Balance of Payments

The Balance of Payments (BOP) is one of the oldest and most important statistical statements for any country. It is a systematic record of all economic transactions between the residents of one country and the residents of the rest of the world in a year. Since we merely record all receipts and payments in international transactions using double entry system, the balance of payments always balance in an accounting sense. The international transactions of the domestic country are classified into the following groups: • Trade Transactions: They include exports and imports of all types of visible and invisible goods and services in a year. • Capital Transactions: They include inflow and outflow of foreign capital in one year. The inflow of foreign capital is due to foreign direct investment, foreign portfolio investment and foreign borrowings. The outflow of foreign capital is due to direct capital investment abroad and foreign lending. The Balance of Payment Account record in every country is maintained by the central bank of the country. India’s Balance of Payment is maintained by The Reserve Bank of India. The Balance of Payment account is horizontally divided into Current account, Capital account and Reserve account. • Current account : This account is the summary of all international trade transactions of the domestic country in one year. It is divided into: ✔ Balance of Trade account:

On the Credit side of Balance of Trade account Receipt of Foreign Exchange due to export of visible goods is recorded and on the debit side of payment of Foreign Exchange due to import of visible goods is recorded. On the Debit side of the Balance of Trade account Receipt of Foreign Exchange due to export of all types of services is recorded and on the Debit side payment of Foreign Exchange due to import of all types of services is recorded. ✔ Capital Account Balance: This account is the summary of Foreign Capital transcations. On the credit side of this account receipt of Foreign Exchange due to Foreign Direct Investment (FDI) Foreign Capital Investment and Foreign Borrowing (FB) is recorded. On the Debit side of the Capital Account payment of Foreign Exchange due to Direct Investment Abroad (DIA), Portfolio Investment Abroad (PIA) and Foreign Lending (FC) is recorded.

Reserves Account Balance: This is the adjusting account in Balance of Payment. It makes an adjustment between Current Account Balance and Capital Account Balance. If the deficit in the Current Account is followed by surplus in Capital Account then the excess Foreign Exchange is diverted from Capital Account to Current Account so that deficit in the Current Account is eliminated. The remaining surplus in the Capital Account is transferred to the Reserve Account and recorded on the Credit of Reserve Account Therefore both Current and Capital Account is always Balanced. It

means that in the Accounting principle Balance of Payment is always balanced. The Reserve Account is also indicator of Forex Reserves of the country if surplus in the Capital Account is more than deficit in the Current Account, there is net increase in the Forex Reserves of the country at the end of the year. On the other hand if deficit in the Current Account is more than surplus in the Capital Account there is net decrease in the Foreign Reserves of the country at the end of the year.

The Balance of Payment System
The balance of payments situation has been undergoing cyclic changes since 1951-52. The first five year plan was the only period where we did not experience balance of payments problem. During this period, the trade deficit was financed by net receipts from the invisibles and transfers. The current account deficit, therefore, is very small. Since the beginning of the second five year plan, India has experienced balance of payments problems of varying intensity. By the end of 1980, the situation reaches crisis point. The trade deficit stood at 3.2% of GDP; the current account deficit increased to 2.2 percent. It was necessary to finance the deficit by resorting more and more to commercial borrowing.

The Crisis: 1990-92
The gulf crisis of 1990 led to an unprecedented crisis in the balance of payments. The balance of payments crisis reached its peak in the summer of 1991 when the foreign currency reserves had fallen to almost $1 billion, inflation had risen to an annual rate of 17 percent, industrial production was falling and overall

