Group AO-2

Components of BoP
Current Account
Import and Export of goods
Import and Export of services
Unilateral transfers from one country to another

Capital Account
Foreign Investment
FDI & portfolio Investment
Loans
Commercial Borrowings, External Assistance & Banking
Capital Transactions

Uses of BoP Analysis

Overview of Macroeconomic and Monetary

situations of the economy

Study on prospects of direct investment to the
nation
Implications on the exchange rate of the currency
Provides data for economic analysis
Reveals changes in the composition & magnitude
of foreign trade
Provides indications of future repercussions of
countrys past trade performances
Reveals the weak and strong points of a countrys
foreign trade relations

BoP under 1st, 2nd & 3rd Annual Plans

First : Affected by Korean War boom and
favorable monsoon; BoP was only 42 crores;
satisfactory

Second: heavy deficit due to rising imports of

capital goods, declining exports, failure of
agricultural production

Third: first time current account deficit; high

imports; sluggish exports; borrowing from IMF;
net invisibles dwindled; practically all surplus
wiped out

Fourth: import restriction, surplus in BoP for 1st

time

BoP 1990-91 and thereafter

Net invisibles : negative for first time in last 40

years (435 cr)

Trade deficit: astronomical 52k cr in 8th plan but
invisibles neutralized its effect
Current account deficit: 20k cr in 98, sometimes
inivisbles neutralized it sometimes not
9 th plan: entire trade deficit was wiped out by
invisibles 71k cr
Reckless import policy

Economic Indicators-pre Crisis

period
GDP growth rate: 5.5 % (3.3% on a per capita

basis)
Industrial Growth : 6.6%
Agriculture: 3.6%
Investments went from nearly 19% of GDP from
to 1970s to 25% by end on 1980s
Composition was predominantly primary sector
which accounted for 32.8% of the GDP

Trends in Pre BoP crisis

Capital inflows mainly consisted of aid flows,

commercial deposits and Non resident Indian

deposits
FDI was heavily restricted and foreign portfolio
investments generally channelized to public sector
issued bonds
Gradual loss of for-ex reserves and deterioration
of trade balance due to fixed nominal exchange
rate which was declining over the 1980s

Trendscontd
Sharp rise in imports due to growth orientation

and ( petroleum imports rose by 40% from

1986-87 to 1989-90 )
Doubling of external debt from 1984-85 ($35
bn) to 1990-91 ($69 bn)
Loss of investor confidence led to outflows
being increasingly dependent on short term
external debts. An unstable government and
the gulf crisis further aggravated the situation

Balance of payments: The Crisis

Also known as the Unfortunate period of Indian

Economy
Gulf crisis of 1990 increase in oil import bill
Deterioration of invisibles account
Increase in price of oil => overall current account
deficit in
1990-91 : US $ 9.7 billion
Important trading partners like US, Russia turned up to
invest
in India
Export growth reduced to 4%
World growth declined from 4.5% in 1988 to 2.5% in
1991
Political turmoil VP Singh government overthrown,
Rajiv
Gandhi assassination reduced credibility of India,

Balance of payments: The

Unbalance
Foreign reserves very low at $1.2 billion

Overshot IMF SDR reserves

Simultaneous outflow of NRI deposits
Serious difficulties in rolling over of short term

loans
Current account deficit of $9.7 billion almost
impossible to finance

What actually happened..

Agreement with IMF for a drawing of $1,025 billion

under its Compensatory and Contingency

Financing Facility (CCFF)
Drawings of $789 million from the first credit
tranche made in Jan,1991
Despite the drawings, the situation was hardly
under control.
Between March 1991 and June 1991, there was a
sharp withdrawal of non-resident deposits to the
extent of $952 million leading to further drop in
foreign exchange reserves

The crisis
Despite low trade deficit ,the slide in foreign
reserves
continued unabated
Essentially became a crisis of confidence
Foreign exchange reserves fell below $1 b
Barely enough to cover 2 weeks of imports
Expectat
ion of
default

expected
devaluati
on

payment
s of
imports
&
exports

Further
drop in
reserves
withdraw
al by
foreigner
s

Likely ramifications
Credit unavailability, trade
disruption
Shortages, industry
dislocation ,unemployment
High inflation , instability

BoP crisis- Factors and causes

Economic factors
Huge development expenditure owing to which there are large

scale imports
Business cycles in terms of recession, depression, recovery
and boom
High rate of inflation running up to large scale imports of
essential goods
Decline of import substitutes which would necessitate and
increase in imports
Change in cost structure of trading partners

Political factors
Political Instability leading to decline in FDI and FII
Populism policies which may encourage imports

