TASK -5

1)Balance of Payment (BOP) is a declaration that documents all monetary transfers made
during any given time between citizens of a country and the rest of the world. This argument
covers all transfers made by individuals, companies, and government, and assists in tracking
the transfer of funds about the economic growth. The balance of payments includes both the
current account and capital account. The current account includes a nation's net trade in
goods and services, its net earnings on cross-border investments, and its net transfer
payments. The capital account consists of a nation's imports and exports of capital and
foreign aid.

ANALYSING THE TREND FOR PAST 10 YEARS

BOP
150

106.6
100 89.3 89.3

63.7 67.8
51.6 48.8
50 45.2

3.86 7.4
0
2010
-2.91 2006 2007 2008 2009 2010 2011 2012 2013 2014
-9.6
-15.7
-27.9 -26.9
-32.3
-38.2
-50
-48.1

-78.2
-88.2
-100

Current Account Balance - as % of GDP Capital Account Balance - as % of GDP

ANALYSIS
After analysing the above data, it can be observed that the Capital Account balance from the
year 2010 to 2019 are positive and is between 2 – 4%. From 2010 till 2012, Capital Account
balance increased which is a negative sign for the Indian Economy. This can be attributed to
limited use of foreign exchange reserves despite massive decline in net capital flows in these
years. Since 2013 until 2019, the level of Capital Account fluctuates between the lowest of
1.6% to the highest of 4.39%. The declining trend from 2014 to 2016 and from 2017 to 2019
is a positive sign for the economy. The current account balances including foreign
investment, portfolio investment and direct investment also decreased from the financial year
2009 – 2010. This declining trend is a positive sign for the Indian economy. A major fall
from 3.52% in 2017 to 2.02% in 2018 is due to the fall in imports that could have happened
due to government policies and make in India campaign. Population growth, demonstration
effect, cyclic fluctuations, globalization and inflation are the factors that cause disequilibrium
in the balance of payments

Relationship between Current account and Capital account Balances:

Current account which comprises of balance of trade and invisibles (services, transfers and
income) can be surplus or a deficit. But Balance of Payments will always be zero. That is,
BOP cannot be surplus or a deficit. In a scenario where there is current account deficit,
capital accounts are used to meet those deficits and vice-versa. As a result, the BOP will
always balance out.
All inflows of money into the nation shall be matched with equivalent outflow of money
across all accounts. However, in practice keeping track of all the transactions might not be
possible. Therefore, errors and omissions are added in order to balance the BOP.
The relationship between current and capital accounts are as follows:
Current Account = Capital Account + Financial Account + Errors and Omissions
Or
Current Account + Capital Account + Financial Account + Errors and Omissions = 0
 Current Account Capital Account

It is the representation of the trade balanceIt is the representation of capital

of the country and of the direct paymentsinvestments and expenditures that don’t
and net income. affect the trade of the country.

The fund inflow and outflow ofThe capital is invested and expended in
international trades. making international trade happen.

It affects the current account or the

It affects the net income of the country. financial account (either to reduce trade
deficit or to increase trade surplus).

International trade, receipt of cash non-The application of the capital and how
capital items, etc. they are sourced.

The capital account is also another

The current account is one component of
component that constitutes the balance of
the balance of payment.
payment.

COMPARATIVE ANALYSIS REPORT ON CURRENT BOP

OF INDIA, U.S., BRAZIL, RUSSIA AND CHINA

COUNTRY BOP (MN )

INDIA -5760.03
US -109822
BRAZIL -3904
RUSSIA 10160
CHINA 49189.24
 BOP(MN )
60000

40000

20000

0
INDIA US BRAZIL RUSSIA CHINA
-20000

-40000

-60000

-80000

-100000

-120000

 The US has BOP of $-109822 Mn in 2019-2020 Financial year while Brazil, Russia
and China have BOP of $-3904 MN, $10160 MN and $49189.24 MN respectively.
And the current account balance of India in Financial year 2019-2020 is -$5760.03
MN.
 China has more (positive) BOP value compared to other countries. A positive current
account balance indicates that the nation is a net lender to the rest of the world, while a
negative current account balance indicates that it is a net borrower.
2. CURRENT ACCOUNT DEFICIT

Current Account Deficit also known as CAD is used to measure the flow of goods, service
and investments which comes into country and which goes out of country. It is a
measurement of a country's trade where the value of the goods and services it imports
exceeds the value of the products it exports.

India’s current account deficit narrowed when compared to last year for the same period i.e.,
December quarter. It has come $1.4 billion, which is 0.2percent of GDP and it was 2.7
percent in the corresponding quarter a year ago and 0.9 percent in the previous quarter.

Calculation of Current Account Deficit:

The current account on the balance of payments measures the inflow and outflow of goods,
services, investment incomes and transfer payments.

X = Exports of goods and services

M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers
The formula is: CAB = (X – M) + NY + NCT
We can call a country is in deficit if it values of goods and services in import exceeds the
value of goods and services in export. Further we will be knowing what this are in details. To
know about Current account deficit lets know what current account and its transactions are.