economic growth had declined to 1.1 percent in 1991-92. The payments crisis became evident in 1990-91 when the oil prices increased due to the Gulf War. This resulted in worsening of current accounts deficit which increased to 3.2% of GDP in 199091. There was also a deteriorationin the invisible account because of lower remittances and higher interest payments. Foreign exchange reserves started to decline from September 1990. They declined from Rs.5480 crores ($3.1 billion) in August 1990 to Rs. 1666 crores (896 million) in January 1991. During this period the Government had to take recourse to IMF to overcome the balance of payments difficulties. The main factor responsible for the sharp fall in reserves was the sharp rise in the imports of POL. However, the payments crisis of 1990-91 was not simply due to deterioration on the trade account, it was accompanied by other adverse developments on the capital account reflecting the loss at home, coupled governments ability to manage the situation. Political uncertainty at home, coupled with rising inflation and widening fiscal deficits, led to a loss of international confidence. India’s recourse to the commercial borrowings totally dried up as the credit rating agencies down graded India. Simultaneously, there began an outflow of non-resident Indian deposits. In addition there were serious difficulties in the rolling over of short term credit, which was roughly of the order of $5 billion. While current account deficit of the order of $8 billion was easily financed in 1988-89, a deficit of $9.7 billion in 1990-91 became almost impossible to finance. By June 1991, the balance of payments crisis had become overwhelmingly a crisis of confidence, i.e. a crisis of confidence in the governments’ ability to manage the balance of payments. A default on payments had become a serious possibility in June 1991 for the first time in the Indian history. A default is essentially a failure to repay debts, but its ramifications are never confined to debt. A default in payments

inevitably leads to a breakdown in credit availability and normal payments arrangements. Suppliers become reluctant to sell goods and services and insist on advance payments through banks of their own country. This leads to severe trade disruptions which in turn forces severe and prolonged import compression and results in shortages, industrial dislocation, and severe unemployment and high inflation. The new government of Mr. P. V. Narshima Rao which assumed office in June 1991 acted swiftly and took measures which relied on a combination of macro economic stabilization and structural reforms in industrial and trade policies. The exchange rate was also adjusted downwards. As a result of these policy reforms and successful mobilization of exceptional financing, the balance of payments position slowly stabilized during 1991-92. The increase in foreign exchange reserves combined with stabilization and structural reforms restored international confidence. With the sharp decline in the absolute level of imports, 1991-92 ended with a current account deficit of less than one percent of GDP.



India has emerged stronger in its external payments position at the end of the first decade of liberalisation and structural reforms that have transformed the country’s standing in the world economy. The 1991 balance of payments crisis was turned into an opportunity by Government to re-set the directions of the economy to become outward-oriented and move closer to integration with the world economy. The reforms covered trade and industrial policies, the exchange rate, tax and foreign investment policies and the banking system. The launching of a truly liberalised trade regime,

with a two-step devaluation of the rupee in 1991 leading later to market-determined exchange rate, and the ushering in of a conducive climate for foreign investment inflows, have had a dramatic impact on the country’s external transactions. The effect of liberlisation on the balance of payment can be compared:

Trade and Investment Flows
The early 1990s saw a surge in exports, a significant rise in foreign direct investment and other capital flows including portfolio capital from foreign institutional investors and a substantial increase in ‘private transfers’ under the category of ‘invisibles’ in balance of payments account. In ten years, 19912001, over 37 billion dollars of foreign investment flowed. Of these 18 billion dollars was direct investment, i.e., an average of 2.2 billion dollars a year. The private transfers, which averaged two to three billion dollars in the 1980s – mainly the remittances of Indians employed abroad – grew to a level of 10-12 billion dollars in the latter half of 1990s. The export growth momentum resulting from the gradual opening of the economy and the exchange rate reforms including the convertibility of the rupee for current account transactions in August 1994 triggering the surge in invisible receipts, are the two major factors which helped contain the current account deficit in BOP to 1 to 1.5 per cent of GDP between 1991 and 2001.

Balance of Payment Surplus
A low current account deficit is a healthy indicator of the country’s balance of payment position. With the strong capital flows (net) from 1993-94 onwards, India could easily finance the current account deficit and add sizeable amounts to the foreign exchange reserves. NRI deposits with the banking system in India have also been on the rise from 13 billion dollars in 1991-92 to 23.8 billion dollars by March 2001.