Social factors
Change in tastes and preferences leading to demand changes
Cross border prejudices which may lead to expensive sources

of imports

Rangarajan Panel for Correcting BoP

Recommendations:
Current account deficit of 1.6% of GDP a ceiling
Govt must not give excess concessions to

foreigners in any form

Debts to equity conversion but of ratio 1:2
Minimum foreign exchange reserves target should
be fixed and make cushion for 3 extra months
Halt any foreign investments by domestics, policies
should favor more to domestic residents than
foreigners

Reforms undertaken
Liberalized all export laws
80 % of the industries were taken out from the licensing

framework
The limit of foreign equity holders was raised from 40 to 51
% in the wide range of priority industries.
Technology imports for priority industries are automatically
approved for royalty payments upto 5 % of domestic sales
and 8 % of export sales or for lumpsum payments of Rs 1
Crore.
The number of investment approvals rise from 3335 in 1990
to 5538 in 1991.
505 foreign technology import agreements were also
approved.
In 1991, a total of 244 cases of foreign equity participation
with the proposed equity investment of $ 504 million was

BOP 92-93

Foreign exchange reserves had been build up to

respectable
level of $5.63 billion from a low of $1.29 billion at the end
of July 2001.
Introduction to LERMS( Liberalized exchange
rate management system)
Mobilization of external assistance from IMF,
World Bank , ADB and Bilateral donors to
support the BOP
Introduced, from March 1992, a dual exchange rate
system
in the place of a single official rate
One official rate for select government and private
transactions and the market-determined rate for the
others
Treated current and capital transactions in different ways
Decision to permit gold imports was linked to LERMS

Effects of liberalization
BOP Surplus:
External sector - growth rates moving up to 11 and 20% in
the two years ended March 2001
NRI deposits with the banking system in India on the rise
from 13 billion dollars in 1991-92 to 23.8 billion dollars by
March 2001
BOP recorded an overall surplus consecutively for five
years from 1996-97
Indias foreign exchange reserves, 1 billion in 1990
reached $ 40 billion the average annual addition being $
4.5 billion
Rise in FDIs and other capital flows
Under the category of Invisibles, a significant increase in
private transfers
Private transfers grew to a level of 10-12 billion dollars in
the latter half of 1990s.

Indias Trade Policy

India doesnt have a clear trade policy

Trade Policy aimed to cut down admin controls

and barriers
Instrument developed: EXIM
Five Phases of Trade Policy
1st : 1951-52
Restriction placed by UK on use of balances
Import restrictions
Currency devaluation
Some restrictions were also placed on exports

 2nd Phase: 1952-53 to 1956-57

Liberalization of foreign trade
Import licenses were granted
3rd Phase: 1956-57
Policy reoriented to meet the requirements of
planned eco develop.
Import restrictions, export promotions
4th Phase: 1966
Rupee devaluation to boost exports
Recommendations by Mudaliar committee
5th Phase: 1975-76
Strive for striking a balance between exports and
imports
Basically, Indias policy have led to classical

debt trap !

EXIM (export import policy 1985)

Aimed at restricting unnecessary imports, but

permitted imports for promoting indigenous production

and exports
Helped selective restriction
Intended to pursue technological up- gradation
Critiques:

Adverse effect on growth of capital goods

Import policy hits small industries
Adverse effect on indigenous industries
Technological dumping in name of technology upgrading

Current Scenario
Indias BOP has improved in the year 2013-2014
Due to measures taken by RBI and the Government
CAD (Current Account deficit) declined from

US$88.2(bn) to US$32.4(bn)
Merchandised exports increased amidst global

recovery and depreciating rupee

With built up of foreign exchange-> downward
pressure on currency
Volatility in the Indian rupee begins to slide

 In 2013 US decided to halt its quantitative easing policy

Withdrawal of funds from the debt market
This lead to depreciation of currency in emerging market

economies
Countries with larger CAD saw larger volumes of outflows
As on November 2014 Indias export declined by 5%
The subdued growth is due to weakness in overseas demand
Contraction in Japan, moderate growth in USA and Feeble
growth in EU

Balance of Payments
Indias Balance of Payments 2012-2013 and 2013-2014
2012-2013

Item
Current Account
-Exports
-Imports
-Trade Balance
-Invisibles
a- Services
b-Transfer
c-Income
Current Account Balance
Capital Account
-External assistance
-External commercial borrowing
-Short term debt
-Banking Capital
-FDI
-Other Flows
Capital Account Balance
Errors & Ommissions
Over all Balance
Reserves

2013-2014

306581
502237
-195656

318607
466216
-147609

64915
64034
-21455
-88163

72965
65276
-32397
-32397

982
8485
21657
16570
46710
-5105
89300
2689
3826
-3826

1032
11777
-5044
25449
26386
-10813
48787
-882
15508
-15508

Thank You