Current account Transaction:

Current account requires foreign currency to execute its transactions for example payments
connected with foreign trade that is import and export which is the biggest component of
current account. Interest on loans given to other countries or taken from other countries is
also part of current account. Some transactions which net income from investments in other
countries remittances for living expenses of parent spouse and children and residing abroad
also comes under current account transactions. Even expenses in connection with foreign
travel, foreign education and medical comes under current account transitions.

EXAMPLE:
 If a country has an import of 1200 million dollars and the expenses in connection with
foreign travel, education and health etc. are 200 million, and other outflows are 100 million
The Total value of goods and service of import is 1500 million (1200+200+100)

Where same country exports up to 1150 million with the income from foreigners travelling to
India and health is 150 million, with other inflow of 150 million. The Total value of inflow
would be 1450 million (1150+150+150).

And as the country’s export is more than the country import it is considered as the country is
under current deficit of 50 million.
(1500-1450 = 50 million)

How CAD is financed:

Current account deficit is financed by any one from two major types of account called as
capital account or financial account. Where the loans which are lend to other country or loan
borrowed from other country for investment purpose is considered under financial account.

Another popular and more important way of financing current account deficit is through
capital account transactions. In Capital account there are three major capital account
transactions such as

 Foreign Direct Investment (FDI)

 Foreign Indirect Investments (FII)
 Remittances.

Real world example of current account deficit

Current account fluctuations in one country are primarily based on global conditions. And
countries which run deficits intentionally have deficit volatility. For example, the United
Kingdom has seen its structural debt decline since the outcome of the Brexit election in 2016.

The UK has historically maintained a deficit, because it is a government that uses high debt
rates to fund unsustainable imports. Many of the country's exports are goods, and declining
oil prices have resulted in lower earnings for domestic companies. This decline translates into
lower taxes coming back into the UK, increasing its current account deficit.
However, the weakened pound reduced the nation's current debt after the British pound
deteriorated in value as a result of the Brexit referendum that took place on June 23, 2016.
This reduction occurred because the foreign dollar earnings for domestic commodity firms
were higher, leading to further cash inflows into the country.

Factors to be considered for calculation

 Overvalued exchange rate: -If the currency is overvalued, imports will be lower, and
thus sales will be higher. Exports will become non-competitive, and therefore the
volume of exports will decrease. Eurozone countries (e.g. Greece, Portugal, and
Spain) had an overvalued exchange rate (and were not able to devalue). Those three
countries had a CAD shortfall in 2007 that was equivalent to 10% of GDP.
 Economic Growth: If national income rises, individuals will continue to have more
disposable income to consume goods. If domestic manufacturers can not satisfy
domestic demand, they are the world's leading distributor of many goods, including
India importing a lot from China. Economic growth can therefore also be viewed as
the CAD element. And also, where domestic suppliers are unable to satisfy the
domestic demand or there is shortage of natural resources. Consumers or merchants
would then need to import goods from outside the world. As with India, we are the
world's third largest importer of crude oil and we also source palm oil from foreign
countries such as Malaysia.
 Decline in competitiveness/export sector: - In the UK, the exporting industrial
sector has declined as it has failed to cope with the developed countries in the far east.
That has contributed to a persistent trade balance deficit. While we are in decent
shape and doing well in the export sector in India right now, we can still do even
more.
 Higher Inflation: - If INDIA's inflation grows more than our major competitors so
INDIA's exports will become less competitive and imports more competitive. This
will lead the current account to deteriorate. Inflation, however, may also contribute to
currency depreciation to mitigate the decrease in productivity.
 Recession in other countries: - If the major trade partners of INDIA experience
negative economic growth, they will purchase less of our exports, worsening the
current account of INDIA.
 Borrowing money: - If nations borrow money to spend, e.g. third world countries,
then the current account situation would worsen.
Does the impact of unauthorized import or exports influence the variation
of CAD?
Unauthorized trades are those trade which are not included in the trade balance and it is
illegal where government will not give permission or documentation is also done in
unauthorized and illegal. In India so many products are imported without billing and that can
be included in the unauthorized trade. The goods can be imported through different means of
transportation.

Hence these unauthorized trades can impact the CAD as this may not impact directly but can
impact indirectly changing the market situation in the country which will eventually impact
the authorized trade and can increase the CAD.

Is it positive impact or negative impact? As it is unauthorized trade and hence there is no

proper information on how much is the unauthorized trade. However, it can impact in both
positive and negative way depending on the amount of trade, country from which it is coming
and how our trade is with that country in authorized market. The more unauthorized export
will impact the CAD negatively as the unauthorized export is not been deducted in current
account balance and it increase our trade deficit.

If we do more unauthorized import, then as this amount of trade is not included in the actual
trade which will not increase the import amount. Therefore, it has positive impact, this will
impact the market situation internally in the country which may be negative as in the first
place it is been unauthorized because it is not good for the country.