The balance of payments has recorded an overall surplus in most of the years and consecutively for five years from 1996-97. India’s foreign exchange reserves, which were barely one billion dollars in the pre-crisis year, have now reached a level of 40 billion dollars (other than gold and SDR), the average annual addition being 4.5 billion dollars. This order of reserves is equivalent to eight to nine months of imports. The external sector strength has to be derived essentially from exports. And, after a few years of slowdown, there has been a revival with growth rates moving upto 11 and 20 per cent in the two years ended March 2001. But no less important is the management of the external sector as a whole including exchange rate stability. India has successfully withstood the fall-out effects of the Asian financial turmoil in 1997, the economic sanctions imposed by USA and other countries following the nuclear tests in May 1998 and the sharp rise in international oil prices since the closing months of 1999. In spite of a heavy outgo of over 10 billion dollars from imports of higher priced oil, India’s trade deficit has been contained within manageable limits.

Recording of Transactions: General Principles
The double-entry bookkeeping used in accounting for the balance of payments is similar to that used by business firms in accounting for their transactions. In ordinary business accounting the amount of each transaction is recorded both as a debit and a credit, and the sum of all debit entries must, therefore, equal the sum of all credit entries. Furthermore, in business accounting it is recognized that the total value of the assets employed by the firm must be equal to the total value of the claims against those assets, that is, that all the assets belong to someone. As is well known, the claims against the assets are called the liabilities of the firm. (Assets of the firm not subject to the claims of creditors are, of course, the property of stockholders, so that, broadly speaking; the firm has two classes of liabilities: those due to creditors and those due to stockholders.) By accounting

convention, a debit entry is used to show an increase in assets or a decrease in liabilities, while a credit entry is used to show an increase in liabilities or a decrease in assets. Since a debit entry is always accompanied by a credit entry, it follows that the value of total assets on the books of a going concern is always equal to the value of total liabilities (including the claims of stockholders). These elementary principles can be applied to the recording of transactions in the balance of payments. For example, when a foreigner gives up an asset to a resident of this country in return for a promise of future payment, a debit entry is made to show the increase in the stock of assets held by U.S. residents, and a credit entry is made to show the increase in U.S. liabilities to foreigners (that is, in foreign claims on U.S. residents). Or when a U.S. resident transfers a good to a foreigner, with payment to be made in the future, a debit entry is made to record the increase in one category of U.S. assets (U.S. financial claims on foreigners, that is, U.S. holdings of foreign IOUs), and a credit entry is made to record the decrease in another category (goods). These principles are illustrated in greater detail in the following section, which through a series of examples constructs a hypothetical balance-of-payments statement. Recording of Typical Transactions The balance-of-payments accounts are commonly grouped into three major categories: (1) accounts dealing with goods, services, and income; (2) Accounts recording gifts, or unilateral transfers; and (3) Accounts dealing basically with financial claims (such as bank deposits and stocks and bonds). This section shows how typical transactions in each of these major categories are recorded. COMMERCIAL EXPORTS: TRANSACTION 1

Suppose that a firm in the United States ships merchandise to an overseas buyer with the understanding that the price of $50 million, including freight, is to be paid within 90 days. In addition, assume that the merchandise is transported on a U.S. ship. In this case U.S. residents are parting with two things of value, or two assets: merchandise and transportation service. (Transportation service, like other services supplied to foreigners, can be viewed as an asset that is created by U.S. residents, transferred to foreigners, and consumed by foreigners all at the same time.) In return for giving up these two assets, U.S. residents are acquiring a financial asset, namely, a promise from the foreign customer to make payment within 90 days. In accordance with the principles outlined above, the bookkeeping entries required to record these transactions are as follows: first, a debit of $50 million to an account we shall call, “U.S. private short-term claims,” to show the increase in this kind of asset held by U.S. residents; second, a credit of $49 million to “Goods,” and third, a credit of $1 million to “Services.” The credit entries, both in the export category, show the decreases in the assets available to U.S. residents. These figures are entered on lines 19, 2, and 3 in the table on page 2 and are preceded by the number (1) in parentheses to identify them with the first transaction discussed .

