Amity International Business School

MODULE 6 ECONOMIC GROWTH AND DEVELOPMENT BALANCE OF PAYMENT

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FOREIGN CAPITAL FLOW External Assistance

Official Development Assistance Grants Non concessional Foreign flows
Direct investment

Private Capital Flow

Portfolio Investment

Concessional flows

Commercial Bank Lending

Others

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BALANCE OF PAYMENT: ACCOUNTING OF FOREIGN TRANSACTIONS

Balance of payment is a systematic record of all economic transactions between the residents of a country and residents of foreign countries for a specific period of time, usually one year.

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PURPOSE -for economic analysis of countrys strengths and weaknesses in international trade and evaluating the economic position. It also invites government attention for corrective measures against the weak points -to reveal changes in composition and magnitude of foreign trade, so that if these changes prove to be obstacle for economic growth government can take remedial actions. - to indicate any future repercussions of countrys past trade performances. If there is continuous deficit, it shows growing international indebtedness and eventually financial bankruptcy. If there is growing surplus surpassing the absorption capacity then it results in high inflation.

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CURRENT ACCOUNT: 1.Trade Account: Transactions related to merchandise imports and exports 2. Invisible Account: service transactions, Investment income (interest/ dividends) and Transfer Payments . Capital Account:(a) Short term capital movement- purchase of short term securities such as treasury bills, commercial bills and Acceptance bills etc - speculative purchase of foreign currency. - cash balance held by foreigners for reasons like war, political instability etc. - net balance of current account.

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(b) Long term capital movement- direct investment in shares, bonds, real estate, physical assets with controlling power - portfolio investments in stock and bonds such as government securities without controlling power. - amortization of capital- repurchase and resale of securities earlier sold to or purchased from foreigners. (c) Changes in gold and foreign exchange reserves.

Current Account + Capital Account = Change in Official Reserve Account

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BALANCE OF PAYMENT DEFICIT OR SURPLUS

Current A/c Balance Deficit / surplus

Capital A/c Balance Deficit / surplus

Trade A/c

Invisible A/c

(Current A/c + Capital A/c) Balance= Overall Balance = Official Settlement Entry
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Current A/C Deficit = X-M Financed through

Capital A/C Surplus

Official Settlement A/C

Debt Crisis

BOP Crisis

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CAUSES OF DISEQUILIBRIUM IN BALANCE OF PAYMENTS 1)-PRICE CHANGESDeflation mainly cause surplus in BOP. On the other hand inflation may cause deficit in BOP. 2)-BUSINESS CYCLES 3)-STRUCTURAL CHANGES-Structural changes in an economy are caused by such factors as:a)-depletion of cheap natural resources, b)-change in technology, c)-change in consumers tastes and preferences. 4)-OTHER FACTORS A)-Disturbances or crop failure B)-Rapid growth in population leading to large scale of imports of food grains or wage goods. C)-Ambitious development projects requiring heavy imports of technology, equipment, machinery and technical know-how. D)-Demonstration effect of advanced countries on the consumption pattern of less developed countries.

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Methods of correcting disequilibrium in BOP Monetary methods Deflation Exchange depreciation Devaluation

Non-Monetary methods Import prohibition and quota system Import duties Export promotion Exchange control

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TRENDS IN INDIAS BALANCE OF PAYMENTS

When the country began its planned program of development, India had a comfortable foreign exchange reserves. Thus not much attention was given to the balance of payment situation as the country pursued the inward looking import substitution policies. In fact the bop position was so comfortable that the country had surplus on this account during 1970-73. Strains began to appear on the bop with the 1st oil stock in 1973-74.oil import bill mounted substantially. Increase in the value of POL imports along with other goods, caused strain on balance on BOP. But the country was able to meet the situation without much problem Serious BOP problem began during the period 1980-92 which culminated in a full fledged crisis in the beginning of 1992. the problems started with the second oil stock of 1978-79 and where compounded by many other factors, such as gulf wars and shortage in NRI remittances. The BOP situation became so precarious that foreign exchange reserves came down to rock bottom level of 1.6 billions dollars. IMF was approached for credit facility and gold was pledged to the bank of England . This situation was somehow retrieved, but the need for comprehensive reforms became urgent. Thus the trade policy reforms under a full package of economic reforms were launched for achieving better growth rate of exports. Though the BOP has remained under strain during the year even after economic reforms were launched, in the recent years, there has been emergence of surplus on the current 11 account of BOP. This has happened mainly due to rapid growth in export of services,