Relationship between CAD and retail consumer spending:

Activity of consumer-spending will cause a deterioration in the current account. Higher
consumer spending will lead to higher spending on imports. This increases the outflow of
money from the economy which thereby increases the current account deficit. Since the trade
of balance is a major part of current account balance, negative value (Exports exceeding
Imports) will result in current account deficit. Therefore, increased retail consumer spending
will increase the current account deficit.

By comparing rural and urban retail consumer spending, we can say that the proportion of
consumer spending is less in rural areas than in urban areas.

Urban: As most of the manufactured products would be costly, so we can assume most of the
imported goods are bought by the urban population, bearing in mind the cost of purchasing
these goods. We would also assume that more customer investment in urban areas would
have more chances of getting or rising the CAD

Rural: Now that the rural population absorbs a minority of manufactured commodities, India
imports cheap items from China, and we have a large trade deficit with China that impacts
the CAD. As the Chinese dumps their cheap products in India, and we can easily say that
these cheap goods and price are largely eaten by the rural population, bearing in mind the
affordability. Rural population absorbs the even not so many of the imported products but in
groups.

3. FISCAL DEFICIT

A fiscal deficit is a shortfall in the revenue of a government relative to its spending. The
country with a budget deficit spends beyond its means.
A budget deficit is measured as a percentage of the gross domestic product (GDP), or simply
as the total dollars spent below income. For this case, the revenue calculation only covers
taxation and other profits, which lacks lent capital to make up for the deficit.
A budget deficit is separate from revenue debt. The following is the gross debt accrued
during deficit spending years.

ANALYZE THE PERCENTAGE OF FISCAL DEFICIT TO GDP FOR

LAST FIVE YEARS

FY FD % GDP
2014-2015 4.10%
2015-2016 3.90%
2016-2017 3.51%
2017-2018 3.53%
2018-2019 3.39%
2019-2020 3.80%
 FD % GDP

4.50%
4.10%
4.00% 3.90% 3.80%
3.51% 3.53%
3.50% 3.39%
Fiscal Deficit % of GDP

3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
2014-2015 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Fin Year

ANALYSIS: -
Over the last 5 years fiscal deficit has remained below 4% of GDP. Above graph says that the
fiscal deficit had lowered considerably after 3.9% in 2015-16. The Government achieved the
target of 3.51% in 2016-17. Fiscal deficit is constant trend till it decreased further in 2018-19
to 3.39% which was lower than the target of Government. The deficit figure had come down
mainly on account of GDP expansion in 2018-19. In the year 2019-20, fiscal deficit rose to
3.8% of GDP. Since then, India has increased tax on Petrol and GST was set to enhance
revenue to reduce fiscal deficit over the years. However, in FY 2020, since signs of
depression came out, government tried to increase fiscal deficit to make policies to boost the
economy. Thus, it can be said that when GDP of country is decreasing, government increases
its spending and if fiscal deficit decreases then it is considered a good indicator of the
economy.

ANALYZE THE FISCAL POSITION OF INDIA, US AND CHINA

 India’s fiscal deficit settled at 3.8 percent in 2019-20 and will be targeted at 3.5
percent in 2020-21. For 2019-20, the fiscal deficit was estimated at 3.3 percent at the
time of the budget presentation in July. A fall in nominal growth for FY20 to 7.5
percent from an estimated 11 percent, however, led to a widening of the budget gap.
 Gross borrowings stood at Rs 7.1 lakh crore for 2019-20 and budgeted at Rs 7.8 lakh
crore for 2020-21.

 China's Consolidated Fiscal Balance recorded a deficit equal to 4.89 % of its Nominal
GDP in Dec 2019. As per latest reports, China's National Government Debt reached
2,262.6 USD bn in Dec 2018 and it reached 3,947.3 USD bn in Dec 2019. China is set
to unleash trillions of yuan of fiscal stimulus to revive an economy expected to shrink
for the first time in four decades amid the coronavirus pandemic. The ramped-up
spending will aim to spur infrastructure investment, backed by as much as 2.8 trillion
yuan ($394 billion) of local government special bonds. The national budget deficit
ratio could rise to record levels.

 Fiscal deficit in US has surged to 25% in FY20 and it is $1.1 trillion from previous
year. Reports showed shortfall of $389.2 bn. The government has spent $1.06 trillion
more than it has taken in and has bought the total national debt to $23.3 trillion.
Receipts actually rose to $1.18 trillion compared with $1.1 trillion a year earlier.
However, the rate of spending was lot more.
 Comparing these three countries we can say in terms of Fiscal policy China was ahead
of others but in future it is difficult to say anything as du to outbreak of Covid-19
origin from China and now countries are shifting their production plants outside
China so China might have a tough future ahead and USA have allowed SUD 2
trillion stimulus package to handle the pandemic allotted to the various heads and
India will miss its fiscal target for FY 20-21 as of now.