Balance of payment

Su ni tha N. K
Za ha bia Ashmi tha N. S
Bhal am wala In du priy a S
Mand ann a T. M
Sh ruti Sr in ivas

Group 11
 Agenda
• DEFINITION
• PURPOSE OF BOP
• BALANCE OF PAYMENT ACCOUNTS
• TYPES OF ACCOUNTS
• STRUCTURE OF BOP ACCOUNT
• BALANCE OF TRADE
• EQUILIBRIUM
• DISEQUILIBRIUM
• CORRECTIVE MEASURES
• BOP ADJUSTMENTS
• INDIA’S PAST & CURRENT BOP SCENARIO
 Definition
A Balance of Payment account is a statement
of double entry system of record of all
economic transactions (involving foreign
payments) between residents of a country
and the rest of the world carried out in
specific period of time.
 Purpose Of BOP
• Provides data for economic analysis
• Reveals changes in the composition &
magnitude of foreign trade
• Provides indications of future
repercussions of country’s past trade
performances
• Reveals the weak and strong points of a
country’s foreign trade relations
 TERMINOLOGIES
• Favo rable Bal ance O f Pay ment s – Value
of total receipts more than total payments

• Adve rse B alan ce Of Payme nts – Value of

total receipts less than total payments
• Bala nced Bala nce Of Paym ents – Value
of total receipts equals total payments
• Unre quite d re ceipts – Receipts for
which nothing has to be paid in return.
• Unre quite d pa yments – Payments for
which nothing is received in return.
 Balance of Trade
De fin it io n: Difference between value of exports
and imports of visible items only

BOT BOP

• Records only merchandise •Records transactions

transactions relating to both goods and
• Does not record transactions services
of capital nature • Records transaction of
• A part of current account of capital nature
BOP • Includes BOT , Balance of
services , Balance Of
Unrequited Transfers and
Balance Of Capital
Transactions.
BALANCE OF PAYMENT ACCOUNT
 CURRENT ACCOUNT
• All transactions relating to goods,
services and unrequited transfers
constitute current account
• Flow of items pertaining to specific
period of time
• Visible items include
goods
• Invisible items include
services
 Structure of current account
Transactions Credit Debit Net Balance
1. Merchandise Export Import -

2. Foreign Travel Earning Payment -

3. Transportation Earning Payment -

4. Insurance Receipt Payment -

(Premium)
5. Investment Income Dividend Receipt Dividend Payment -

6.Government Receipt Payment -

(purchase of goods &
services)
CURRENT A/C - - Surplus (+)
Balance Deficit (-)
 CAPITAL ACCOUNT
• All transactions indicating changes in stock
magnitudes concerning capital receipts and
payments constitute capital account
• Relates to
- Borrowing
- Capital repayment
- Sale of assets
- Change in stock of gold
- Change in reserve of foreign currency
Short term capital movement includes:
 Purchase of short term securities
 Speculative purchase of foreign currency
 Cash balances held by foreigners
 Net balance of current account

Long term capital movement includes:

 Investments in shares, bonds, physical
assets etc.
 Amortization of capital
DIFFERENCE BETWEEN CURRENT
ACCOUNT AND CAPITAL ACCOUNT