PAYMENT FOR COMMERCIAL EXPORTS: TRANSACTION 2 To make payment in dollars for the merchandise received from the United States, the foreign customer might purchase from his local bank a demand deposit held by his bank in a U.S. bank, then transfer the deposit to the U.S. exporter. As a result U.S. demand deposit liabilities to foreign residents (that is, foreign private short-term claims) would be diminished (debited). The payment by the foreign buyer would also cancel his obligation to the U.S. exporter, so that U.S. private short-term claims on

foreigners would be reduced (credited). The appropriate entries, preceded by the number (2), are on lines 19 and 22 of the table. RECEIPT OF INCOME FROM INVESTMENTS ABROAD: TRANSACTION 3 Each year residents of the United States receive billions of dollars in interest and dividends from capital investments in foreign stocks, bonds, and the like. U.S. residents receive these payments in return for allowing foreign residents to use U.S. capital that otherwise could be put to work in the United States. Foreign residents receive similar returns from investments in the United States. Suppose that a U.S. firm has a long-standing capital investment in a profitable subsidiary abroad, and that the subsidiary transfers to the U.S. parent (as one of a series of such transfers) some $10 million in dividends in the form of funds held in a foreign bank. The U.S. firm then has a new (or enlarged) demand deposit in a foreign bank, as compensation for allowing its capital (and associated managerial services) to be used by its subsidiary. A debit entry on line 19 shows that U.S. private short-term claims on foreigners have increased, and a credit entry on line 4 reflects the fact that U.S. residents have given up an asset (the services of capital over the period covered) that is valued at $10 million. COMMERCIAL IMPORTS: TRANSACTION 4 In the balance-of-payments accounts U.S. commercial imports of goods and services have opposite results from U.S. commercial exports. Residents of the United States are acquiring goods and services rather than giving them up, and in return are transferring financial claims to foreigners rather than acquiring them.

To take an illustration, assume that U.S. residents import merchandise valued at $65 million, making payment by transferring $10 million from balances that they hold in foreign banks and $55 million from balances held in U.S. banks. A debit entry on line 6 records the increase in goods available to U.S. residents, while credit entries on lines 19 and 22 record the decrease in U.S. claims on foreigners and the increase in U.S. liabilities. EXPENDITURES ON TRAVEL ABROAD: TRANSACTION 5 Residents of the United States who tour abroad purchase foreign currency with which to meet their expenses. If U.S. residents transfer balances of $5 million in U.S. banks to foreigners in exchange for foreign currency that they spend traveling abroad, the end result is that imports of services must be debited $5 million to reflect U.S. purchases of the “asset,” “travel,” from foreigners, and “Foreign private short-term claims” must be credited $5 million to show the increase in U.S. demand deposit liabilities. GIFTS TO FOREIGN RESIDENTS: TRANSACTION 6 Many residents of this country, some of them recent immigrants, send gifts of money to relatives abroad. If individuals in the United States acquire balances worth $1 million that U.S. banks have held in foreign banks and then transfer these balances to relatives overseas, there must be a credit entry of $1 million showing the decrease in U.S. private short-term claims on foreigners. This transaction differs from the other transactions analyzed in that U.S. residents obtain nothing of material value in return for the asset given up. Yet if the books are to balance, there must be a debit entry of $1 million. The bookkeeping convention followed in such cases is to debit an account called “Unilateral transfers” (line 9). In the official U.S. balance-ofpayments presentation, this account is divided into several

subsidiary accounts, some of which are used to record grants by the federal government under foreign aid programs.

