An Economics and environment of business project.


 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 balance—in an accounting sense—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 ―surpluses‖ or ―deficits‖ 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 shipping, insurance and banking; payment of interest, and dividend; expenditure by tourists, etc. The balance of payments takes into account the exchange of both the visible and invisible terms. Hence, 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. Nature of Balance of Payments Accounting The transactions that fall under Balance of Payments are recorded in the standard double- entry bookkeeping form, under which each international transaction undertaken by the country results in a credit entry and a debit entry of equal size, As the international transactions are recored in the double-entry book-keeping form, the balance of payments must always balance, i.e., the total amount of debits must equal the total amount of credits. Somethimes, the balancing item, error and omissions, must be added to balance the balance of payments.

Conceptual Framework of the Balance of Payments The Reserve Bank of India (RBI) is responsible for compiling the balance of payments for India. The RBI obtains data on the balance of payments primarily as a by-product of the administration of the exchange control. In accordance with the Foreign Exchange Management Act (FEMA) of 1999, all foreign exchange transactions must be channeled through the banking system, 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, information is obtained directly from the relevant government agencies, other concerned agencies, and other departments within the RBI. The information is also supplemented by data collected through various surveys conducted by the RBI. Data are prepared on a quarterly basis and are published in the Reserve Bank of India Bulletin. The data are compiled in crores of rupees (one crore is equal to 10 million) . The data are also expressed in millions of U.S. dollars.

1. Current Account - 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. Earnings on investments, both public and private, are also put into the current account. Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it

exports more than it imports. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, 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. Data on exports are based on export transactions and the collection of export proceeds as reported by the banks. In the case of imports, exchange control records cover only those imports for which payments have been effected through banking channels in India. Information on payments for imports not passing through the banking channels is obtained from other sources, primarily government records and borrowing entities in respect of their external commercial borrowing. Since 1992-93, 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, other sectors. Exports are recorded on an f.o.b. basis, whereas imports are recorded c.i.f. The Fund adjusts imports, for publication in this yearbook, to an f.o.b. basis by assuming freight and insurance to be 10 percent of the c.i.f. value.

Services Under the exchange control rules, authorized dealers (i.e., banks authorized to deal in foreign exchange) are required to report details in respect of transactions, other than exports, when the individual remittances exceed a stipulated amount. For receipts below this amount, the banks report only aggregate amounts without indicating the purpose of the incoming remittance. The balance of payments classification of these receipts is made on the basis of the Survey of Unclassified Receipts conducted by the RBI. This sample survey is conducted on a biweekly basis. Transportation This category covers all modes of transport and port services; the data are based mainly on the receipts and payments reported by the banks in respect of transportation items. In addition to the exchange control records, the survey of unclassified receipts is also used as a source. These sources are supplemented by information collected from major airline and shipping companies in respect of payments from foreign accounts. A benchmark Survey of Freight and Insurance on Exports is also used to estimate freight receipts on account of exports. Travel Travel data are obtained from exchange control records, supplemented by information from the surveys of unclassified receipts. The estimates of travel receipts also use the information on foreign tourist arrivals and expenditure, received from the Ministry of Tourism as a cross-check of the exchange control and survey data.

The insurance category covers all types of insurance (i.e., life, nonlife, and reinsurance transactions). Thus, the entries include all receipts and payments reported by the banks in respect of insurance transactions. In addition to information available from exchange control records, information in the survey of unclassified receipts is also used. The benchmark survey of freight and insurance is used to estimate insurance receipts on account of exports. Other services also cover a variety of service transactions on account of software development, technical know-how, communication services, management fees, professional services, royalties, and financial services. Since 1997-98, the value of software exports for onsite development, expenditure on employees, and office maintenance expenses has been included in other services. Transactions in other services are captured through exchange control records and the survey of unclassified receipts, supplemented by data from other sources. For example, 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, RBI.

