INDEX

What is balance of payment? Balance of Trade & balance of payment. Components of balance of payment. India¶s foreign exchange reserve. India¶s balance of payment. India¶s foreign trade. Balance of Payment of a country is one of the important indicators for International trade, which significantly affect the economic policies of a government. As every country strives to a have a favourable balance of payments, the trends in, and the position of, the balance of payments will significantly influence the nature and types of regulation of export and import business in particular. Balance of Payments is a systematic and summary record of a country¶s economic and financial transactions with the rest of the world over a period of time. The balance of payments is a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world. Transactions, for the most part between residents and nonresidents, consist of those involving goods, services, and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as gifts) classified as transfers, which involve offsetting entries to balance²in an accounting sense² one-sided transactions. (a) Transactions in good and services and income between an economy and the rest of the world, (b) Changes of ownership and other changes in that country¶s monetary gold, SDRs, and claims on and liabilities to the rest of the world, and (c) Unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting. A country¶s balance of payments can also commonly defined as the record of transactions between its residents and foreign residents over a specified period. Each transaction is recorded in accordance with the principles of double-entry bookkeeping, meaning that the amount involved is entered on each of the two sides of the balance-of-payments accounts. Consequently, the sums of the two sides of the complete balance-of-payments accounts should always be the same, and in this sense the balance of payments always balances.However, there is no bookkeeping requirement that the sums of the two sides of a selected number of balance-of-payments accounts should be the same, and it happens that the (im)balances shown by certain combinations of accounts are of considerable interest to analysts and government officials. It is these balances that are often referred to as ³surpluses´ or ³deficits´ in the balance of payments.

The Balance of Trade takes into account only the transactions arising out of the exports and imports of the visible terms; it does not consider the exchange of invisible terms such as the services rendered by

Somethimes. In accordance with the Foreign Exchange Management Act (FEMA) of 1999. the balance of payments presents a better picture of a country¶s economic and financial transactions with the rest of the world than the balance of trade. other concerned agencies. both public and private. must be added to balance the balance of payments. the balance of payments must always balance. and royalties from patents and copyrights. which includes goods such as raw materials and manufactured goods that are bought. 1. engineering. Services refer to receipts from tourism. under which each international transaction undertaken by the country results in a credit entry and a debit entry of equal size. transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal). dollars. The data are also expressed in millions of U. Nature of Balance of Payments Accounting The transactions that fall under Balance of Payments are recorded in the standard double. error and omissions. insurance and banking. information is obtained directly from the relevant government agencies.S.entry book-keeping form. the balancing item. When combined.Under this are included imports and exports of goods and services and unilateral transfers of goods and services The current account is used to mark the inflow and outflow of goods and services into a country. sold or given away (possibly in the form of aid). business service fees (from lawyers or management consulting. for example). and dividend.. payment of interest. are also put into the current account. and the banks that undertake foreign exchange transactions must submit various periodical returns and supporting documents prescribed under the FEMA. In respect of the transactions that are not routed through banking channels. Conceptual Framework of the Balance of Payments The Reserve Bank of India (RBI) is responsible for compiling the balance of payments for India. As the international transactions are recored in the double-entry book-keeping form. Within the current account are credits and debits on the trade of merchandise. Hence. The balance of payments takes into account the exchange of both the visible and invisible terms. The information is also supplemented by data collected through various surveys conducted by the RBI.e. The data are compiled in crores of rupees (one crore is equal to 10 million) . Earnings on investments. and other departments within the RBI. i.shipping. The RBI obtains data on the balance of payments primarily as a by-product of the administration of the exchange control. The BOT is typically the biggest bulk of a country's . etc. the total amount of debits must equal the total amount of credits. all foreign exchange transactions must be channeled through the banking system. Data are prepared on a quarterly basis and are published in the Reserve Bank of India Bulletin. goods and services together make up a country's balance of trade (BOT). expenditure by tourists. Current Account .

