India: Balance of payments, Balance of trade, Current account deficit, Capital account transfers, important issues, etc.

GROUP 4
Ekta Suri (17/11) Anirban Chakraborty (18/11) Vishal Mohla(19/11) Sumit Gupta (20/11) Swati Karki (21/11)

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 them on account of goods imported and services received from the capital transferred to non-residents or foreigners.

Reserve Bank of India (RBI)

BALANCE OF PAYMENTS
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.

India's balance of payment worsened in the early 1990's but now the situation is under control. In fact, India has a good foreign exchange reserves mainly due to capital inflows from foreign financial institutions or the stock exchange.

IMPORTANCE OF BoP
The BoP is an important indicator of pressure on a countrys foreign exchange rate

The BOP helps to forecast a countrys market potential, especially in the short run
Changes in a countrys BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors

CONTENTS OF BoP
Current account

Capital account
Financial account

Net errors and omissions account

Reserves and related items: official reserve

account

Balance of Payments from 2005-06 through 2009-10, 2010-11 estimates, and April-September 2010 Semi annual Results

MAJOR ITEMS OF INDIAs BoP

Current account
Net export/import of goods (trade balance) Net export/import of services Net income (investment income from direct and portfolio investment plus employee compensation) Net transfers (sums sent home by migrants and permanent workers aboard, gifts, grants and pensions)

Capital account
Capital transfers related to the purchase and sale of fixed assets such as real estate

Financial account
Net foreign direct investment Net portfolio investment Other financial items

Net errors and omissions account

Missing data such as illegal transfers

Reserves and related items: official reserve account

Changes in official monetary reserves including gold, foreign exchange, and IMF position.

EXAMPLE
AUTOMOBILES

U.S.A

Japan
dollars or dollar-denominated assets E.g.. Treasury bills

If Americans buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end up holding dollars, which they may hold in the form of bank deposits in the United States or in some other U.S. investments

EXAMPLE (Contd.)
The payments of Americans to Japan for automobiles are balanced by the payments of Japanese to U.S. individuals and institutions, including banks, for the acquisition of dollar assets Japan sold the United States automobiles, and the United States sold Japan dollars or dollardenominated assets such as Treasury bills

 Although the totals of payments and receipts are necessarily equal, there will be inequalitiesexcesses of payments or receipts, called deficits or surplusesin particular kinds of transactions. There can be a deficit or surplus in any of the following:
merchandise trade (goods), services trade, foreign investment income, unilateral transfers (foreign aid), private investment, the flow of gold and money between central banks and treasuries, or any combination of these or other international transactions.

IMPORTS
Goods and services produced by the foreign sector and purchased by the domestic economy. Imports are goods purchased from other countries. For e.g. The United States, buys a lot of the stuff produced within the boundaries of other countries, including bananas, coffee, cars, chocolate, computers, and, well, a lot of other products. Imports and exports are frequently combined into a single term, net exports (exports minus imports)

EXPORTS
The sale of goods to a foreign country. For E.g.. The United States, sells a lot of the stuff produced within our boundaries to other countries, including wheat, beef, cars, furniture, and, well, almost every variety of product you care to name. In general, domestic producers (and their workers) are elated with the prospect of selling their goods to foreign countries-leading to more buyers, a higher price, and more profit. The higher price, however, is bad for domestic consumers.

BALANCE OF TRADE

BALANCE OF TRADE
Buying and selling goods and services from other countries The purchase of goods and services from abroad that leads to an outflow of currency from the home country Imports (M)

The sale of goods and services to buyers from other countries leading to an inflow of currency to the home country Exports (X)

BALANCE OF TRADE
The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a "favourable" surplus (exports exceed imports) or an "unfavourable" deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services....

BALANCE OF TRADE
A balance of trade surplus is most favourable to domestic producers responsible for the exports. However, this is also likely to be unfavourable to domestic consumers of the exports who pay higher prices. Alternatively, a balance of trade deficit is most unfavourable to domestic producers in competition with the imports, but it can also be favourable to domestic consumers of the exports who pay lower prices.

The Flow of Currencies

Whisky sold to Italian hotel

Export earnings for UK (Credit on Balance of Payments)

changed to

The Flow of Currencies:

Oil from Russia

Oil

changed into Roubles Import expenditure for the UK (Debit on balance of payments)

Export earnings for Russia

INDIA: BALANCE OF TRADE

India reported a trade deficit equivalent to 13601 Million USD in November of 2011. India is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union, The United States, China and UAE .

Current Account: Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid). Current Account Deficit: Occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers. This situation makes a country a net debtor to the rest of the world. A substantial current account deficit is not necessarily a bad thing for certain countries. Developing counties may run a current account deficit in the short term to increase local productivity and exports in the future. Read more:

India Current Account

India reported a current account deficit equivalent to 16.9 Billion USD in the third quarter of 2011. It is leading exporter of gems and jewellery, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals.

Main trading partners are European Union, The United States, China and UAE .

Indias Current Account Deficit

Rose to 3.7% of gross domestic product (GDP) for the first half of the year ending 31 March last time India had a current-account deficit of over 3% was during the crisis of 1991, when the government was close to defaulting on its external debt Exports have been growing at a faster pace than imports in recent months on the back of a pickup in global recovery India imports almost 75% of the oil it uses

Capital Account:
The net result of public and private international investments flowing in and out of a country.
The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies. Capital Account = Foreign direct investment+ Portfolio investment + Other investment Reserve account

Consolidated Fiscal Deficit Ratio, Debt Ratio, and Interest Payments as % of GDP

CURRENT TRENDS
Indias balance of payments during the second quarter of the current financial year sprang a surprise of sorts with the current account deficit contained to what it was during the same quarter of 2010-11 $16.9 billion. This was despite a ballooning of the trade gap to $43.9 billion from $37 billion as both services and secondary income stayed buoyant with considerable accretion in net terms.

CURRENT TRENDS
These facts emerge from a scrutiny of the external sector data released by the Reserve Bank of India under the revised format as per the IMFs Balance of Payments (BoP) Manual 6, where details are furnished in four distinct categories in the current account while the traditional capital account is broken into two heads capital account that comprise mainly official transfers and financial account. Based on this new presentation, though exports growth was impressive at 47.2%during this quarter, the pace of imports, at 35.4%, was higher than the 21.9%recorded during the same period of the previous year, leading to a deterioration in the merchandise trade. Net income from services rose by 9.3% and secondary income, comprising mainly transfers, was up by over $16 billion.

CURRENT TRENDS
In the financial account, the tempo had slackened during the July-September 2011 period to $17.9 billion from the year-ago level of $18.3 billion. This was a sequel to an outflow under portfolio investment ($1.4 billion) as against an inflow of $18.7 billion in the same period of the preceding year. What was notable during this quarter is the negligible accretion to the foreign exchange reserves a mere $0.3 billion as compared to $3.2 billion a year ago.

Consolidated deficit ratio

Consolidating debt is when you take out a single, new loan to pay off several existing debts. This can be a good way of taking control of your finances but you need to be careful. Impact of consolidation General government debt has to be consolidated according to the Maastricht definition. This means that general government debt does not include the debt issued by one government sub-sector and held by another. The result of any intra-governmental debt elimination is a lower general government debt.

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