BALANCE OF PAYMENT

BALANCE OF PAYMENTS
• Balance of Payments (BOP)—is a systemic accounting record of all economic
transactions during a period of time between the residents of the country and
residents of foreign countries.
• It presents a classified record of all receipts on account of goods exported, services
rendered and capital received by residents and payments made by them on account
of goods imported and services received from the capital transferred to non-
residents or foreigners.

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 FEATURES OF THE BOP
• BOP follows the accounting procedure of double-entry bookkeeping (debits
& credits).
• A credit entry records an item or transaction that brings foreign exchange into the country.
• A debit entry represents a loss of
foreign exchange.
• BOP will always balance.
• A BOP deficit (surplus) means that the debit entries exceed (are less than) the
credits. This imbalance applies only to a particular account or component of
the BOP.

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 IMPORTANCE OF THE BALANCE OF PAYMENTS

• BOP records all the transactions that create demand for and supply of a currency.
This indicates demand-supply equation of the currency. This can drive changes in
exchange rate of the currency with other currencies.
• BOP may confirm trend in economy’s international trade and exchange rate of the
currency. This may also indicate change or reversal in the trend.
• Balance of payments accounts provide insights into the country’s economic
performance relative to the rest of the world.
• The study of the economics of balance of payments allows proper evaluation of the
various arguments and government policies recommended to eliminate trade
imbalances.
• This may indicate policy shift of the monetary authority (RBI) of the country.
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 THE GENERAL RULE IN BOP ACCOUNTING

• a) If a transaction earns foreign currency for the nation, it is a credit and is recorded
as a plus item.
• b) If a transaction involves spending of foreign currency it is a debit and is recorded
as a negative item.

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 THE VARIOUS COMPONENTS OF A
BOP STATEMENT
• A. Current Account
• B. Capital Account
• C. IMF
• D. SDR Allocation
• E. Errors & Omissions
• F. Reserves and Monetary Gold

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 Statement II: Standard Presentation of India's Balance of Payments
(US$ Million)
Item Apr-Jun 2019 P Apr-Jun 2018
Credit Debit Net Credit Debit Net
A. CURRENT ACCOUNT
I. MERCHANDISE 82,729 1,28,941 -46,212 83,389 1,29,140 -45,751
II. INVISIBLES (a+b+c) 77,957 46,091 31,867 72,360 42,413 29,947
a) Services 52,197 32,166 20,031 48,200 29,524 18,676
i) Travel 6,950 6,203 747 6,448 5,914 534
ii) Transportation 5,344 6,104 -760 4,863 4,776 87
iii) Insurance 588 409 179 606 373 233
iv) G.n.i.e. 151 307 -155 170 278 -108
v) Miscellaneous 39,164 19,143 20,021 36,114 18,183 17,930
Of which :
Software Services 22,811 1,812 20,998 20,121 1,516 18,605
Business Services 11,475 11,715 -239 9,436 9,479 -43
Financial Services 1,287 519 769 1,111 744 367
Communication Services 700 284 415 522 232 290
b) Transfers 19,963 2,012 17,951 18,803 1,772 17,031
i) Official 35 307 -272 41 225 -184
ii) Private 19,928 1,705 18,224 18,763 1,547 17,216
c) Income 5,797 11,913 -6,116 5,356 11,117 -5,760
i) Investment Income 4,446 11,274 -6,829 4,213 10,514 -6,3017
ii) Compensation of Employees 1,352 639 713 1,144 603 541
Total Current Account (I+II) 1,60,686 1,75,031 -14,345 1,55,749 1,71,552 -15,803
 Statement II: Standard Presentation of India's Balance of Payments
(US$ Million)
Item Apr-Jun 2019 P Apr-Jun 2018
Credit Debit Net Credit Debit Net
B. CAPITAL ACCOUNT
1. Foreign Investment (a+b) 88,393 69,659 18,734 77,688 76,261 1,427
a) Foreign Direct Investment (i+ii) 21,215 7,323 13,891 17,235 7,663 9,573
i. In India 20,830 3,976 16,854 16,960 3,834 13,126
Equity 16,492 3,957 12,535 12,914 3,821 9,093
Reinvested Earnings 3,193 3,193 3,228 3,228
Other Capital 1,145 19 1,126 817 12 805
ii. Abroad 384 3,347 -2,963 276 3,829 -3,554
Equity 384 1,336 -952 276 2,326 -2,050
Reinvested Earnings 0 770 -770 0 758 -758
Other Capital 0 1,241 -1,241 0 745 -745
b) Portfolio Investment 67,178 62,335 4,843 60,453 68,598 -8,145
In India 67,073 61,916 5,156 59,138 68,244 -9,106
FIIs 67,073 61,916 5,156 59,138 68,244 -9,106
of which:
Equity 50,491 47,378 3,112 49,357 52,107 -2,749
Debt 16,582 14,538 2,044 9,781 16,137 -6,356
ADRs/GDRs 0 0 0 0 0 08
Abroad 105 419 -314 1,315 354 961
 Statement II: Standard Presentation of India's Balance of Payments

