Term Paper

International Financial Management

TOPIC

Balance of Payment
of

INDIA

Submitted to

Miss Sweta Singh Submitted by

Lovely School of Mr. Makavana

Business Jitendra

Lovely Professional Reg No- 10904936

University
Section- R1906

Class- MBA (IB)

16
 Roll no-
RR1906A21

16
 BALANCE OF PAYMENT
INDIA
Shrinking foreign trade
INDIA’s trade deficit during the first nine months of fiscal 2009-10 on a balance of payments
(BoP) basis was lower at US$ 89.51 bn compared with US$ 98.44 bn during the same period in
fiscal 2008-09. The trade deficit on a BoP basis in Q3 (US$ 30.72 billion) was, however, less
than that in Q3 of 2008-09 (US$ 34.04 billion). This is revealed in e report (India's Balance of
Payments Developments during the first quarter (October-December) of 2009-10) of the
country’s central banking authority Reserve Bank of India (RBI).

The key features of India’s BoP that emerged in Q3 of fiscal 2009-10 were:

(i) Exports recorded a growth of 13.2 per cent during Q3 of 2009-10 over the corresponding
quarter of the previous year, after consecutive declines in the last four quarters.

(ii) Imports registered a growth of 2.6 per cent in Q3 of 2009-10 after recording consecutive
declines in the last three quarters.

(iii) Private transfer receipts remained robust during Q3 of 2009-10.

(iv)Despite low trade deficit, the current account deficit was higher at US$ 12.0 billion
during Q3 of 2009-10 mainly due to lower invisibles surplus.

(v) The current account deficit during April-December 2009 was higher at US$ 30.3 billion
as compared to US$ 27.5 billion during April-December 2008.

(vi)Surplus in capital account increased sharply to US$ 43.2 billion during April-December
2009 (US$ 5.8 billion during April-December 2008) mainly on account of large
inflows under FDI, Portfolio investment, NRI deposits and commercial loans.
 (vii) As the surplus in capital account exceeded the current account deficit, there was a net
accretion to foreign exchange reserves of US$ 11.3 billion during April-December
2009 (as against a drawdown of US$ 20.4 billion during April-December 2008).

Major Items of India's Balance of Payments

(US$ million)

(2007-08) (2008- April-December (2008- April-December (2009-

(PR) 09) (P) 09) (PR) 10) (P)
Exports 166163 175184 150520 124473

Imports 257789 294587 248967 213988

Trade Balance -91626 -119403 -98446 -89515
Invisibles, net 74592 89587 70931 59185
Current Account -17034 -29817 -27516 -30330
Balance
Capital Account* 109198 9737 7136 41630
Change in -92164 20080 20380 -11330
Reserves#
(+ indicates increase, - indicates decrease)
Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR: Partially
revised. R: revised
SOURCE: Reserve Bank of India Report
Invisibles

The decline in invisibles receipts, which started in the Q4 of 2008-09, continued during Q3 of
2009-10. Invisibles receipts registered a decline of 3.1 per cent during the quarter (as against an
increase of 5.4 per cent in Q3 of 2008-09) mainly on account of decline in business,
communication and financial services, and investment income receipts. Although, software
exports recorded a robust growth of 15.3 per cent, services exports as a whole witnessed a
decline of 12.3 per cent during the quarter as against an increase of 11.8 per cent during the
corresponding quarter of 2008-09.

Invisible receipts recorded a decline of 7.7 per cent during April-December 2009, as compared
with an increase of 22.2 per cent in the corresponding period of the previous year, mainly due to
the lower receipts under almost all components of services coupled with lower investment
income receipts.

Invisibles Payments
Invisibles payments recorded a growth of 12.9 per cent during Q3 of 2009-10, as compared with
a low growth of 2.4 per cent in Q3 of 2008-09, mainly led by increase in payments under almost
all components of services.

Invisibles payments witnessed a positive growth of 3.7 per cent in April-December 2009 (10.4
per cent in April-December 2008) mainly supported by higher business, communication and
financial services, and increase in payments under investment income account.