LOANS TO BORROWERS ABROAD: TRANSACTION 7 A financial loan by a resident of the United States to a borrower in another country entails the transfer of money by the U.S. resident in exchange for a promise from the borrower to repay at a future time. Suppose that U.S. residents purchase $40 million in long-term bonds issued by Canadian borrowers. Also assume that the bonds are denominated in U.S. dollars, so that payment for them is made by transferring U.S. dollar demand deposits. A debit entry on line 18 records the increase in U.S. holdings of foreign bonds, and a credit entry on line 22 records the increase in demand deposits held by foreigners in U.S. banks. In principle, direct investment abroad by a U.S. firm could have required the same accounting entries. For the $40 million bond purchase to qualify as a direct investment (line 17), the bonds would have to be the obligations of a Canadian firm in which a U.S. party (or affiliated parties) owned at least 10 percent of the voting securities. Typically, however, direct investment abroad by a U.S. firm takes some other form, such as a purchase of foreign equity securities or a simple advance of funds to a foreign subsidiary. PURCHASES AND SALES OF DOLLAR BALANCES BY FOREIGN CENTRAL BANKS: TRANSACTION 8 At this point it is appropriate to examine the net result of the foregoing seven transactions on the short-term claims of U.S. residents and of foreign residents. As the table shows, these transactions have involved almost the same volume of debits as credits to U.S. private short-term claims on foreigners, with the net result that these claims have been diminished (credited) by $1 million (the figure on line 19 in the last column). By contrast,

as shown on line 22, foreign private short-term claims on this country have risen by $50 million (excluding the effects of transaction 8, which remains to be discussed). It happens that all of this $50 million is in the form of demand deposits, and private foreigners might not wish to retain all of these newly acquired dollar balances. Those who hold demand deposit dollar balances typically do so for purposes such as financing purchases from the United States (or from non-U.S. residents desiring dollars), and no guarantee exists that such motivations will be just strong enough to make the dollar-balance holders exactly satisfied with the $50 million increase in their holdings. For purposes of illustration, assume that foreign residents attempt to sell $40 million of this increase in exchange for balances in their native currencies, but that U.S. residents do not want to trade any of their foreign-currency balances for the proffered dollar balances at the going rates of exchange between the dollar and foreign currencies. In circumstances such as these the foreign-exchange value of the dollar (the price of the dollar in terms of foreign currencies) will decline. However, some central banks might hold the view that the foreign exchange value of their currencies was inappropriately high—that the foreign-exchange value of the dollar was inappropriately low—in which case they might sell foreign currencies in exchange for dollar balances in order to moderate the decline in the exchange price of the dollar. In the present case, suppose that foreign central banks purchased 25 million in dollar balances from commercial banks within their territories. (Typically, of course, the amounts involved would be much larger.) The U.S. balance-of payments accounts would register an increase of $25 million in U.S. liabilities held by foreign monetary authorities (line 21) and an equivalent decrease in short-term liabilities held by private foreigners (line 22).

It should be noted that such purchases of dollar balances by foreign central banks supply the commercial banks that sell the dollars with new reserves in their native currencies. In general, these reserves can be used by the banks to expand loans and thus to inflate the money supplies in the countries concerned, if nothing else is changed. STATISTICAL DISCREPANCY At the beginning of this monograph it was noted that a country’s balance of payments is commonly defined as the record of transactions between its residents and foreign residents over a specified period. Compiling this record presents difficult problems, and errors and omissions sometimes occur in collecting the data. Take first the matter of coverage. In spite of attempts to gather data on them, some international transactions go unreported. One category of transactions that probably is often substantially underreported is purchases and sales of short-term financial claims; such unreported movements of short-term capital are widely believed to be a major component of total errors and omissions. No attempt is made to collect complete data on certain other transactions, which are estimated by balance-of-payments statisticians. The sample observations on which these estimates are based are sometimes of doubtful reliability, and even the best sampling and estimating techniques will not prevent errors of estimation. Or take the matter of valuation. While import documentation, for example, may state a precise value for the merchandise imported, a different amount may eventually be paid the exporter. The discrepancy can arise for a number of reasons, ranging from default by the importer to incorrect valuation of the merchandise on the import documents. Because of such problems total recorded debits do not equal total recorded credits in the actual balance-of-payments accounts in any given year. To provide a specific illustration of how this discrepancy arises, suppose that U.S. export

