Parvathi M L

Index

Contents
Balance of Payment analysis...............................................................................................................2
Analyse the trend of BOP of last 10 years.........................................................................................2
Relationship between capital account and current account balances..................................................2
Different between current and capital account...................................................................................3
Comparative analysis report on current BOP of India, U.S., Brazil, Russia and China.........................4
CURRENT ACCOUNT DEFICIT.....................................................................................................4
Calculation of Current Account Deficit:............................................................................................5
Factors to be considered for calculation........................................................................................5
 Overvalued exchange rate..........................................................................................................5
 Economic Growth......................................................................................................................5
 Borrowing money......................................................................................................................5
 Decline in competitiveness/export sector...................................................................................5
 Higher Inflation.........................................................................................................................6
 Recession in other countries......................................................................................................6
Does the impact of unauthorized import or exports influence the variation of CAD?...........................6
Is it positive impact or negative impact?............................................................................................6
Relationship between CAD and retail consumer spending....................................................................7
Urban.................................................................................................................................................7
Rural..................................................................................................................................................7
Fiscal Deficit.........................................................................................................................................7
Analyse the percentage of fiscal deficit to GDP for last five years (India)............................................8
ANALYSIS:......................................................................................................................................8
Analysis of the fiscal position of India and China.............................................................................8
India’s fiscal Position........................................................................................................................9
China’s Fiscal Position......................................................................................................................9
Conclusion.......................................................................................................................................10
 2

Balance of Payment analysis

The Balance of Payments (BOP) records all economic transactions between residents of a
country and the rest of the world. The BOP account mainly consists of the current account
and the capital account.

Analyse the trend of BOP of last 10 years

India's current account balance reported a deficit of US$ 1.7 billion (0.2 percent of GDP) in
Q3 2020-21, following a surplus of US$ 15.1 billion (2.4 percent of GDP) in Q2 2020-21 and
US$ 19.0 billion (3.7 percent of GDP) in Q1 2020-21. The current account deficit in Q3 of
2020-21 was exacerbated by an increase in the goods trade deficit to $34.5 billion from $14.8
billion the previous quarter, as well as an improvement in net investment income payments.
In Q3 of 2019-20, the foreign exchange reserves rose by US$ 32.5 billion (on a BoP basis),
compared to US$ 21.6 billion in Q3 of the previous year.

India had a current account surplus of 1.7 percent of GDP in April-December 2020,
compared to a deficit of 1.2 percent in April-December 2019. This was due to a sharp
reduction in the trade deficit. Net invisible receipts were lower in April-December 2020 due
to a fall in net private transfer receipts and an increase in investment income payments.

Net FDI inflows totaled $40.8 billion in April-December 2020, up from $31.1 billion in
April-December 2019. Net FPI inflows totaled US$ 28.9 billion from April to December
2020, up from US$ 15.1 billion the previous year. From April to December 2020, the foreign
exchange reserves increased by $83.9 billion.

The current account is negative based on a ten-year review of the above results (slow). The
Indian economy may be able to emerge from the crisis-driven path to recovery as a result of
various initiatives initiated by the Reserve Bank of India. This fact confirms that the global
recession had an effect on Indian trade flows.

Causes of disequilibrium in balance of payments:

Natural Causes
Economics Development Plans
Price Cost Effect
Cyclical Fluctuations
Political factors:
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Relationship between capital account and current 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

Different between current and capital account

Current Account Capital Account

It is the representation of the trade balance of It is the representation of capital investments

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

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

It affects the net income of the country. It affects the current account or the 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 they
capital items, etc. are sourced.
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The current account is one component of the The capital account is also another
balance of payment. component that constitutes the balance of
payment.
The current account includes the transaction The capital account comprises credit and
of goods, services, primary income, and debit transactions under non-produced non-
secondary income between the residents and financial assets and capital transfers between
the rest of the world. The current account residents and non-residents. Thus,
balance is largely driven by the movement of acquisitions and disposals of non-produced
goods and services. non-financial assets, such as land sold to
embassies and sales of leases and licenses,
as well as transfers which are capital in
nature, are recorded under this account.

Comparative analysis report on current BOP of India, U.S., Brazil, Russia and
China

COUNTRY RECENT YEARS Current Account Capital Account

(USD Mn) (USD Mn)
INDIA 2020 Dec -1,723.60 98.155
CHINA 2020 Dec 138,511.23 100.00
RUSSIA 2021 Jan 6,800.00 -219.460
BRAZIL 2021 Jan -7253.2 -280.802
UNITED STATES 2020 Sept -178,513.00 -1,333.00

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.

