.

CHHATRAPATI SHAHU JI
MAHARAJ UNIVERSITY, KANPUR

International Finance

Current Status of
India’s Balance of
PRESENTED BY-
Payments Group 11
(MBA-FC 3rd semester)
Suman Yadav
Subhash Chandra Karn
PRESENTED TO :
Saurabh Kumar
Vishu Saxena
Dr. Sudhanshu Pandiya Roma Rai
 CONTENTS

 MEANING
 STRUCTURE
 C O M PA R E B E T W E E N 2 0 1 6 & 2 0 1 7
 BALANCE ON CURRENT ACCOUNT VS. BALANCE ON
C A P I TA L A C C O U N T
 OBJECTIVE
 CHARACTERISTICS
 E C O N O M I C I M P L I C AT I O N S O F T H E B O P
 B A L A N C E O F PAY M E N T S E Q U I L I B R I U M
 CAUSES OF DISEQUILIBRIUM IN BALANCE OF
PAY M E N T S
 MEASURES OF DISEQUILIBRIUM IN BALANCE OF
PAY M E N T S
 I M PA C T O N C U R R E N C Y
 B A L A N C E O F PAY M E N T S ‘ S U R P L U S ’ A N D ‘ D E F I C I T ’
 BALANCE OF PAYMENTS
• “A record of
international
transactions between
residents of one country
and the rest of the
world”
 CONTI….

• The balance of payments account of a country is based on the

principle of double-entry book-keeping.
Each transaction is entered on the credit and debit side of
statement. But balance of payments accounting differ from
business accounting in one respect. In business accounting,
debit(-) are shown on the left side
 CONTI….

and credits (+) on the right side of statement . But in the balance
of payments accounting, debits are shown on the right side and
credits on the left side of the statement. For example:
When a payment is received from a foreign country, it is a
credit transaction while payment to a foreign country is a debit
transaction.
STRUCTURE OF BALANCE OF
PAYMENTS ACCOUNTS
CONTI..
CONTI…
 CURRENT STATUS

450000
400000
350000
300000
250000
Credit
200000 Debit
150000 Column1
100000
50000
0
Goods Services Goods Services
2015 2015 2016 2016
 CONTI....
2015 2016
Current Account
Goods -130079 -112442
Services 69676 67455
Primary Income -24375 -26291
Sundry Income 62690 56050
TOTAL -22088 15229
Capital Account 23161 14865
Net Errors and -1073 364
Omissions
BALANCE 0 0
 BOP CRISES IN INDIA 1991

• 1991(Apr-Sep) Million $
• Current -6634
• Capital 4808
• Overall Balance -1826
• RBI’s Forex Res. 728
• IMF Loan 2300
 COMPONENTS OF BALANCE OF
PAYMENTS
• Current Account
• Capital Account

• Current Account- The current account of a country consists

of all transactions related to trade in goods and services and
unilateral transfers.

• Visible Trade — trade in goods

• Invisible Trade — trade in services.
 CONTI….

• Visible Trade:

The money earned from Indian exports of goods (e.g.,

cars sold to Nepal) is credited (added) to this account,
whilst payments for imported goods (e.g., American
aircraft sold in India) are debited. The difference
between the totals is known as the Balance of Trade.
 CONTI....

• Invisible Trade:

The income earned from the sale of Indian services abroad is

known as an invisible export, e.g., an insurance premium paid by
a British ship-owner to an Indian broker. When Indian residents
spend money on foreign services. For ex: Transport, Tourism,
Private Transfers
e.g., a week’s accommodation in London, they are creating
invisible imports, because payment is going out of India
 CONTI…..

• It can be calculated by a formula :

CA = ( X-M ) + NY + NCT

Where ,
CA : Current A/C
X & M : Export & Import of goods and services
NY : Net Income from Abroad
NCT : Net Current Transfers
 CONTI….

• Capital Account- The capital account of a country consist of

its transaction in financial assets in the form of short-term and
long-term lending and borrowing.
.
 CONTI….

• Under capital account, capital inflows can be classified by

instrument (debt or equity) and maturity (short or long-term).
The main components of capital account include foreign
investment, loans, and banking capital. Foreign investment
comprising foreign direct investment (FDI) .

• Component of Capital A/c:

• Borrowings and landings to and from abroad.

• Investments to and from abroad.
 CONTI…

• Investment:

This account includes investment and other capital movements.