Services Under the exchange control rules.. management fees. and office maintenance expenses has been included in other services. A benchmark Survey of Freight and Insurance on Exports is also used to estimate freight receipts on account of exports. royalties. In the case of imports. The Fund adjusts imports. supplemented by information from the surveys of unclassified receipts. banks authorized to deal in foreign exchange) are required to report details in respect of transactions.i.i. the banks report only aggregate amounts without indicating the purpose of the incoming remittance. and reinsurance transactions). authorized dealers (i. This sample survey is conducted on a biweekly basis. The insurance category covers all types of insurance (i. communication services. primarily government records and borrowing entities in respect of their external commercial borrowing. nonlife. Travel Travel data are obtained from exchange control records. Exports are recorded on an f. The last component of the current account is unilateral transfers.o. Transportation This category covers all modes of transport and port services.e..f. These sources are supplemented by information collected from major airline and shipping companies in respect of payments from foreign accounts. the survey of unclassified receipts is also used as a source. Data on exports are based on export transactions and the collection of export proceeds as reported by the banks. The benchmark survey of freight and insurance is used to estimate insurance receipts on account of exports. as well as foreign aid that is directly received Goods The RBI compiles data on merchandise transactions mainly as a by-product of the administration of exchange control. Other services also cover a variety of service transactions on account of software development. These are credits that are mostly worker's remittances. basis. it exports more than it imports. value. it imports more than it exports. If a country has a balance of trade deficit. received from the Ministry of Tourism as a cross-check of the exchange control and survey data. for publication in this yearbook. to an f. which are salaries sent back into the home country of a national working abroad. and financial services. For receipts below this amount. Thus.f. The balance of payments classification of these receipts is made on the basis of the Survey of Unclassified Receipts conducted by the RBI. expenditure on employees.b. Information on payments for imports not passing through the banking channels is obtained from other sources. the value of software exports for onsite development. Since 1992-93. basis by assuming freight and insurance to be 10 percent of the c. information in the survey of unclassified receipts is also used. In addition to the exchange control records. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account.o.b. other sectors. the entries include all receipts and payments reported by the banks in respect of insurance transactions. Transactions in other services are captured through exchange control records and the survey of unclassified . life. exchange control records cover only those imports for which payments have been effected through banking channels in India. The estimates of travel receipts also use the information on foreign tourist arrivals and expenditure.balance of payments as it makes up total imports and exports. the value of gold and silver brought to India by returning travelers has been added to the imports data with a contra-entry under current transfers. professional services. Since 1997-98. whereas imports are recorded c. technical know-how. In addition to information available from exchange control records. and if it has a balance of trade surplus. when the individual remittances exceed a stipulated amount. other than exports. the data are based mainly on the receipts and payments reported by the banks in respect of transportation items.e.

The Financial Account In the financial account. The data on reinvested earnings of foreign direct investment companies are based on the annual Survey of Foreign Liabilities and Assets. a physical asset such as land) and non-produced assets. 2. while. The Capital Account The capital account is where all international capital transfers are recorded. supplemented by data from other sources.100 million in India. this transaction will be represented as a debit in the US balance of payments and a credit in the balance of payments of India. death levies. other sectors since 1996-97. in India. RBI. The payment of interest on loans and dividend payments are recorded in the Current Account. information on issue expenses in connection with the issue of global depository receipts and foreign currency convertible bonds abroad is obtained from the details filed by the concerned companies with the Foreign Exchange Department. conducted by the RBI. the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income). if an American firm invests Rs.receipts. government of India. For example. Income Information on investment income transactions is obtained from exchange control records and foreign investment surveys. real estate. bonds and stocks are documented. Redemption. As has already been mentioned above. supplemented by information available from various departments of the RBI. supplemented by the data collected in the survey of unclassified receipts regularly conducted by the RBI. This refers to the acquisition or disposal of non-financial assets (for example. and financial assets by migrants leaving or entering a country. Interest payments on foreign commercial loans are also reported under the RBI Foreign Currency Loan reporting system. of nonresident dollar account schemes and withdrawals from nonresident rupee account schemes has been included as current transfers. and. like a mine used for the extraction of diamonds. the interest paid on loans given by foreigners of dividend on foreign investments in the home country are debits for the home country. the interest received on loans given abroad and dividends on investments abroad are credits. Current transfers The data are obtained from the Controller of Aid Accounts and Audit. The Capital Account consists of short. since they are really payments for the services of capital. the transfer of goods. . the transfer of funds received to the sale or acquisition of fixed assets. uninsured damage to fixed assets. Embassy in India. gift and inheritance taxes.terms and long-term capital transactions A capital outflow represents a debit and a capital inflow represents a credit. finally. The capital account is broken down into the monetary flows branching from debt forgiveness. international monetary flows related to investment in business. which are needed for production but have not been produced. on the other hand. whereas data on PL-480 grants are obtained from the U.S. Interest accrued during the year and credited to nonresident Indian deposits is also included under this category. 3. Other sectors Transactions relating to workers' remittances are based on the information furnished by authorized dealers regarding remittances received under this category. For instance. Details of investment income receipts on account of official reserves are obtained from the RBI's internal records.

