Balance of Payments

-Prof.Rashmi fattepur
 BALANCE OF PAYMENTS
• The Balance of Payments or BoP is a statement or
record of all monetary and economic transactions
made between a country and the rest of the
world within a defined period (every quarter or
year).

• It takes into account the export and import of both

visible and invisible items.
 BOP statement includes
• All the receipts on account of goods exported &
imported.
• Services rendered.
• Capital received by residents.
• Payments of residents.
• Capital transferred to foreign.
 Importance of Balance of Payment
• BOP provides a clear picture of the economic relations
between different countries. (International financial
management).
• It provides information pertaining to the demand and
supply of the country’s currency. (trade data- the country’s
currency is appreciating or depreciating in comparison
with others).
• Country’s BoP indicates its position in international
economic growth.
• Country would be able to identify trends that may be
beneficial or harmful to the economy and take appropriate
measures.
 Balance of trade
• It deals with exports and imports of visible
items only.
• It takes into account only merchandise
exports & imports only.
Components of Balance of
Payments
• Current account
• Capital account
• Financial Account
 Current account
• The current account monitors the flow of funds
from goods and services trade (import and export)
between countries.
• This includes
– money received or spent on manufactured goods and
raw materials.
– revenue from tourism, transportation receipts, revenue
from specialized services (medicine, law, engineering),
and royalties from patents and copyrights.
– revenue from stocks.
 Capital account
• The capital account comprises credit and debit
transactions under non-produced non-financial assets and
capital transfers between residents and non-residents.

• It monitors the flow of international capital transactions.

These transactions include :

– the purchase or disposal of non-financial assets (land sold to

embassies and sales of leases and licenses, as well as transfers
which are capital in nature) and non-produced assets.

– records the flow of financial assets by migrants leaving or entering

a country and the transfer, sale, or purchase of fixed assets.
 Financial account
• The financial account monitors the flow of funds pertaining
to investments in businesses, real estate, and stocks.
• It includes government-owned assets such as gold and
Special Drawing Rights (SDRs) held with the International
Monetary Fund (IMF).
• It includes foreign investments and assets held abroad by
nationals & assets owned by foreign nationals.
• It reflects net acquisition and disposal of financial assets
and liabilities during a period.
• It shows how the net lending to or borrowing from the rest
of the world has occurred.
• Conversely, it shows how the current account surplus is
used or the current account deficit is financed.
 Recent Trend
• India's current account deficit (CAD) -USD 13.5 billion (2% of
GDP) during Oct-Dec'17 (Q3 2017-18) from USD 8 billion (1.4%
of GDP) in the corresponding quarter a year ago.
• Reasons for widening of CAD - increase in imports by 19% year-
on-year during Q3 2017-18.
• The surge in crude oil prices increased the import bill for India.
(global crude oil price rose by more than 20% YoY).
• India's trade deficit widened to USD 44.1 billion during Q3 2017-
18 from USD 33.3 billion in the year-ago period.
• Despite the soaring CAD, the forex reserves grew by USD 9.4
billion due to a stronger capital account surplus. This was in
contrast to the deficit of 1.2 billion in the year-ago period.
 Recent Trend
• The capital and financial account surplus rose to USD 12.6
billion in Q3 2017-18 from USD 7.3 billion in Q3 2016-17,
supported by stronger portfolio investment inflows worth USD
5.3 billion.
• With the CAD soaring and concerns over potential fiscal
slippage (as fiscal deficit reached 4% of GDP by end Jan'18),
the rupee is likely to witness a downward pressure.
• The combination of soaring CAD and a high fiscal deficit (twin
deficit scenario) will bring in inflationary pressures and likely
weigh down the rupee, which has already lost 1.4% against
USD since the beginning of 2018.
 Reasons for Deficit Balance
• Government liberalized imports in 1985 this
leads to the increase in imports significantly.
• The gulf war in 1990’s
• The rapid industrialization (import of capital
goods, technology, etc.)
• The slow growth of invisibles
• The devaluation/depreciation of rupee against
importing countries
• 1990-91 crisis
• Less exports