 billion in 2012-13 to US$ 47.9 billion
in 2013-14, that too after a special swap window of the RBI under the non-resident Indian

IV.

DISEQUILIBRIUM IN BALANCE OF PAYMENT

Though the credit and debit are written balanced in the balance of payment account, it may

not remain balanced always. Very often, debit exceeds credit or the credit exceeds debit causing
an imbalance in the balance of payment account. Such an imbalance is called the disequilibrium.
Disequilibrium may take place either in the form of deficit or in the form of surplus.

Disequilibrium of Deficit arises when our receipts from the foreigners fall below our
payment to foreigners. It arises when the effective demand for foreign exchange of the country
exceeds its supply at a given rate of exchange.
A. Causes of Disequilibrium in Balance of Payment
1) Population Growth
Most countries experience an increase in the population and in some like India and China
the population is not only large but increases at a faster rate. To meet their needs, imports become
essential and the quantity of imports may increase as population increases.
2) Development Programmes
Developing countries which have embarked upon planned development programmes
require importing capital goods, some raw materials which are not available at home and highly

skilled and specialized manpower. Since development is a continuous process, imports of these
items continue for the long time landing these countries in a balance of payment deficit.
3) Demonstration Effect
When the people in the less developed countries imitate the consumption pattern of the
people in the developed countries, their import will increase. Their export may remain constant or
decline causing disequilibrium in the balance of payments.
4) Natural Factors
Natural calamities such as the failure of rains or the coming floods may easily cause
disequilibrium in the balance of payments by adversely affecting agriculture and industrial
production in the country.
5) Cyclical Fluctuations
Business fluctuations introduced by the operations of the trade cycles may also cause
disequilibrium in the country's balance of payments.
6) Inflation
An increase in income and price level owing to rapid economic development in developing
countries, will increase imports and reduce exports causing a deficit in balance of payments.
7) Poor Marketing Strategies
The superior marketing of the developed countries have increased their surplus. The poor
marketing facilities of the developing countries have pushed them into huge deficits.
8) Flight of Capital
Due to speculative reasons, countries may lose foreign exchange or gold stocks people in
developing countries may also shift their capital to developed countries to safeguard against
political uncertainties. These capital movements adversely affect the balance of payments position.
9) Globalization
The emerging new global economic order has brought in certain problems for some
countries which have resulted in the balance of payments disequilibrium.
B. Types of Disequilibrium in Balance of Payment
The main types of disequilibrium in the balance of payment are as follows:1) Structural Disequilibrium
It takes place due to structural changes in the economy affecting demand and supply
relations in commodity and factor market.
2) Cyclical Disequilibrium

When disequilibrium is caused due to the changes in trade cycles, it is termed as cyclical
disequilibrium.

3) Technological Disequilibrium
Technological disequilibrium in balance of payments is caused by various technological
changes involve inventions or innovations of new goods or new technique of production. These
technological changes affect the demand for factors and goods.
4) Short run Disequilibrium
Disequilibrium caused on a temporary basis for a short period, say one year is called short
run disequilibrium. Such disequilibrium does not pose a serious threat as it can be overcome
within a short run.
5) Long run or Secular Disequilibrium
When the disequilibrium is persistent & long run oriented, it is called long run
disequilibrium The IMF terms such disequilibrium as "Fundamental Disequilibrium".
6) Monetary Disequilibrium
Monetary disequilibrium, takes place on account of inflation or deflation. Due to inflation,
the prices of the products in the domestic market rises, and therefore, export items will become
expensive. Such a situation may affect the BoP equilibrium.
V.

MEASURES TO CORRECT DEFICIT IN THE BALANCE OF PAYMENT BOP

A. Monetary Measures for Correcting the BoP
The monetary methods for correcting disequilibrium in the balance of payment are as

follows:
1) Deflation
Deflation means falling prices. Deflation has been used as a measure to correct deficit
disequilibrium. A country faces deficit when its imports exceeds exports.
2) Exchange Depreciation
Exchange depreciation means decline in the rate of exchange of domestic currency in
terms of foreign currency. This device implies that a country has adopted a flexible exchange rate
policy.
3) Devaluation
Devaluation refers to deliberate attempt made by monetary authorities to bring down the
value of home currency against foreign currency. While depreciation is a spontaneous fall due to
interactions of market forces, devaluation is official act enforced by the monetary authority.

4) Exchange Control
It is an extreme step taken by the monetary authority to enjoy complete control over the
exchange dealings. Under such a measure, the central bank directs all exporters to surrender their
foreign exchange to the central authority. Thus it leads to concentration of exchange reserves in
the hands of central authority.
B. Non-Monetary Measures for Correcting the BoP
A deficit country along with Monetary measures may adopt the following non-monetary
measures too which will either restrict imports or promote exports.
1) Tariffs
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the prices of
imports would increase to the extent of tariff. The increased prices will reduced the demand for
imported goods and at the same time induce domestic producers to produce more of import
substitutes.
2) Quotas
By restricting imports through the quota system, the deficit is reduced and the balance of
payments position is improved.
3) Export Promotion
The government can adopt export promotion measures to correct disequilibrium in the
balance of payments.
4) Import Substitution
A country may resort to import substitution to reduce the volume of imports and make it
self-reliant.

CONCLUSION
The term "balance of payments" often refers to this sum: a country's balance of payments
is said to be in surplus (equivalently, the balance of payments is positive) by a certain amount if
sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying
for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a
balance of payments deficit (the balance of payments is said to be negative) if the former are less
than the latter.

BIBLIOGRAPHY
B.L. Mathur and Raman K. Dave. International Trade and Finance. Wide Vision, 2012.
Eirc Helleiner , Louis W Pauly et al. John Ravenhill, ed. Global Political Economy. Oxford
University Press, 2005.

Karl Poanyi. The Great Transformation, Beacon Press, 2002. ISBN 978-0-8070-5643-1.