Invisibles Balance
Size of invisibles surplus in Q3 of 2009-10 was, however, lower than Q3 of preceding year.
Therefore, despite low trade deficit, the current account deficit was higher at US$ 12.0 billion in
Q3 of 2009-10 (US$ 11.7 billion in Q3 of 2008-09).

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during
April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this
level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009
as against 72.0 per cent during April-December 2008.

Current Account Deficit

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during
April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this
level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009
as against 72.0 per cent during April-December 2008.

Net capital flows at US$ 43.2 billion in April-December 2009 was much higher as compared
with US$ 5.8 billion in April-December 2008 mainly due to larger inflows under FDI, portfolio
investments and NRI deposits
Due to lower outward FDI, the net FDI (inward FDI minus outward FDI) was higher at US$ 16.5
billion in April-December 2009 as compared with US$ 14.3 billion in April-December 2008.

Portfolio investment witnessed large net inflows of US$ 23.6 billion during April-December
2009 as against a net outflow of US$ 11.3 billion in April-December 2008 due to large net FII
inflows of US$ 20.5 billion.

Net external commercial borrowings (ECBs) inflow slowed down to US$ 2.3 billion in April-
December 2009 (US$ 6.9 billion in April-December 2008) mainly due to increased repayments.

The increase in foreign exchange reserves on BoP basis (i.e., excluding valuation) was US$ 11.3
billion in April-December 2009 (as against a sharp decline in reserves of US$ 20.4 billion in
April-December 2008). [A Press Release on the Sources of Variation in Foreign Exchange
Reserves is separately issued]

The gross disbursements of short-term trade credit was US$ 10.1 billion during Q1 of 2009-10
almost same in Q1 of 2008-09. The repayments of short-term trade credits, however, were very
high at US$ 13.2 billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a result, there
were net outflows of US$ 3.1 billion under short-term trade credit during Q1 of 2009-10 (inflows
of US$ 2.4 billion in Q1 of 2008-09)

Banking capital mainly consists of foreign assets and liabilities of commercial banks. NRI
deposits constitute major part of the foreign liabilities. Banking capital (net), including NRI
deposits, were negative at US$ 3.4 billion during Q1 of 2009-10 as against a positive net inflow
of US$ 2.7 billion during Q1 of 2008-09. Among the components of banking capital, NRI
deposits witnessed higher inflows of US$ 1.8 billion in Q1 of 2009-10 (net inflows of US$ 0.8
billion in Q1 of 2008-09) reflecting the positive impact of the revisions in the ceiling interest rate
on NRI deposits.

Other capital includes leads and lags in exports, funds held abroad, advances received pending
for issue of shares under FDI and other capital not included elsewhere (n.i.e.). Other capital
recorded net outflows of US$ 1.6 billion in Q1 of 2009-10.
 Balance of Payments (BoP)

Merchandise Trade

Exports
On a BoP basis, India’s merchandise exports posted a decline of 17.3 per cent in April-December
2009 (as against a high growth of 27.5 per cent in the corresponding period of the previous year).

INDIA's cumulative value of exports for the first 11 months of fiscal 2009-10 (April-2009 to
February-2010) stood at US $ 152983 million (Rs 727345 crore) as against US $ 172379 million
(Rs. 774585 crore) registering a negative growth of 11.3 per cent in Dollar terms and 6.1 per cent
in Rupee terms over the same period last year. Country's cumulative value of imports for the
period April, 2009- February, 2010 was US $ 248401 million (Rs. 1180124 crore) as against US
$ 287099 million (Rs. 1289412 crore) registering a negative growth of 13.5 per cent in Dollar
terms and 8.5 per cent in Rupee terms over the same period last year.

Oil imports during this 11-month period were valued at US$ 73230 million which was 18.2 per
cent lower than the oil imports of US $ 89492 million in the corresponding period last year. Non-
oil imports during April, 2009- February, 2010 were valued at US$ 175171 million which was
11.4 per cent lower than the level of such imports valued at US$ 197607 million in April 2008-
February, 2009.