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

3. The Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account.

Direct investment Basic data are obtained from the exchange control records, but information on noncash inflows and reinvested earnings is taken from the Survey of Foreign Liabilities and Assets, supplemented by other information on direct investment flows. Up to 1999/2000, direct investment in India and direct investment abroad comprised mainly equity flows. From 2000/2001 onward, the coverage has been expanded to include, in addition to equity, reinvested earnings, and debt transactions between related entities. 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. Because there is a lag of one year for reinvested earnings, data for the most recent year (2003/2004) are estimated as the average of the previous two years. However, as intercompany debt transactions were previously measured as part of other investment, the change in methodology does not make any impact on India's net errors and omissions. Portfolio investment Basic data are obtained from the exchange control records. These are supplemented with information from the Survey of Foreign Liabilities and Assets. In addition, the details of the issue of global depository receipts and stock market operations by foreign institutional investors are received from the Foreign Exchange Department, RBI. Other investment Most of the information on transactions in other investment assets and liabilities is obtained from the exchange control records, supplemented by information received from the departments of the RBI and various government agencies. Entries for transactions in external assets and liabilities of commercial banks are obtained from their periodic returns on foreign currency assets and rupee liabilities. Data on nonresident deposits with resident banks are obtained from exchange control records, the survey of unclassified receipts, and information submitted by the relevant banks to the RBI. Reserve assets Transactions under reserve assets are obtained from the records of the RBI. They comprise changes in its foreign currency assets and gold, net of estimated valuation changes arising from exchange rate movement and revaluations owing to changes in international prices of bonds/securities/gold. They also comprise changes in SDR balances held by the government and a reserve tranche position at the IMF, also net of revaluations owing to exchange rate movement. 4. 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. These errors are common to occur due to the complexity of the calculations and difficulty in obtaining measurements. Omissions are rarely used usually by governments to conceal transactions.They are often referred to as "balancing items". 5. 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 . Frequently, this is the responsibility of a government established central bank. Reserves include official gold reserves, foreign exchange reserves, IMF Special Drawing Rights (SDRs), or nearly any foreign property held by the monetary authority all denominated in domestic currency. 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; the magnitude of these changes will depend upon monetary policy and government mandate. According to the standards published by the IMF in the IMF Balance of Payments Manual, net decreases of official reserves indicate that a country is buying its domestic assets, usually currency then bonds, to support its value relative to whatever asset, usually a foreign currency, that they are selling in exchange. 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, increasing official reserves.

India’s balance of payments position has remained comfortable during 2007- 08 so far. The merchandise trade deficit, on balance of payments basis, increased from US$ 16.9 billion in April-June 2006 to US$ 21.6 billion in April-June 2007. Net surplus on the invisibles account exhibited buoyancy during the first quarter of 2007-08, led by exports of software, business services and private remittances, and continued to finance a large part (78.2 per cent) of the merchandise trade deficit. Despite large merchandise trade deficit, higher net invisible surplus contained the current account deficit (US$ 4.7 billion) during the first quarter of 2007-08 at broadly the same level (US$ 4.6 billion) as in the first quarter of 2006-07. The current account deficit was financed by capital flows that have remained large during 2007-08 so far. India’s Merchandise Trade (In $ billion) Item 2005-06 2006-07 2006-07 2007-08 April-August Exports 103.1 126.4 50.3 59.4 Imports 149.2 185.7 70.2 92.0 Oil 44.0 57.1 24.4 25.9 Non-oil 105.2 128.6 45.8 66.1 Trade Balance -46.1 -59.4 -19.9 -32.5 Non-Oil Trade Balance -13.8 -20.9 -3.9 – Variation (per cent) Exports 23.4 22.6 27.1 18.2 Imports 33.8 24.5 20.6 31.0 Oil 47.3 30.0 44.5 6.0 Non-oil 28.8 22.2 10.9 44.3 Source: DGCI&S. During 2007-08 (up to October 19, 2007), net inflows by FIIs amounted to US $21.2 billion as compared with outflows of US $ 933 million in the corresponding period of 2006-07. FDI inflows were US $ 6.6 billion during April-July 2007 (US $ 3.7 billion a year ago). On the other hand, non-resident Indian deposits registered net outflows amounting to US $ 148 million during April-July 2007 as against net inflows of US $ 1.6 billion during April-July 2006. During 2007-08 so far (April-August), growth of merchandise exports moderated, while imports posted a high growth rate. Non-oil imports registered high growth due to robust growth in capital goods. Oil imports registered a sharp deceleration from the strong growth recorded during the corresponding period of the previous year. Net surplus under invisibles (services, transfers and income taken together) exhibited buoyancy during the first quarter of 2007-08, showing an increase of 36.4 per cent. Exports of services and higher transfer receipts comprising mainly remittances remained the key drivers of the net surplus. Amongst services, both software and business services continued

to record robust growth. Private transfers during April-June 2007 increased by over 45 per cent over the corresponding quarter of 2006-07.

