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BOP analysis

BOP analysis

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Published by: D Attitude Kid on Jun 13, 2010
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SUBMITED TO:Ms. Ashima Thapar (CA, Faculty)SUBMITED BY:Rajat GuptaMBA-2(IB)R.No. 42P.C.T.E.
Analysis of BoP statement(2008-09)
India’s balance of payments underwent major shifts in 2008-09 that resulted from thetransmission of the direct impact of the global crisis to India.1.The current account deficit shot up to 2.6 per cent of GDP in 2008-09 from 1.5 per centof GDP in 2007- 08. And this is the highest level of current account deficit for India since1990-91 (Chart 1).2.The impact on the capital account was more pronounced as the capital account surplusdropped from a record high of 9.2 per cent of GDP in 2007-08 to a meagre 0.8 per cent of GDP in 2008-09. And this is the lowest level of capital account surplus for India since1981-82.3.The year ended with a decline in reserves of US$ 20.1 billion (inclusive of valuationchanges) against a record rise in reserves of US$ 92.2 billion for 2007-08.
Chart 1: Current and Capital Account Balances as % of GDP
In the current year, there has been a turnaround.4.Exports continue to drop but imports are falling faster mainly due to lower oil prices.Therefore, the trade deficit up to August 2009 is lower compared to the same period lastyear.5.However, surplus on the invisibles account has declined in the first quarter from last year as software exports have declined by 12 per cent although private remittances havegrown by 10 per cent.
The most striking is the reversal of capital outflows of last year. While foreign directinvestment, external commercial borrowings and bank capital flows (other than NRIdeposits) remain lower or negative so far, huge inflows are taking place this year under  portfolio investment and, to some extent, under NRI deposits. This is very much the
result of the policy stance in OECD economies, characterized by aggressive monetaryeasing and near zero policy rates.
As a result of sharp decline in exports during the October-March of 2008-09, India’smerchandise exports, on a BoP basis, posted a growth of 5.4 per cent during 2008-09which is lower to 28.9 per cent in the corresponding period of the previous year.
Due to sharp fall in imports during Q4 of 08-09, import payments, on a BoP basis hasfallen down to 14.3 per cent during 2008-09 from high import growth of 35.2 per cent in2007-08.9.On a BoP basis, a sharp fall in exports and imports growth outpacing the growth inexports led to a widening of trade deficit to US$ 119.4 billion (or 10.3 per cent of GDP)in 2008-09 from US$ 91.6 billion (or 7.8 per cent of GDP) in 2007-08 Software receiptswhich are at US$ 47.0 billion had increased by 16.6 per cent during 2008-09 which wasin line with the estimate of the NASSCOM.10.Invisibles receipts which is at US$ 162.6 billion (14.0 per cent of GDP) witnessed aslower growth of 9.4 per cent during the financial year 2008-09 as compared with agrowth of 29.7 per cent in the previous year (US$ 148.6 billion or 12.7 per cent of GDP)mainly due to slow pace of growth in software services and private transfer receiptsalong with a decline in receipts under business services, travel and investment incomeaccount.
Miscellaneous receipts, excluding software exports, stood at US$ 30.5 billion in 2008-09(US$ 26.4 billion in 2007-08). In the capital account, inflows under foreign directinvestment (FDI) to India were higher during 2008-09 than the previous year reflectingthe attractiveness of India as a long-term investment destination. NRI deposits witnessedhigher inflows since September 2008 responding to the hikes in ceiling interest rates onsuch deposits.Table 1 sets out the balance of payments projections for 2009-10. It shows that trade deficit is tocontract to 8.2 per cent of GDP from 10.3 per cent last year, the current account deficit to shrink sharply to 0.8 per cent of GDP and capital account surplus to rise steeply to 5.5 per cent of GDP.There is to be a substantial build-up of reserves to the tune of US$57 billion by the end of 2009-10. This suggests that India would bequite comfortable this year on its external payments front.
Table 1: India's Balance of Payments: Projections for 2009-10 (US$ million)2006-072007-08 2008-092009-10(Projected)
Exports128888166163175184157666Imports190670257789-294587257764Trade balance-61782-91626-119403-100098
% of GDP-6.8-7.8-10.3-8.2
Invisible receipts114558148604162556165562Invisible 62341740127297075513

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