FOREIGN TRADE Balance of Payments in India BoP management still remains a tightrope walk for policy makers, as now we are exposed to each and every change in the global economic scenario ALANCE OF payments (BoP) accounts are the accounting record of all monetary transactions between a country and the rest of the world In other words, itis a record of all transactions made between one particular country and all other countries during a specified period of time. If a country has received money, this is known as a credit Similarly, if a country has paid or given money, the transaction is counted as a debit. Theoretically saying the BoP should always be zero, meaning that assets or credits and liabilities or debits should balance. But in practice this is rare the case and, therefore, the BoP of a country usually has a deficit or a surplus. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa Indian economy which is the ninth largest in the world in terms of Jomon Mathew nominal GDP and the fourth largest in terms of purchasing power parity was having very strong balance of payment figures during the early 2000s and the global financial crisis adversely affected the smooth growing of the overall BoP balance. The international BoP of a country reflects its economic strengths and weaknesses. A typical problem of the developing countries is of chronic deficit, India being no exception. It is therefore necessary to have a look at the overall BoP position of Indian economy which is adversely affected by the global financial crisis and the recent global economic developments Understanding Balance of Payments accounts: The large number of intemational transactions can be summarized into three categori transactions, Capital Account transactions and Official Settlements Balance transactions. such as Current Account ‘The Current Account tracks transactions that involve current ‘The author is Asst, Professor in Economics, University College, Trivandrum, Kerala, YOJANA February 2012income and expenditure, usually transactions in goods and services. The current account mainly consists of four types of transactions such as those given below. ‘© Exports and imports of goods * Exports and imports of * Interest payments on international investments, © Unilateral transfers ‘The Capital Account primarily tracks transactions involving buying and selling of assets. The capital account consists primarily of the following three types of transactions. Purchase and sale of assets; Making and repaying loans; Changes in holdings of currency. ‘An Official Settlements Balance transaction tracks transactions between official government authotities. It is used to make BoP in balance. Trends in Balance of Payment account The overall balance of payments account of India during the last decade is given in Table 1. It can be found that the overall balance of country’s transaction with the rest of the world has been improving during the first three years of the decade. This positive progress can be attributed to the current as well as capital account surplus. From 2004-05 onwards the country witnessed increasing deficit in its current account signifying our imports (expenditure) larger than our exports (receipts). Despite a huge deficit in current account, the country could make improvements {nits capital account until 2007-08. The capital account surplus resulted in decade's highest BOP balance i.e., RS, 369689 crores during 2007- 08, However, India’s BoP balance turned negative for the first time during the decade in 2008-09 (ie.,a huge deficit in overall BoP balan of Rs 97115 crores, the largest figure in the history). Though there Table 1: Annual Balance of Payment account of India (Bs. in crores) en 2001-02 16426 2002-08 30660 52366 2003-04 63983 TRA 2004-05 12174 125367 115907 2005-06 43737 111965 65896 2006-07 4383 203673 163634 2007-08 479 427926 369689 2008-09 127631 26018 975 2009-10 180626 252132 64237 2010-11 202532 273133 50449 Source: Reserve Bank of India, 44 could be seen slight improvement in the overall balance during the last two financial years, the surplus still remains low almost equitant to that of 2001-02 According to the statistics given by the Department of Commerce the share of Asia and the ASEAN region comprising South Asia, East Asia, Mid-Eastern and Gulf countries accounted for 53.5 percent of India’s total exports. The share of Europe and America in India’s exports stood at 20,2 percentand 16,5 percentrespectively of which EU countries comprises 18.6 percent. Similarly, Asia and ASEAN accounted for 61.5 percent of India’s total imports during the period followed by European Union (17.3 percent) and America (10.2 percent). India’s major export items include gems and jewellery, petroleum products, cotton, machinery and instruments, drugs and pharmaceutics ete, The import basket contains petroleum (crude and products), electronic goods, gold, machinery, organic chemicals, iron and steel ete, It is clear from the statistics that the European Union and US economy are significant partners of India’s foreign trade, Due to the same reason, the recent aggravating financial crisis in those developed economies and the crisis affected ASEAN economies adversely affected our international trade balance. As a result, the current account balance worsened and capital account surplus narrowed down, particularly during the last, three financial years, Crude Oil speculators also have created havoc in emerging countries like India, Being the 10th largest oil importing nation in the world (oil YOIANA February 2012imports are close to 70 percent of developments. Other causes of domestic currency depreciates India’s crude oil requirements), depreciation can be attributed to because exports become cheaper a continued uptrend in prices is strengthening of dollar, widening in international markets. However, likely to have repercussions on current account deficit, decline in given sluggish global conditions, India’s Balance of Payments. It other capital flows etc. Now the _ only some sectors would tend to has been estimated that with every question is what will be the impact gain where our competitiveness US SI bbl increase in oil prices is of rupee deprecation on the foreign Will increase such as textiles, likely to increase our import bill _ sector ofthe country andits Balance leather goods processed food by US $ 700mn. This would lead _ of Payments position, products and gems ad jewellery, In case imported raw material A depreciation of the local js used in these industries they currency naturally manifests would be adversely affected. in higher import costs for Therefore, exports may not be able Rupee Depreciation Effect the domestic economy. The to leverage fully. Similarly, with unavoidable import expense the depreciating rupee, borrowing of petroleum products and the from abroad will also become less possible hike in domestic subsidy attractive. may cause fiscal slippage during the financial years to come. Indian corporate sector which imports raw materials from abroad will also be hit hard as they have to pay more for can Jead to downgrading of Indian imports and therefore their profit Sconomy by rating agencies ll over margin will be narrowed. Small the world. It will further worsen importers will also be in pain a8 the already crisis affected BOP they too have to pay more for balance of the country. Therefore, dollar, which in turn would make BoP management still remains a some smaller importers to go out tightrope walk for policy makers, of business or may even lead to as now we are exposed to cach bankruptcy. and every change in the global economic scenario. a toa drawdown in reserves, current account deficits and much further currency weakening. The continuous depreciation of Indian rupee is emerging to be another major challenge so far as country’s internal and external sectors are concerned. Rupee has been depreciating against the dollar for the past four months and many analysts are predicting it that it will depreciate further. Rupee depreciation means that India’s currency has lost its value in comparison to US dollar. The main driver of rupee depreciation in the last three months has been the withdrawal of funds by foreign institutional investors (FIls) from domestic economy. The rather pessimistic view of FIIs is being _It can be expected that exports governed by ongoing global would get a boost in case the (E-mail: jomonmathek@redifinailcom) ase] YOJANA iv Forthcoming & April 2012 Issues » ‘March 2012 Disaster Management Rupee depreciation has more disadvantages than advantages and if this fall is not controlled in time it can have serious effects on the Indian growth story and also it April 2012 ‘Union Budget 2012-13 (Special Issue) YOJANA February 2012 45