documentation valued an item at $10,000, while in fact the terms of sale called for payment of only $9,000 by the foreign importer, who drew down his bank balance in the United States to make the payment. On the basis of the export documentation, balance-of-payments accountants would credit merchandise exports by $10,000; but when they turned their attention to U.S. short-term liabilities to private foreigners, they would find that U.S. banks had reported a decrease of only $9,000 (assuming no other transactions). Consequently, recorded credits would mistakenly exceed recorded debits by $1,000. In fact, of course, the credit entry should have been in the amount of $9,000. It is to accommodate such discrepancies that the residual account, “Statistical discrepancy,” was created. An excess of credits in all other accounts is offset by an equivalent debit to this account, or an excess of debits in other accounts is offset by an equivalent credit to this account. The account thus serves at least two purposes; it gives an indication of the net error in the balance-of-payments statistics, so that users can have some idea of the reliability of the balanceof-payments data, and it provides a means of satisfying the requirement of double-entry bookkeeping that total debits must equal total credits. Of course, no need exists for the account in our hypothetical balance-of-payments table, which displays equality between total debits and total credits.

Balance of Payment Summary

Balance of Payments : Summary (In US $ million)


199091 (P)

199192 (P) 18266

199293 (P) 18869

199394 (P) 22683

199495 (P) 26855

199596 (P) 32311

199697 (P) 34133

199798 (P) 34849

199899 (P) 16634

200304 (P) 64,723

1. Exports


2. Imports











Of which : POL











3. Trade balance











4. Invisibles (net)











Non-factor services Investment income Pvt. transfers































Official Grants











5. Current Account Balance 6. External assistance (net) 7. Commercial borrowing (net)@ 8. IMF (net)









































9. NR (net)












10. Rupee service












11. Foreign investment (net) of which :











The Balance of Payment statistics during the 90s have changed under the entire major heads that is, trade balance, current account balance, capital account balance (net) and reserves. Between 1990-91 and 2003-04, the current account balance, the most important among all the balances has shown an improvement, that is, it recorded a surplus of US $10,561 million. The capital account (net) also has remained steady. The position of foreign exchange reserve also accordingly changed over this period. Trade Balance was always in deficit throughout the period shown in the table above as imports always exceeded the exports. Within the imports the POL items constituting a sizeable position continued to increase throughout. Exports did not achieve the required growth rate. Current Account Balance which includes visible items (trade balance) and invisibles is in a more encouraging position. It declined to $-2,66 million in 2000-01 from $-9680million in 199091 and recorded a surplus in 2003-04 to the extent of $10,561. The main reason for this improvement was the success of invisible items. Invisibles: Our trade balance deficit increased throughout the 1990s yet the current account deficit declined substantially, thanks to the increased earnings from invisibles. The two major items which helped us improve our position were (i) non-factor services; (ii) private transfers. Under the non-factor services, Software service exports emerged as the second largest item of invisible receipts. Since1995, its exports has registered an annual growth rate ranging from 50 percent to 55 percent. During this period the private transfer receipts also increased from $ 2069 million in 1990-91 to $22,833 million in 2003-04. The private remittances accounted to about 65 to 70 percent of the total private transfers. The inclusion of local redemption of non-

resident deposits since 1996-97 was another reason for progress shown under this item. The net inflow of invisibles helped us to have surplus in the current account in the last two years. The current trend of outsourcing a number of jobs by the developed countries to the developing ones is also helping us to get more jobs and earn additional foreign exchange. Capital account has been positive throughout the period. NRI deposits and foreign investment both portfolio and direct have helped to a great extent. Commercial borrowings have registered a decline so also the external assistance. Reserves have changed during this period depending on a balance between current and capital account. An increase in inflow under capital account has helped us build up our foreign exchange reserve making the country quite comfortable on this count. Currently we have nearly $130 billion foreign exchange reserves.