(US$ Million)
Item Apr-Jun 2019 P Apr-Jun 2018
Credit Debit Net Credit Debit Net
B. CAPITAL ACCOUNT
2.Loans (a+b+c) 22,450 12,597 9,853 18,774 23,046 -4,272
a) External Assistance 3,021 1,551 1,470 1,876 1,350 526
i) By India 5 30 -25 12 31 -19
ii) To India 3,016 1,521 1,495 1,864 1,319 545
b) Commercial Borrowings(MT&LT) 10,001 3,608 6,393 4,749 6,057 -1,308
i) By India 881 742 140 1,718 1,519 199
ii) To India 9,119 2,866 6,253 3,031 4,538 -1,507
c) Short Term To India 9,428 7,438 1,990 12,149 15,639 -3,490
i) Buyers' credit & Suppliers' Credit >180 days 8,028 7,438 590 5,613 15,639 -10,026
ii) Suppliers' credit up to 180 days 1,400 0 1,400 6,536 0 6,536
3. Banking Capital (a+b) 16,877 20,761 -3,884 28,806 18,745 10,061
a) Commercial Banks 16,877 20,378 -3,501 28,806 18,231 10,575
i) Assets 5,503 10,076 -4,573 11,158 5,690 5,468
ii) Liabilities 11,375 10,302 1,072 17,648 12,541 5,106
of which: Non-Resident Deposits 10,780 8,026 2,754 15,578 12,067 3,512
b) Others 0 383 -383 0 513 -513
4. Rupee Debt Service 0 60 -60 0 23 -23
5. Other Capital 13,312 10,073 3,239 5,975 8,381 -2,406
Total Capital Account (1 to 5) 1,41,032 1,13,150 27,882 1,31,243 1,26,456 4,787
C. Errors & Omissions 447 0 447 322 -322
D. Overall Balance (A+B+C) 3,02,166 2,88,182 13,984 2,86,992 2,98,331 -11,338
E. Monetary Movements (i+ii) 0 13,984 -13,984 11,338 0 11,338
i) I.M.F. 0 0 0 0 0 9 0
ii) Foreign Exchange Reserves 13,984 -13,984 11,338 0 11,338
( Increase - / Decrease +)
 SIMPLIFIED/ CONSOLIDATED VIEW
Table 1: Major Items of India's Balance of Payments
(US$ Billion)
April-June 2019 (P) April-June 2018
Credit Debit Net Credit Debit Net
A. Current Account 160.7 175.0 -14.3 155.7 171.5 -15.8
1. Goods 82.7 128.9 -46.2 83.4 129.1 -45.8
Of which:
POL 11.6 35.0 -23.4 11.8 34.8 -23.0
2. Services 52.2 32.2 20.0 48.2 29.5 18.7
3. Primary Income 5.8 11.9 -6.1 5.4 11.1 -5.8
4. Secondary Income 20.0 2.0 18.0 18.8 1.7 17.1
B. Capital Account and Financial Account 141.0 127.2 13.9 142.6 126.5 16.1
Of which:

Change in Reserves (Increase (-)/Decrease (+)) 14.0 -14.0 11.3 11.3

C. Errors & Omissions (-) (A+B) 0.4 0.4 0.3 -0.3

P: Preliminary
Note: Total of subcomponents may not tally with aggregate due to rounding off.
 CURRENT ACCOUNT
• The current account includes the value of trade in merchandise, services, income
from investments, and unilateral transfers .
• Merchandise—tangible goods.
• Services—include travel and tourism, royalties, transport costs, and insurance.
• Income from investments—interest and dividends.
• Unilateral transfers—include foreign aid, gifts, and retirement pensions.
The net value of the balances of visible trade and of invisible trade and of unilateral
transfers defines the balance on current account.

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 CAPITAL ACCOUNT

• The capital account records all international transactions that involve a resident of the
country concerned changing either his assets with or his liabilities to a resident of another
country.
• Transactions in the capital account reflect a change in a stock – either assets or liabilities.
a) Inflows = credits
b) Outflows = debits

• Transactions classified as
a) portfolio
b) direct
c) short term
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 THE RESERVE ACCOUNT

• Measures changes in international reserves owned by central banks

• Reflects surplus/deficit of
a) current account
b) capital account
• Three accounts: IMF, SDR, & Reserve and Monetary Gold are collectively called as The
Reserve Account.
• The IMF account contains purchases (credits) and re-purchase (debits) from International
Monetary Fund. Special Drawing Rights (SDRs) are a reserve asset created by IMF and
allocated from time to time to member countries. It can be used to settle international
payments between monitary authorities of two different countries.