EXPORTS & IMPORTS (April-February, FY 2009-10)

In $ In Rs Crore
Million
Exports including re-exports
2008-09 172379 774585
2009-10 152983 727345
Growth 2009-10/2008-2009 (percent) -11.3 -6.1
Imports
2008-09 287099 1289412
2009-10 248401 1180124
Growth 2009-10/2008-2009 (percent) -13.5 -8.5
Trade Balance
 2008-09 -114721 -514827
2009-10 -95418 -452779

Figures for 2008-09 are the latest revised whereas figures for 2009-10 are
provisional

The trade deficit for April 2009- February, 2010 was estimated at US $ 95418 million which was
lower than the deficit of US $ 114721 million during April 2008 -February, 2009.

Source: Federal Ministry of Commerce, Government of India

Imports
Import payments, on a BoP basis, also remained lower recording a decline of 14.0 per cent
during April-December 2009 as compared with a high growth of 35.6 per cent in the
corresponding period of the previous year.

According to the DGCI&S data, exports declined by 17.3 per cent, and imports growth was
negative at 22.0 per cent led by the decline in both oil imports (a decline of 29.7 per cent) and
non-oil imports (a decline of 18.4 per cent) during April-December 2009.

On a BoP basis, the merchandise trade deficit decreased to US$ 89.5 billion during April-
December 2009 from US$ 98.4 billion in April-December 2008 mainly on account of both lower
oil and non-oil import payments

Inflows & Outflows from NRI Deposits and Local Withdrawals

(In $ million)

Inflows Outflows Local

Withdrawals
 2006-07 (R) 19914 15593 13208
2007-08 (PR) 29401 29222 18919
2008-09 (P) 37,089 32,799 20,617
2008-09 (Q1) (PR) 9063 8249 5157
2009-10 (Q1) (P) 11172 9354 5568

P: Preliminary, PR: Partially revised. R: revised

SOURCE: Reserve Bank of India report India's Balance of Payments

Developments during the First Quarter (April-June 2009) of 2009-10

Variation in Reserves

During April-December 2009, there was an accretion to foreign exchange reserves mainly on
account of valuation gains. Also, inflows under foreign investments, Non-Resident Indian
deposits and short-term trade credits have contributed significantly to the increase in foreign
exchange reserves during April-December 2009.

On balance of payments basis (i.e., excluding valuation effects), the foreign exchange reserves
increased by US$ 11,300 million during April-December 2009 as against a decline of US$
20,380 million during April-December 2008. The valuation gains, reflecting the depreciation of
the US dollar against the major currencies, accounted for US$ 20,185 million during April-
December 2009 as compared with a valuation loss of US$ 33,375 million during April-
December 2008. Accordingly, valuation gains during April-December 2009 accounted for 64.1
per cent of the total increase in foreign exchange reserves.

KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

2007- 2008-09 2008-09 (Q1) 2009-10 (Q1)

08 (PR) (P)
Merchandize Trade
Exports ($ on BoP basis) Growth Rate 28.9 5.4 43 -21
(percent)
Imports ($ on BoP basis) Growth Rate 35.2 14.3 42.9 -19.6
(percent)
Crude Oil Prices, Per Barrel (Indian 79.2 82.4 118.8 63.9
Basket)
Trade Balance ($ billion) -91.6 -119.4 -31.4 -26
Invisibles
Net Invisibles ($ Billion) 74.6 89.6 22.4 20.2
Net Invisibles Surplus/Trade Deficit 81.4 75 71.3 77.7
(Percent)
Invisible Receipts/Current Receipts 47.2 48.1 44.2 49.9
(Percent)
Services Receipts/Current Receipts 28.6 30 26.2 28.9
(Percent)
Private Transfers/Current Receipts 13.8 13.7 13.8 17.2
(Percent)
Current Account
Current Receipts ($ Billion) 314.8 337.7 88.1 77.5
Current Payments ($ Billion) 331.8 367.6 97.1 83.3
Current Account Balance ($ Billion) -17 -29.8 -9 -5.8
Capital Account
Gross Capital Inflows ($ Billion) 433 302.5 90.9 78.5
Gross Capital Outflows ($ Billion) 325 293.3 79.7 71.8
Net Capital Flows ($ Billion) 108 9.1 11.1 6.7
Net FDI/Net Capital Flows (Percent) 14.3 191.3 80.5 101.4
Net Portfolio Investment/Net capital Flows 27.4 -153.4 -37.8 122.7
(Percent)
Net ECBs/Net capital Flows (Percent) 21 89.2 13.2 -5.3
Reserves
Import Cover of Reserves (In months) 14.4 10.3 13.3 11.4
Outstanding Reserves as at end period ($ 309.7 252 312.1 265.1
Billion)

SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First
Quarter (April-June 2009) of 2009-10

India's Merchandize Trade (2003-04 to 2008-09 )

Year Exports Growth Imports Growth

(Percent) (Percent)
2003-04 63.8 - 78.1 -
2004-05 83.5 30.8 111.5 42.7
2005-06 103.1 23.4 149.2 33.8
2006-07 126.3 22.5 185.6 24.4
2007-08 162.9 29 251.4 35.5
2008-09 (April-March) - 5.4 - 14.3
SOURCE: Federal Ministry of Commerce, Government of India

Gross Capital Inflows and Outflows (In $ Million)

HEADS Gross Inflows Gross Out flows

April-March April-March
2008-09 2008-09 2009-10 2008-09 2008-09 2009-10
P (Q1) (PR) (Q1) (P) P (Q1) (PR) (Q1) (P)
Foreign Direct Investment 36258 12137 9612 18762 3170 2779
Portfolio Investment 128651 40764 38625 142685 44975 30357
External Assistance 5,042 909 821 2,404 558 737
External Commercial 15,382 2760 2092 7,224 1293 2448
Borrowings
NRI Deposits 37,089 9063 11172 32,799 8249 9354
Banking capital excluding 27,909 12889 4405 35596 11007 9588
NR Deposits
Short-term trade Credits 39,734 10176 10126 45529 7779 13211
Rupee Debt Service 0 0 0 101 30 23
Other Capital 12,391 2176 1636 8210 2678 3256
TOTAL 302,456 90784 78489 293310 79739 71753
R: Revised; P: Preliminary; PR: Partially Revised
SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First
Quarter (April-June 2009) of 2009-10

Business Services (In $ Million)

Item Receipts Payments

April-March April-March
2008- 2007-08 2006-07 R 2008- 2007-08 2006-07 R
09 P PR 09 P PR
Trade Related 2,008 2233 1325 1,642 2285 1801
Business & Management 4,847 4433 4476 3,512 3653 3484
Consultancy
Architectural, Engineering 1,759 3144 3457 3,106 3173 3025
& other Technical
Maintenance of Offices 2,980 2861 2638 3,283 3,496 4,032
Others 4,657 4100 2648 3,726 4,108 3,522
TOTAL 16,251 16771 14544 15,269 16715 15866
R: Revised; P: Preliminary;
PR: Partially Revised
SOURCE: Reserve Bank of India Report on Balance of Payment, December 2008

• Until few years ago, our trade deficit used to be equal to our oil imports; this is no longer
true. Trade deficit is reduced considerably by the invisibles mainly software services and
remittances. FDI & FII flows fund our current account deficit.

• The major advantage China has over India is her strong trade and current account
surpluses year after year. That's how China has accumulated vast forex reserves over
years which gave her the financial strength to undertake mega infrastructure investments
year after year while our trade and current account deficits restrict us from confidently
planning and implementing such mega infrastructure investments.

Highlights of India’s International Trade

• Indias merchandise Trade Turnover increased from INR 7.6 lac cr in 2001- 02 to INR
32.22 lac cr in 2008 – 09
 • Indias exports increased from INR 3.88 lac cr in 2001- 03 to 15.45 lac cr in 2008 – 09

• Indias Imports increased from INR 3.72 Lac cr in 2001- 03 to INR 16.77 lac cr in 2008
– 09