CURRENT ACCOUNT CAPITAL ACCOUNT

• Indicates flow aspect • Indicates changes in
of country’s national stock magnitudes
transactions • Relates to all
• Relates to goods , transactions
services and unrequited constituting debts and
transfers transfer of ownership
 STRUCTURE OF BALANCE
OF PAYMENTS ACCOUNT
CREDITS
Cur re nt A/ c:
•Exports of goods(Visible items)
•Exports of services
(Invisibles)
•Unrequited receipts(gifts ,
remittances, indemnities,
etc. form foreigners)
Cap it al A/ c:
•Capital receipts (Borrowings
from abroad , capital repayments
by , or sale of assets to
foreigners, increase in stock of
gold and reserves of foreign
currencyTotal
etc.)
Receipts
DEBITS
Cur re nt A/ c:
•Imports of goods(Visible items)
•Imports of services(Invisibles)
•Unrequited payments( gifts,
remittance, indemnities etc. to
foreigners)
Cap it al A/ c:
•Capital payments (lending to ,
capital repayments to , or
purchase of assets from
foreigners, reduction in stock
of gold and reserves of foreign
currency etc.)
Total Payments
 An Example
Let us consider the following hypothetical
situation:
• Export of goods Rs. 550 Crore
• Import of goods Rs. 650 Crore
• Export of services Rs. 150 Crore
• Import of services Rs. 70 Crore
• Unrequited receipts Rs. 100 Crore
• Unrequited payments Rs. 80 Crore
• Capital receipts Rs. 200 Crore
• Capital payments Rs. 200 Crore.
 Balance Of Payment
Account
Credits Debits
• Current A/c: • Current A/c:
2) Export of goods 550 2) Import of goods 650
3) Export of services 150 3) Import of services 70
4) Unrequited receipts 100 4) Unrequited payments 80

• Capital A/c: • Capital A/c:

7) Capital receipts 200 7) Capital payments 200

To ta l r ec eip ts To ta l p ay men ts
10 00 10 00
 EQUILIBRIUM IN BOP
ACCOUNTS
Total receipts equals total payments arising
out of transfer of
– Goods and services
– Other transactions
These transactions are classified as:-
– Autonomous transactions
– Induced transactions or Accommodating
capital flows
• In the curr ent account autonomous
transactions are the export and import of
goods and services

• When export is not equal to import, short

run capital movements such as international
borrowing and lending take place, which are
called induced or accommodating
transactions
• In the cap ital accou nt the export and
import of long term capital are autonomous
transactions

• The short term capital movements viz. gold

movements and accommodating capital
movements on account of autonomous
transactions are induced transactions.
 Example of Autonomous and
Accommodating transactions
Credits Debits
• Cu rre nt A /c • Cu rre nt A /c
Au ton om ou s t ra nsa cti on s Aut on omo us tr an sac ti ons
• Export of goods 550 4. Import of goods 800
• Export of services 150 5. Import of services 50
• Unrequited receipts 6. Unrequited payments
Gifts 75 Gifts 20
Indemnity 25 Remittance 60
• Ca pit al A /c • Ca pit al A /c
Acc om mod at ing Acc om mod ati ng
tr ans ac tio ns tra ns ac tio ns
• Borrowings 200 11.Lending 70
Re cei pt s 10 00 Pa yme nt s 10 00
 Disequilibrium
• Total receipts and total payments
inequality shows disequilibrium of balance
of payments account
• Total receipt and payment arising from
autonomous transactions determine the
deficit or surplus in the balance of
payments
• If payments>receipts, BOP shows Deficit
• If payments<receipts, BOP shows Surplus
 KINDS OF BOP
DISEQUILIBRIUM
• Fundamental Disequilibrium

• Cyclical Disequilibrium

• Structural Disequilibrium
 CAUSES OF
DISEQUILIBRIUM
• Increase in imports

• Slow progress in exports

• Burden of interest payments

• International developments

• Deficit in capital account

 Corrective Measures
• Devaluation
• Export promotion
• Import restrictions
• Import substitution
• Government intervention
• Supply of credit
• Special treatment to NRIs
• Announcement of trade policies
• Foreign aid
• Improvements in production efficiency
 BOP Adjustments

• INDIRECT MEASURES
Income measures
Fiscal Policy
Monetary Policy
Price measures

• DIRECT MEASURE
Exchange control
 Variations in India’s
deficit position

• 1991-1995:- Equal growth of exports &

imports
• 1995-1999:- Growth of imports& stagnation
of exports(widening of trade deficits)
• 1999-2000:- Exports recovered while imports
surged(continued rise in trade deficits)
• 2000-2001:- Rise in exports &stagnation of
imports(normal level of trade deficit)
India’s current BOP position
• Remained comfortable during 2007-08

• Increase in net inflows by FIIs

• Increase in FDI inflows

• Increase in net surplus