Balance of Payments

Prepared by: Group 6 Annette Stanley Nikita Agarwal Nivin Mathew Simon Subhanshu Verma Zyann Paul Nitesh Aggarwal Sharan J.V Ravi Kwatra

Meaning
The balance of payments is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. It represent 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.

Key Concepts
RBI is responsible for compiling the balance of payments for India and obtain data primarily as a by-product of the administration of the exchange control. All foreign exchange transactions must be channeled through the banking system, and the banks must submit various periodical returns and supporting documents. In respect of all other transaction, information is obtained directly from the relevant departments and agencies and RBI also collected information through various survey. Data are prepared on a quarterly basis and are published in the RBI Bulletin

Importance of BOP
The BOP is an important indicator of pressure on a countrys foreign exchange rates. 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 fee, royalty fee, or other cash disbursements to foreign firms or investors.

Balance of Payments Account

It is an itemization of the factors behind the demand for and supply of a currency It includes transactions done by a resident of the country with the rest of the world.
Current Account Export/Import Transfer Payments Factor Payments Capital Account FDI/FII Portfolio Investments NRE/NRE A/Cs Official Reserve Account Gold Reserve Forex Reserve IMF Loans

Current Account
Records flows of exports, imports, investment income, and international financial transfers. Merchandise trade export and import of tangible goods Services payments and receipts for legal and consulting fees, royalties, tourist expenditures Investment income payments and receipts of interest, dividends, and other income on foreign investments Unilateral Transfers unrequited payments (e.g. Foreign aid). If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.

Capital Accounts
Records sales of Indian financial assets to foreigners and Indian purchases of foreign financial assets. The capital account is composed of Foreign Direct Investment (FDI), portfolio investments, and other investment. Direct investment involves acquisitions of controlling interests in foreign businesses. Portfolio investment represents investment in foreign shares and bonds that do not involve acquisitions of control. Other investment includes bank deposits, currency investment, trade credit and the like.

Reserve Accounts
The Reserve Account of BOP records changes in the amount of official reserve assets held by the Reserve Bank of India. Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF. If a country must make net payment to foreigners because of BOP deficit, the country could either run down its official reserve assets or borrow anew from foreigners.

Impact on Currency
Current A/c: All the other factors constant, a deficit balance on a countrys current account implies that there is excess supply of its currency in the foreign markets. Hence, its currency should depreciate.

Capital A/c: All other factors constant, a surplus balance in a countrys financial account implies that there is excess demand for assets denominated in its currency. Hence, its currency should appreciate.

Affects on the Economy

Is a nations current account balance, by itself, a good measure of its economic health? NO; there is no law, economic or political, which states that the current account balance must be positive. Unlike running a budget deficit in which a person or institution spends more than it makes, running a deficit in the current account, simply means a country imports more than it exports. Is a current account surplus and financial account deficit by itself an indication of economic strength? NO, particularly not if the exodus of the financial capital occurs because there are a few good investment opportunities in the country. Is the net inflow of capital bad? NO, if the capital is being invested in such a way as to enhance the productive capacity of the country.

Monetary and Fiscal Policy Impact on BOP

Monetary Policy
An unanticipated shift to expansionary monetary policy will lead to more rapid economic growth, accelerated inflation and lower real interest rates Higher income and higher domestic prices stimulate imports and discourage exports. Lower real rates discourage foreign and domestic investment at home.

Fiscal Policy
An unanticipated shift to more open fiscal policy will result in budget deficits, increase in aggregate demand, inflation and an increase in real interest rates. Increase demand will encourage imports & discourage exports, which moves the current account towards deficit. Meanwhile, the higher interest rates attract foreign investment and discourage domestic investment from leaving the country, moving the financial account surplus.

BOP

Monetary measures for correcting disequilibrium in the BOP

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.

Non-Monetary Measures for Correcting the BOP

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. Non-essential imports can be drastically reduced by imposing a very high rate of tariff. 2. Quotas Under the quota system, the government may fix and permit the maximum quantity or value of a commodity to be imported during a given period. 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. This includes substitutes, tax concessions to exporters, marketing facilities, credit and incentives to exporters, etc. 4. Import Substitution A country may resort to import substitution to reduce the volume of imports and make it self-reliant. Fiscal and monetary measures may be adopted to encourage industries producing import substitutes. Industries which produce import substitutes require special attention in the form of various concessions, which include tax concession, technical assistance, subsidies, providing scarce inputs, etc.

BOP Balances
STATEMENT II : INDIA'S OVERALL BALANCE OF PAYMENTS ( US $ million) 2009-10 Item Current Account Credit Debit Net Credit 2010-11 Debit 492332 Net -44281

345639 384022

-38383 448051

Capital Account
Errors & Omissions Foreign Exchange Reserves Total

345674 292277
1573 13441

53397 496035
-1573 -13441 -

436288
2416 13050 944086

59747
-2416 -13050 0

691313 691313

0 944086

BOP Comparison
India's Overall Balance of Payments

80000 60000 40000 20000

53397 59747

2009-10 2010-11

-13441 0
Current Account -20000 -40000 -60000 -44281 -38383 Capital Account

-13050

Foreign Exchange Reserves

Balance of Payment Calculations

Comparison of China ,India & United States

Country
China China India India United States United States

Subject Descriptor
Current account balance Current account balance Current account balance Current account balance Current account balance Current account balance

Units
U.S. dollars Percent of GDP U.S. dollars Percent of GDP U.S. dollars Percent of GDP

Scale
Billions

2009
261.000 5.230

2010
305.300 5.194 -42.807 -2.623 -470.898 -3.242

Billions

-35.766 -2.828

Billions

-376.551 -2.701

Latest News on BOP

India's services exports rose 14.3% to USD 11.89 billion in August from the previous month, according to Reserve Bank of India. India's financial year 2011-12 balance of payments are likely to be in a surplus of US$ 17.5 billion, as a wide deficit in the current account is offset by capital inflows.