Selected indicators of external factors
Selected Indicators of External Sector Years (Apr-Sept) Item 1. Growth of Exports - BOP (%) 2. Growth of Imports - BOP (%) (a) of which, POL (%) 3. Exports/Imports - BOP (%) 4. Import cover of FER (No. of months) 5. External assistance (net)/TC (%) 6. ECB (net)/TC (%) 7. NR deposits/TC (%) 8. Short-term debt / FER (%) 9. Debt service payments as % of current receipts As per cent of GDP 10. Exports 11. Imports 12. Trade balance 13. Invisibles balance 14. Current account balance 15. External Debt 16. Debt Service Payments 199192 -1.1 -24.5 -11 86.7 5.3 1992 -93 3.3 15.4 13.7 77.6 4.9 1993 -94 20.2 10 -5.7 84.8 8.6 1994 -95 18.4 34.3 3 74.8 8.4 1995 -96 20.3 21.6 27 74 6 1996 -97 5.6 12.1 33.4 69.7 6.5 1997 -98 2.1 4.4 -18.1 68.2 6.9 1998 -99 -5.1 0.9 -25.6 67.3 7.1 2003 -04 20.4 24.4 -80.7 16.9










31.9 6.4 76.7 30.2

-8.5 47.4 64.5 27.5

6.1 12.2 18.8 25.6

12.9 2.1 16.9 26.2

43 37.2 23.2 24.3

27.6 32.5 25.5 21.2

38.6 10.9 17.2 19.5

153.3 -13.1 12.1 18.3

-7.3 17.5

6.7 7.7 -1 0.6 -0.3 37.7 3

7.1 9.4 -2.2 0.6 -1.7 36.6 2.9

8.1 9.6 -1.5 1 -0.4 33.1 3.1

8.1 10.9 -2.7 1.7 -1 30 3.3

8.9 12 -3.1 1.5 -1.6 26.3 3.3

8.6 12.3 -3.7 2.6 -1.1 23.8 2.9

8.3 12.2 -3.9 2.3 -1.6 23.8 2.7

10.8 13.3 -2.5 4.3 1.8 17.8

The various aspects of a country’s balance of payments indicate the strength and weakness of that economy. This table brings out

the changes in indicators for external sector between 1990 and 2003-04. Exports/Imports: The growth of exports and imports as percentage of balance of payment is not very favorable till 200304, where exports increased by 20.4% as against 24.4 % of imports. The major part of increase in imports through the 90s except in 97-98 and 98-99 was due to the imports of petroleum, oil and lubricants (POL). The percentage of exports/imports to BOP has been increasing from 66.2 in 1990-91 to 83.4 in 2002-03 indicating an improvement in our export growth but declined to 80.7 percent in 2003-04. Import cover of Foreign Exchange Reserve which was too low in 1990-91, was just enough for 2.5 months. This was below the norm which is a minimum of 3 months. In the subsequent years it has increased reaching to 16.9 months in 2003-04. India at present is in a very comfortable position with regards to foreign exchange reserves which now has crossed $130 billion. External sector variables as a percentage of GDP have also shown improvement in the last decade. Exports have increased from 5.8% in 1990-91 to 10.8% of GDP in 2003-04. However the imports all the time outstripped the exports. It increased from 8.8% to 13.3% of GDP during the above period. Trade Balance was always negative, ranging from -3.0 (90-91) to -4.0 (99-00) and again showed an improvement by reaching to -2.5 (2003-04). Invisibles have played an important role in improving our BOP position. From negative position (-0.1)in 1990-91 it reached 4.3% of GDP in 2003-04. Current account balance was the one which was causing concern since it crossed the safe limit of one percent of GDP in 1990-91(3.1) but fortunately declined over the period reaching to -1.1 in 99-2000 but increased again to 1.8 % in 2003-04.

External Debt which was 28.7 percent of GDPin 1990-91 has come down to 17.2 percent in 2003-04. Debt service has shown a positive change by declining from 2.8 percent in 1990-91 to 2.4% of GDP in 2001-02 but again has shot up to 2.9%in 2002-03.

On the basis of the balance of payment account till date it can be concluded that India is a Developing Country however not for long……..

Future prediction for India on the basis Balance of Payment:
The Balance of Payment of any country reflects the Developmental stage of the country. According to “The International Monetary Fund” India will be counted as the tenth country to join the list of developed countries on 9th December, 2009 when the Current Account of the Balance of Payment account will have a surplus.

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