foreign exchange reserves. Direct investment Basic data are obtained from the exchange control records. They comprise changes in its foreign currency assets and gold. Net errors and omissions This is the last component of the balance of payments and principally exists to correct any possible errors made in accounting for the three other accounts. or nearly any foreign property held by the monetary authority all denominated in . and direct foreign investment. Portfolio investment Basic data are obtained from the exchange control records. RBI. Data on nonresident deposits with resident banks are obtained from exchange control records. These errors are common to occur due to the complexity of the calculations and difficulty in obtaining measurements. IMF Special Drawing Rights (SDRs). the change in methodology does not make any impact on India's net errors and omissions. direct investment in India and direct investment abroad comprised mainly equity flows. Entries for transactions in external assets and liabilities of commercial banks are obtained from their periodic returns on foreign currency assets and rupee liabilities. private and official. but information on noncash inflows and reinvested earnings is taken from the Survey of Foreign Liabilities and Assets. Reserve Account The official reserve account records the change in stock of reserve assets (also known as foreign exchange reserves) at the country's monetary authority . special drawing rights (SDRs) held with the International Monetary Fund. private assets held abroad. and debt transactions between related entities. Frequently.They are often referred to as "balancing items". and information submitted by the relevant banks to the RBI. Reserves include official gold reserves. supplemented by information received from the departments of the RBI and various government agencies. 5. These are supplemented with information from the Survey of Foreign Liabilities and Assets. The data on equity capital include equity in both unincorporated business (mainly branches of foreign banks in India and branches of Indian banks abroad) and incorporated entities. However. Omissions are rarely used usually by governments to conceal transactions. In addition. also net of revaluations owing to exchange rate movement. They also comprise changes in SDR balances held by the government and a reserve tranche position at the IMF. From 2000/2001 onward. in addition to equity. this is the responsibility of a government established central bank. are also recorded in the financial account. the coverage has been expanded to include.Also included are government-owned assets such as foreign reserves. Because there is a lag of one year for reinvested earnings. as intercompany debt transactions were previously measured as part of other investment. net of estimated valuation changes arising from exchange rate movement and revaluations owing to changes in international prices of bonds/securities/gold. 4. data for the most recent year (2003/2004) are estimated as the average of the previous two years. Up to 1999/2000. Other investment Most of the information on transactions in other investment assets and liabilities is obtained from the exchange control records. reinvested earnings. the details of the issue of global depository receipts and stock market operations by foreign institutional investors are received from the Foreign Exchange Department. gold. supplemented by other information on direct investment flows. the survey of unclassified receipts. Reserve assets Transactions under reserve assets are obtained from the records of the RBI. Assets owned by foreigners.