Outflows create deficits (-) and inflows give surpluses (+) in the
account.
For instance, if an Indian trader purchases a new shop in
London, this is an outflow of capital. Conversely, if Toyota
(Japan) builds a showroom in Bangalore, then there is a capital
inflow.
CONTI..
 B of P
A. Current Account
A.Net exports/imports goods & services (Balance of Trade)
B.Net Income (investment income from direct portfolio investment plus employee
compensation
C.Net transfers (sums sent home by migrant abroad)

B. Capital Account
Capital transfers related to purchase and sale of fixed assets such as real estate

C. Financial Account
A.Net foreign direct investment Basic Balance = A+B+C
B.Net portfolio investment
C.Other financial items

D. Net Errors and Omissions Overall Balance = A+B+C+D

Missing data such as illegal transfers
E. Reserves and Related Items
Changes in official monetary reserves including gold and foreign exchange reserves

Σ (A:E) = Overall Balance 20

BALANCE ON CURRENT ACCOUNT VS.
BALANCE ON CAPITAL ACCOUNT:

• Balance on current account and balance on capital account

are interrelated.

• A deficit in the current account must be settled by a surplus on

the capital account.

• A surplus in the current account must be matched by a deficit

on the capital account
 OBJECTIVE

• Its main objective is to represent the economic position of a

country, whether its currency is rising or falling in its external
value.
CHARACTERISTICS OF BALANCE
OF PAYMENTS
• It is statement having two sides.
• It is a record of economic transaction.
• It shows a relation between receipts & payments.
• Visible & Invisible items both are included in this statement.
• It is prepared for a certain period of time.
 ECONOMIC IMPLICATIONS OF THE BOP

• It is impossible for every country in the world to have a trade

surplus.
• If international trade is voluntary, then
it is difficult to argue that deficit countries are harmed and
surplus countries benefit.
• Deficits are not inherently bad, nor are surpluses necessarily
good.
 BALANCE OF PAYMENTS
EQUILIBRIUM

• BOP equilibrium is the situation where credit items equal

debit items for a particular sub-account, such as the current
account or official settlements account, of a country’s balance
of payments.
 MOVEMENT TOWARDS
BOP EQUILIBRIUM

• What happens if the country has a current account deficit?

• The country must borrow (sell domestic securities) to the

rest of the world to finance the current account deficit.
• As foreigners accumulate domestic securities, the domestic
currency value falls which, in turn, raises net exports and
consequently income.
 CONTI…….

• In addition, domestic interest rates rise which, in turn,

lowers consumption and investment spending.

• The increase in national income relative to spending will

reduce the current account deficit.
CAUSES OF DISEQUILIBRIUM IN
BALANCE OF PAYMENTS
• Temporary causes
• National Income
• Inflation
• Economic Development
• Borrowing and Lending
• Change in exchange rate
• Political factors-like instable govt.
 CONTI…

• Temporary Causes- Temporary causes may arises due to

variations in the trade, effect of weather on agriculture
production etc.

• National Income - Another cause is the change in country’s

national income. If the national income of a country increases,
it will lead to an increase in imports thereby creating a deficit
in balance of payments.
 CONTI…

• Inflation-

Inflation is another cause of disequilibrium in the balance of

payment. If there is inflation in the country prices of exports
increase, thus increase in export prices leading to decline in
exports and rise in imports result in adverse.
 CONTI…

• Economic Development-

A country’s balance of payments also depends on its stage of

economic development. If a country is developing it will have a
deficit in its balance of payments.
 CONTI…..

• Borrowing and lending-

A country which gives loans and grants on a large scale to other

countries has a deficit in its balance of payments on capital
account. On the other hand, a developing country borrowing
large funds from other countries may have a favourable balance
of payments.
 CONTI…

• Change in exchange rate –

This change arise due to change in exports and imports. If

exports of the country are more then imports the demand for its
currency increase so that the rate of exchange moves in favours.
On the other hand if imports are more than exports the demand
for the foreign currency increase and the rate of exchange will
against the country.
MEASURES OF DISEQUILIBRIUM
IN BALANCE OF PAYMENTS

• Full convertibility of rupee

• Export promotion
• Import substitution
• Export oriented units
• Special economic zones
 CONTI..

• Devaluation of Currency
• Improvement in advance licensing
• Foreign loans
• Encouragement to foreign investment
• Incentives to tourism
 IMPACT ON CURRENCY

• CA: All the other factors constant, a deficit balance

on a country’s current account implies that there is
excess supply of its currency in the foreign markets.
Hence, its currency should depreciate.

• KA: All other factors constant, a surplus balance in a

country’s financial account implies that there is
excess demand for assets denominated in its currency.
Hence, its currency should appreciate.