• Share in world merchandise exports in 2008 was 1.04%

Major Trading Partners Top 5 Countries of Export

Rank Country Apr-Mar 2008 Apr-Mar 2009(P) %Growth %Share

1 U ARAB EMTS 62,915.03 110,021.10 74.87 13.1

2 USA 83,388.07 95,750.58 14.83 11.4

3 CHINA P RP 43,597.41 42,661.32 -2.15 5.08

4 SINGAPORE 29,662.23 37,746.56 27.25 4.49

5 HONG KONG 25,385.25 30,639.15 20.7 3.65

Total 655,863.50 839,977.94 28.07 100

Top 5 Countries of Import

Rank Country Apr-Mar 2008 Apr-Mar 2009(P) %Growth %Share

1 CHINA P RP 109,116.11 144,114.78 32.07 10.75

2 U ARAB EMTS 54,233.20 94,768.04 74.74 7.07

3 SAUDI ARAB 78,110.31 89,654.59 14.78 6.69

4 USA 84,625.13 83,537.24 -1.29 6.23

5 IRAN 43,945.93 55,806.96 26.99 4.16

Total 1,012,311.75 1,340,587.75 32.43 100

 India’s BOP position in 2008-09
• Due to the synchronized global recession, exports have declined since October 2008 for
eight successive months. Imports growth also witnessed a deceleration during October-
November 2008, before turning negative thereafter. The merchandise trade deficit
declined during 2009-10 (April-May) over the corresponding period of the previous year,
reflecting the sharper decline in the imports in relation to exports.

• The lower trade deficit emanating from moderation in oil prices resulted in a turnaround
in the current account to a modest surplus during the fourth quarter of 2008-09, after
recording deficits for seven consecutive quarters.

• For the year as a whole, net capital flows fell from US$ 108.0 billion in 2007-08 to US$
9.1 billion in 2008-09, while the current account deficit widened from 1.5 per cent of
GDP to 2.6 per cent of GDP during the same period.

• External shock on India’s BoP was managed with a loss of reserves of only US$ 20.1
billion (net of valuation) without resorting to any extraordinary measures.

• The lead information on certain indicators of the capital account suggests revival in
capital flows to India during first quarter of 2009-10, after the net outflows in successive
two quarters in the second half of 2008-09. The contraction in exports and imports,
however, continues. India’s foreign exchange reserves increased from US$ 252 billion at
end-March 2009 to US$ 276 billion by Aug 28, 2009. The debt sustainability indicators
remained at comfortable levels at end-March 2009.

India’s BOP position

• Is India facing a BOP Crisis?

• Forex Reserves of USD 276 Bn

Problem Areas:
– Widening Trade deficits: INDIA’s trade deficit on a balance of payments (BoP)
basis has widened significantly by $ 26 billion to $ 69.2 billion in the first six
months (April-September) of fiscal year* 2008-09 from $ 43.2 billion in the
comparable period in previous fiscal.

– higher current account deficit ($ 22.3 billion) due to high trade deficit volatile
and relatively lower net capital inflows ($ 19.9 billion) than April-September
2007-08 ($ 50.9 billion)

Foreign trade Policy

• Exports Target at USD 200 bn by 2010-11

• Tax holiday extended for one more year for EOU

• Focused Market Schemes to be extended to 26 new countries including 16 Latin

American & 10 in Asia-Ocenia

• Duty free imports for capital goods in select industries like engineering, chemicals,
electronics, textiles, handicrafts etc.

Measures to make BOP favorable

• Government sops for labor intensive goods like textiles, Handicrafts, gems & jwellery

• Lower transactions costs

• Speedy set up of Export oriented units & SEZ.

• Lower transaction costs & reduced paper work

Reference
• http://www.indiaonestop.com/economy/balanceofpayments/economy-macro-balance
%20of%20payments.htm

• http://www.managementparadise.com/forums/managerial-economics-eco/32932-balance-
payment-india-ppt.html

• http://rbi.org.in/SCRIPTs/SDDS_ViewDetails.aspx?ID=5

• http://www.rbi.org.in/scripts/NotificationUser.aspx

• http://thinkahead.net.in/balance-of-payment-and-external-debt-of-india-in-2010.html

• http://indianblogger.com/indias-balance-of-payments-part-ii/

• http://www.siliconindia.com/shownews/Balance_of_Payment_deficit_rises_to_20_Billio
n_in_0809-nid-58746.html

• http://www.economicshelp.org/blog/economics/balance-of-payments-disequilibrium/