Invisibles Account (Net) ($ million)

Item 2006-07 P 2006-07 2007-08 April- April- July- Oct.- Jan- AprilMarch June PR Sept. PR Dec. PR March P June P Services 32,727 7,965 7,268 7,467 10,027 9,150 Travel 2,188 220 -31 792 1,207 207 Transportation -788 -314 -31 -255 -188 -484 Insurance 559 111 162 92 194 233 Government, not included elsewhere -144 -24 -62 -11 -47 -16 Software 28,798 6,601 6,678 6,864 8,655 7,884 Other Services 2,114 1,371 552 -15 206 1,326 Transfers 27,415 5,692 5,226 7,844 8,653 8,327 Investment Income -4,282 -1,147 -1,300 -1,088 -747 -486 Compensation of Employees -564 -131 -162 -133 -138 -108 Total 55,296 12,379 11,032 14,090 17,795 16,883 P : Preliminary. PR : Partially Revised. The net invisible surplus offset a large part of the trade deficit – 78.2 per cent during April-June 2007 as compared with 73 per cent during the corresponding period of the previous year. Despite large merchandise trade deficit, higher net invisible surplus, mainly emanating from private transfers, contained the current account deficit at US $ 4.7 billion in the first quarter of 2007-08, broadly at the same level as in the first quarter of 2006-07. Net of remittances, the current account deficit was US $ 13.0 billion during April-June 2007.

India’s Balance of Payments (US $ million) Item 2006-07 P 2006-07 2007-08 April- April- July- Oct.- Jan- AprilMarch June PR Sept. PR Dec. PR March P June P Exports 127,090 29,674 32,700 30,664 34,052 34,960 Imports 191,995 46,620 48,562 47,529 49,284 56,540 Trade Balance -64,905 -16,946 -15,862 -16,865 -15,232 -21,580 (-7.1) Invisible Receipts 119,163 24,643 25,597 31,658 37,265 31,432 Invisible Payments 63,867 12,264 14,565 17,568 19,470 14,549 Invisibles, net 55,296 12,379 11,032 14,090 17,795 16,883 (6.0) Current Account -9,609 -4,567 -4,830 -2,775 2,563 -4,697 (-1.1) Capital Account (net)* 46,215 10,946 7,100 10,280 17,889 15,897 of which: Foreign Direct Investment 8,437 1,416 2,426 2,558 2,037 461 Portfolio Investment 7,062 -505 2,152 3,569 1,846 7,458 External Commercial Borrowings + 16,084 3,959 1,458 3,994 6,673 7,048 Short-term Trade Credit 3,275 417 1,554 -316 1,620 1,048 External Assistance 1,770 49 337 633 751 258 NRI Deposits 3,895 1,231 797 1,236 631 -447@ Change in Reserves # -36,606 -6,379 -2,270 -7,505 -20,452 -11,200 Memo:

Current Account net of Private Transfers -36,804 - 10,280 -10,047 -10,429 -6,048 -13,037 (-4.0) P : Preliminary. PR : Partially Revised. * : Includes errors and omissions. # : On balance of payments basis (excluding valuation); (-) indicates increase. + : Medium and long-term borrowings. @ : Includes Non-resident Rupee Deposits for April June 2007. Note : Figures in parentheses are percentages to GDP.

The net invisible surplus offset a large part of the trade deficit – 78.2 per cent during April-June 2007 as compared with 73 per cent during the corresponding period of the previous year. Despite large merchandise trade deficit, higher net invisible surplus, mainly emanating from private transfers, contained the current account deficit at US $ 4.7 billion in the first quarter of 2007-08, broadly at the same level as in the first quarter of 2006. Net of remittances, the current account deficit was US $ 13.0 billion during April-June 2007. India’s foreign exchange reserves were US $ 261.1 billion as on October 19, 2007, showing an increase of US $ 62.0 billion over end-March 2007 level. Source: Reserve Bank of India India's Foreign Trade: 2006-07 (In $ million) Exports 2005-06 100606.92 2006-07* 124629.48 Y-O-Y Growth 23.88 Imports 2005-06 140237.65 2006-07* 181368.26 Y-O-Y Growth 39.00 Trade Balance 2005-06 -39630.72 2006-07* -56738.77 * Provisional Source: Federal Ministry of Commerce, Govt. of India

India's Balance of Payments (2003-04 to 2005-06) (In $ million) Items 2003-04R 2004-05PR 2005-06P Trade Balance -13,718 -36,629 -51,554 Invisibles, net 27,801 31,229 40,942 Current Account Balance 14,083 -5,400 -10,612 Capital Account 16,736 31,027 24,693 Overall balance 31,421 26,159 15,052 Foreign Exchange Reserve Increase (+)/Decrease (-) -31,421 -26,159 -15,052 R : Revised PR : Partially Revised P : Preliminary Source: Reserve Bank of India Report

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