0 Oil 44.0 Non-oil 28.4 Imports 149. the magnitude of these changes will depend upon monetary policy and government mandate.8 66.1 Trade Balance -46.7 billion a year ago).1 -59.1 18.2 185. On the other hand.7 70.9 44.3 Source: DGCI&S.2 Imports 33. and continued to finance a large part (78. Countries with large net increases in official reserves are effectively attempting to keep the price of their currency low by selling domestic currency and purchasing foreign currency.5 6.6 31. usually currency then bonds. while imports posted a high growth rate. During 2007-08 (up to October 19.6 billion during April-July 2007 (US $ 3.08 so far.2 per cent) of the merchandise trade deficit.7 billion) during the first quarter of 2007-08 at broadly the same level (US$ 4.8 22. Non-oil imports registered high growth due to robust growth in capital goods. that they are selling in exchange. Net surplus on the invisibles account exhibited buoyancy during the first quarter of 2007-08.4 -19. During 2007-08 so far (April-August).9 Non-oil 105. Changes in the official reserve account equal the differences between the capital account and current account (and errors & omissions) by accounting identity and are mostly composed of foreign exchange interventions and deposits into international organizations such as the IMF.5 Non-Oil Trade Balance -13.5 20. increasing official reserves. net inflows by FIIs amounted to US $21. The current account deficit was financed by capital flows that have remained large during 2007-08 so far. increased from US$ 16.4 22.0 44.9 ± Variation (per cent) Exports 23.4 25. net decreases of official reserves indicate that a country is buying its domestic assets. to support its value relative to whatever asset.1 126. According to the standards published by the IMF in the IMF Balance of Payments Manual. usually a foreign currency.2 128. business services and private remittances.2 billion as compared with outflows of US $ 933 million in the corresponding period of 2006-07. non-resident Indian deposits registered net outflows amounting to US $ 148 million during April-July 2007 as against net inflows of US $ 1. India¶s Merchandise Trade (In $ billion) Item 2005-06 2006-07 2006-07 2007-08 April-August Exports 103.9 billion in April-June 2006 to US$ 21.6 billion during April-July 2006.6 billion) as in the first quarter of 2006-07.4 50.6 billion in April-June 2007.2 10. led by exports of software.domestic currency.0 Oil 47. on balance of payments basis.9 -32.6 45.2 92. Oil imports registered a sharp deceleration from the strong growth recorded during the corresponding period of the .1 24. higher net invisible surplus contained the current account deficit (US$ 4. Despite large merchandise trade deficit. India¶s balance of payments position has remained comfortable during 2007.8 24.3 30. The merchandise trade deficit. FDI inflows were US $ 6.0 57.3 59. growth of merchandise exports moderated. 2007).8 -20.6 27.9 -3.

April.052 34.114 1.653 8.965 7.864 8. showing an increase of 36.905 -16.032 14.April.700 30.415 5.580 .Jan. both software and business services continued to record robust growth.327 Investment Income -4. The net invisible surplus offset a large part of the trade deficit ± 78. PR March P June P Services 32.379 11.July.4 per cent. PR March P June P Exports 127.AprilMarch June PR Sept.601 6. Amongst services.862 -16.Oct. Private transfers during April-June 2007 increased by over 45 per cent over the corresponding quarter of 2006-07.296 12.2 per cent during April-June 2007 as compared with 73 per cent during the corresponding period of the previous year. Net of remittances. PR Dec.467 10.960 Imports 191.090 17.326 Transfers 27.620 48.Oct.562 47.692 5. Despite large merchandise trade deficit.865 -15. contained the current account deficit at US $ 4. broadly at the same level as in the first quarter of 2006-07.678 6. the current account deficit was US $ 13. PR Dec.7 billion in the first quarter of 2007-08.284 56.232 -21.090 29.July.147 -1. higher net invisible surplus.027 9.884 Other Services 2.282 -1.previous year.798 6.946 -15.674 32..Jan. PR : Partially Revised. not included elsewhere -144 -24 -62 -11 -47 -16 Software 28.655 7.795 16.150 Travel 2..207 207 Transportation -788 -314 -31 -255 -188 -484 Insurance 559 111 162 92 194 233 Government. India¶s Balance of Payments (US $ million) Item 2006-07 P 2006-07 2007-08 April.268 7. Invisibles Account (Net) ($ million) Item 2006-07 P 2006-07 2007-08 April.088 -747 -486 Compensation of Employees -564 -131 -162 -133 -138 -108 Total 55.188 220 -31 792 1.300 -1.371 552 -15 206 1.540 Trade Balance -64.226 7.995 46.883 P : Preliminary.844 8.AprilMarch June PR Sept. Net surplus under invisibles (services. transfers and income taken together) exhibited buoyancy during the first quarter of 2007-08.0 billion during April-June 2007.727 7.664 34.529 49. mainly emanating from private transfers. Exports of services and higher transfer receipts comprising mainly remittances remained the key drivers of the net surplus.

