BALANCE OF PAYMENTS IN INDIA

DONE BY:
AMRUTHA KUBER

ROMIKA JAIN
BALAVARSHINI

SONAM BAFNA
NEHAL JAIN
nd 2 B.COM(MM)

INTRODUCTION
In economics, the balance of payments, (or BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits). Balance of payments is one of the major indicators of a country's status in international trade, with net capital outflow.

The balance, like other accounting statements, is prepared in a single currency, usually the domestic. Foreign assets and flows are valued at the exchange rate of the time of transaction.

DEFINITION
The IMF definition: "Balance of Payments is a statistical statement that summarizes transactions between residents and nonresidents during a period." The balance of payments comprises the current account, the capital account, and the financial account. "Together, these accounts balance in the sense that the sum of the entries is conceptually zero ."

Balance of payments identity

The balance of payments identity states that:: Current Account = Capital Account + Financial Account + Net Errors and Omissions This is a convention of double entry accounting, where all debit entries must be booked along with corresponding credit entries such that the net of the Current Account will have a corresponding net of the Capital and Financial Accounts: Where: X = exports M = imports Ki = capital inflows Ko = capital outflows

HISTORY OF BOP IN INDIA

India has a chronic deficit on current accounts. What bridge the gap between payments and receipts are mainly external aid (especially nonproject assistance), tourism earnings, and remittances from Indians working abroad. Heavy imports of food grains and armament purchases caused a decline in India's foreign exchange reserves in the mid-1960s. An economic recovery from 196869, however, eased the problem, and by September 1970, foreign exchange reserves amounted to $616 million, as compared with $383 million by December 1965.

Reserves declined to $566 million by the end of 1972 but increased to $841 million as of December 1975, despite massive deficits on current accounts, attributable to the quadrupling of oil import prices during 197374.

 Foreign exchange reserves declined from $6,739 million at the end of 1979 to $3,476 million as of November 1982 but subsequently rose to $5,924 million by March 1987.
The Gulf War crisis worsened the ratio of current account deficit to GDP. Foreign exchange reserves plummeted because of export losses in Kuwait, Iraq, and other nations. Remittances from Indian workers fell, and sudden price increases for oil imports caused an estimated loss to India of over $2.8 billion in earnings. By November 1993, however, India's foreign exchange reserves had risen to $8.1 billion, the highest level since 1951.

 A substantial reduction in the trade deficit, increased inflows from foreign institutional investors, a stable exchange rate, and improved remittances all contributed in the recovery of reserves.
Although export growth remained strong, the current account deficit tripled from 199394 to 199596. The increase was attributed to a continuing surge in imports and higher debt service requirements. However, between 1995 and 1998 the current account deficit shrank to about 1% of GDP due to increased textile exports and a liberalizing trade regime.

 India's total external debt in 2001 was estimated at $100.6 billion. In 2000, the external debt-GDP ratio stood at around 20.7%, down from 41% in 1991/92.
In the early 2000s, India's exports to East and Southeast Asia increased, including to Japan and South Korea. High growth rates were registered for textiles, chemicals and related products, engineering goods, and leather and manufactures.

STATISTICS AS ON 2000
Current Account Balance on goods Balance on services Balance on income Current transfers Capital Account Financial Account Direct investment abroad Direct investment in India Portfolio investment assets Portfolio investment liabilities Other investment assets Other investment liabilities Net Errors and Omissions Reserves and Related Items -4,198 -12,193 -1,582 -3,876 13,453 9,616 -335 2,315 1,619 -1,136 7,152 670 -6,087

Rupees crore Item 1 A . CURRENT ACCOUNT 1 Exports, f.o.b. 2 Imports, c.i.f. 3 Trade Balance 4 Invisibles, Net a) 'Non-Factor' Services of which : Software Services b) Income c) Private Transfers d) Official Transfers 5 Current Account Balance 98,678 -26,116 1,08,565 867 -43,737 1,31,144 -29,778 1,26,088 1,019 -45,343 1,48,887 -23,845 1,63,709 952 -70,357 4,65,748 6,95,412 -2,29,664 1,85,927 1,02,611 5,79,128 8,65,404 -2,86,276 2,40,933 1,43,604 6,37,190 9,99,286 -3,62,096 2,91,739 1,50,923 2005-06 R 2 2006-07 PR 3 2007-08 P 4

B.

CAPITAL ACCOUNT 1 Foreign Investment, Net (a+b) a) Direct Investment of which: i) In India 39,457 99,261 1,29,746 68,782 70,443 1,80,152

13,425

38,553

62,339

Equity
Reinvested Earnings Other Capital ii) Abroad Equity Reinvested Earnings Other Capital b) Portfolio Investment

26,239
12,220 998 -26,032 -16,718 -4,834 -4,480 55,357

73,969
23,029 2,263 -60,708 -50,670 -4,868 -5,170 31,890

1,00,777
27,714 1,255 -67,407 -50,179 -4,363 -12,865 1,17,813

In India
Abroad

55,357
0

31,630
260

1,17,154
659

2 External Assistance, Net Disbursements Amortizations 3 Commercial Borrowings, Net Disbursements Amortizations 4 Short term Credit, Net 5 Banking Capital

7,592 16,133 8,541 10,505

7,937 16,961 9,024 72,596

8,465 17,022 8,557 89,317

63,476 52,971 16,300 5,795

94,332 21,736 30,096 8,477

1,20,173 30,856 70,846 47,147

of which: NRI Deposits, Net

6 Rupee Debt Service 7 Other Capital, Net @ 8 Total Capital Account

12,457

19,574

706

-2,557 5,548 1,11,965

-725 17,565 2,06,389

-488 38,464 4,33,903

Errors & Omissions

-2,332

6,143

D.

Overall Balance [A(5)+B(8)+C]

65,896

3,69,689

E.

Monetary Movements (F+G)

-65,896

-3,69,689

F.

IMF, Net

G.

Reserves and Monetary Gold

-65,896

-3,69,689

April-December (2008-09) (P)

Exports Imports Trade Balance Invisibles, net 133,527 238,864 -105,337 68,868

April-December (2007-08) (PR)

113,614 182,894 -69280 53772 -15508

Current Account Balance -36,469

Capital Account*

16,089

82,682

Change in Reserves# (+ indicates increase;- indicates decrease) 20,380

-67,174

CONCLUSION

Indias trade deficit on a balance of payments (BOP) basis has widened significantly by 52.04 percent to $ 105.33 26 billion in the nine months (April-December) of fiscal year* 2008-09 from $ 68.28 billion in the comparable period in previous fiscal. The widening trade deficit is attributed to significant growth in imports. During the nine-month period (AprilDecember, 2008) imports were up 30.60 percent to $ 238.86 billion from $ 182.89 percent in the comparable period in fiscal 2007-08.