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 NET EFFECT

7. Net Effects:
a. Sum of all transactions must be zero:

1.) current account

2.) capital account
3.) official reserves

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INDIAN CURRENT ACCOUNT
HISTORICAL TRENDS

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 DRAWING A LINE IN THE BOP
• If we draw a line at the BOP statement, then:
• Items “above the line” refer to the current account trade in goods,
services, income, and unilateral transfers.
• Items “below the line” are the capital and financial account transactions
(purchases and sales of financial assets).
• Since the BOP always balances, then a current account deficit (above
the line) implies that the country is running a net surplus below the
line, so that the country is a net borrower from the rest of the world.
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 DOUBLE-ENTRY ACCOUNTING

• Balance of payments
• Record of the economic transactions
• Between the residents of one country and the rest of the world
• Double-entry accounting system

• International transaction
• Exchange of goods, services, or assets
• Between residents of one country and those of another

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 DOUBLE-ENTRY ACCOUNTING

• Residents
• Businesses, individuals, and government agencies
• That make the country in question their legal domicile

• Credit transaction (+)

• Receipt of a payment from foreigners

• Debit transaction (-)

• Payment to foreigners

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 DOUBLE-ENTRY ACCOUNTING

• India credit transaction (+)

• Merchandise exports
• Transportation and travel receipts
• Income received from investments abroad
• Gifts received from foreign residents
• Aid received from foreign governments
• Investments in the United States by overseas residents

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 DOUBLE-ENTRY ACCOUNTING

• India debit transaction (-)

• Merchandise imports
• Transportation and travel expenditures
• Income paid on the investments of foreigners
• Gifts to foreign residents
• Aid given by the Indian government
• Overseas investment by Indian residents

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 DOUBLE-ENTRY ACCOUNTING

• Total balance-of-payments account

• Must always be in balance

• Surplus
• Balance on a subaccount (subaccounts) is positive

• Deficit
• Balance on a subaccount (subaccounts) is negative

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 1. Suppose ABC Exports goods worth $1M to United States. The amount will be credited to
ABC’s account held in USD in a US Bank.
‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
Services
Investment
income
Current Account +1000
Official Capital
Private Capital 1000 (1)
Capital Account -1000

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Goods export represents merchandise exports / credit Merchandise
Credit to ABC account in US represents foreign asset for India – Debit Private Capital
 2. India gets into an agreement with UAE to supply Wheat worth USD 3 M in lieu of crude oil

‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
3000 (2) 3000 (2)
Services
Investment income
Unrequited transfers
Current Account +1000
Official Capital
Private Capital 1000 (1) -1000
Capital Account

This transaction represents Merchanise Export (Wheat) / Import (Oil) 25

3. Indian bank makes a loan of $1.5 millon to a Bhutanese food processor. The loan is
funded by creating a $1 million deposit for Bhutanese company in an Indian bank

‘000 USD
Credit (+) Debit (-) Net balance
Merchandise 1000 (1)
3000 (2) 3000 (2)
Services
Investment income
Unrequited Transfers
Current Account +1000
Official Capital
Private Capital 1000 (1)
1500 (3) 1500 (3)
Capital Account -1000
Loan represents private capital outflow / deposit is private capital inflow 26
4. An Indian company sells $750 K worth of goods to a Bhutanese company, these goods are
paid for with the bank account created in example 3.

‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
3000 (2) 3000 (2)
750 (4)
Services
Investment income
Unrequited Transfers
Current Account +1750
Official Capital
Private Capital 1000 (1)
1500 (3) 1500 (3)
750 (4)
Capital Account -1750

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5. Indian government gifts $250,000 worth of medicines to Malawi

‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
3000 (2) 3000 (2)
750 (4)
250 (5)
Services
Investment income
Unrequited Transfers 250 (5)
Current Account +1750
Official Capital
Private Capital 1000 (1)
1500 (3) 1500 (3)
750 (4)
Capital Account -1750

Medicine export is recorded as Merchandise export / Gift is unrequited transfer 28

 6. Indian government treasury buys $50 million worth of US government bonds. Paid from
a deposit in US
‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
3000 (2) 3000 (2)
750 (4)
250 (5)
Services
Investment income
Unrequited Transfers 250 (5)
Current Account +1750
Official Capital 50,000 (6) 50,000 (6)
Private Capital 1000 (1) -1750
1500 (3) 1500 (3)
750 (4)
Capital Account

Foreign govt purchases by Indian govt are recorded as official capital inflow. Reduction in 29
foreign deposits is treated as capital outflow
 7. An Indian resident receives $10,000 in interest from Euro bonds she owns. The $10,000 is
deposited in a German bank.
‘000 USD

Credit (+) Debit (-) Net balance

Merchandise 1000 (1)
3000 (2) 3000 (2)
750 (4)
250 (5)
Services
Investment income 10 (7)
Unrequited Transfers 250 (5) +1760
Current Account
Official Capital 50,000 (6) 50,000 (6)
Private Capital 1000 (1)
1500 (3) 1500 (3)
750 (4)
10 (7)
Capital Account -1760

Earning of international investments represent credit to investment income account. Increase 30

in US owned foreign bank deposits is considered a capital outflow – debit to private capital