673 7.883 (6.452 -11. 2007.0) P : Preliminary.565 17.379 -2. Despite large merchandise trade deficit.200 Memo: Current Account net of Private Transfers -36.609 -4.270 -7.416 2.994 6.770 49 337 633 751 258 NRI Deposits 3.0) Current Account -9.804 . (-) indicates increase. contained the current account deficit at US $ 4. PR : Partially Revised.037 (-4.775 2.100 10.032 14. # : On balance of payments basis (excluding valuation).88 Imports 2005-06 140237.946 7.846 7.10.429 -6. Govt.643 25.1) Capital Account (net)* 46.152 3.658 37. @ : Includes Non-resident Rupee Deposits for April June 2007.047 -10.2 per cent during April-June 2007 as compared with 73 per cent during the corresponding period of the previous year.1) Invisible Receipts 119.889 15.597 31.895 1.00 Trade Balance 2005-06 -39630.236 631 -447@ Change in Reserves # -36.264 14.084 3.563 -4.275 417 1.72 2006-07* -56738.470 14.569 1.458 3.280 -10.48 Y-O-Y Growth 23.606 -6.959 1.048 Short-term Trade Credit 3.567 -4.379 11.(-7.26 Y-O-Y Growth 39.830 -2. * : Includes errors and omissions.048 -13.062 -505 2. Net of remittances.65 2006-07* 181368. the current account deficit was US $ 13. The net invisible surplus offset a large part of the trade deficit ± 78.037 461 Portfolio Investment 7. higher net invisible surplus.280 17. net 55.296 12.620 1. Note : Figures in parentheses are percentages to GDP.458 External Commercial Borrowings + 16.0 billion during April-June 2007.558 2.426 2. of India .432 Invisible Payments 63.549 Invisibles.92 2006-07* 124629.505 -20.77 * Provisional Source: Federal Ministry of Commerce. Source: Reserve Bank of India India's Foreign Trade: 2006-07 (In $ million) Exports 2005-06 100606.697 (-1.554 -316 1.163 24.568 19.795 16. showing an increase of US $ 62.215 10. + : Medium and long-term borrowings.7 billion in the first quarter of 2007-08. broadly at the same level as in the first quarter of 2006.1 billion as on October 19.231 797 1.048 External Assistance 1.897 of which: Foreign Direct Investment 8.437 1.265 31. India¶s foreign exchange reserves were US $ 261.867 12.0 billion over end-March 2007 level.090 17. mainly emanating from private transfers.

736 31.159 15.159 -15.612 Capital Account 16.421 26. net 27.942 Current Account Balance 14.693 Overall balance 31.554 Invisibles.S.India's Balance of Payments (2003-04 to 2005-06) (In $ million) Items 2003-04R 2004-05PR 2005-06P Trade Balance -13.š Mishra Business Environment ± Aswathapaš www.052 R : Revised PR : Partially Revised P : Preliminary Source: Reserve Bank of India Report Economic Environment of Business .629 -51.229 40. K.comš .421 -26.718 -36.801 31.400 -10.027 24. Indiainfo.083 -5.052 Foreign Exchange Reserve Increase (+)/Decrease (-) -31.