A fiscal deficit is a shortfall in a government's income compared with its spending. The
government that has a fiscal deficit is spending beyond its means a fiscal deficit is calculated
 5

as a percentage of gross domestic product (GDP), or simply as total dollars spent in excess of
income.

A government creates a fiscal deficit by spending more money than it takes in from taxes and
other revenues excluding debt.

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.

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.
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.
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Borrowing money
If nations borrow money to spend, e.g. third world countries, then the current account
situation would worsen.

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.

Does the impact of unauthorized import or exports influence the

variation of CAD?
Unauthorized trades are those that are not included in the trade balance and are unlawful
when the government refuses to grant permission. Unauthorized and illegal paperwork is
often performed. Many goods are imported into India without being billed, which can lead to
illegal trade. Different modes of transportation can be used to import the goods.

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?

Since it is an illegal transaction, there is no accurate statistics about how much the
unauthorised trade is worth. However, depending on the amount of trade, the country from
which it is coming, and how our trade with that country is conducted in the approved market,
it can have a positive or negative effect.
 7

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

The current account will deteriorate as a result of consumer purchasing activity. Higher
consumer spending would result in higher import spending. This raises the current account
deficit by increasing the outflow of money from the economy.

Because the exchange of balance is a major part of current account balance, negative value
(Exports exceeding Imports) would result in current account deficit. Therefore, increased
retail consumer spending would 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
Since most manufactured goods are expensive, we can conclude that the majority of imported
goods are purchased by the urban population, based on the cost of buying these goods. We
also believe that more consumer spending in urban areas has a higher chance of obtaining or
increasing the CAD.

Rural
Now that the rural population consumes only a small portion of manufactured goods, India
imports low-cost products from China, resulting in a significant trade deficit with China,
which has an effect on the CAD. As the Chinese dump their low-cost goods in India, we can
easily conclude that these low-cost goods and prices are primarily consumed by the rural
population, given their affordability.

Fiscal Deficit
A fiscal deficit is a shortfall in a government's income compared with its spending. The
government that has a fiscal deficit is spending beyond its means. A fiscal deficit is
calculated as a percentage of gross domestic product (GDP), or simply as total dollars spent
in excess of income. In either case, the income figure includes only taxes and other revenues
and excludes money borrowed to make up the shortfall.

With the pandemic leading to a sharp contraction in tax revenues, India’s fiscal deficit for
2020-21 zoomed to 9.5 per cent of GDP, as against the 3.5 per cent budgeted.
 8

India’s fiscal deficit is estimated at 6.8 per cent of gross domestic product (GDP) in 2021-22
as the government looks to increase spending to revive growth in the pandemic-battered
economy.

Analyse the percentage of fiscal deficit to GDP for last five years (India)

YEAR % OF FISCAL DEFICIT TO GDP FOR

LAST 5 YEARS
2016 3.9%
2017 3.5%
2018 3.5%
2019 3.4%
2020 9.5%
2021 Pegged 9.5%

ANALYSIS:
The fiscal deficit is forecast to be 6.8% of GDP in 2021-22. In 2020-21, the fiscal deficit is
forecast to be 9.5 percent of GDP, up from the budgeted figure of 3.5 percent. COVID-19-
related higher expenses and lower tax collection contributed significantly to this.

As of January 8, 2021, the union government had borrowed a total of Rs 10.72 lakh crore
(fiscal deficit), which was 65 percent higher than FY20. State governments, on the other
hand, borrowed a total of Rs 5.71 lakh crore, up 41% from the previous fiscal year. The
government earned Rs 15,220 crore through disinvestment, or around 7.2 percent of the
targeted amount of Rs 2.1 lakh crore.

The company's stake in public-sector businesses is sold as part of the disinvestment plan. The
government's main objective is to privatise CPSEs such as Air India, Bharat Petroleum
Corporation Limited (BPCL), Container Corporation of India (CONCOR), and Shipping
Corporation of India (SCI).

However, the forecasts were made in 2018, and market fluctuations and the outbreak of the
coronavirus (COVID-19) pandemic were not taken into account. The fiscal deficit peaked in
2015 at 4.1 percent, but steadily decreased before remaining unchanged in 2017 and 2018.
(3.5%). Though market conditions were favourable at the start of the year, GDP growth
slowed in the second half of the year. It resulted in lower tax revenue receipts for the
government, putting more pressure on government spending.
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Analysis of the fiscal position of India and China

India’s fiscal Position

The Indian economy is expected to rise 13.7 percent in fiscal year 2021-22 (FY22), a solid
turnaround from a 7% contraction this fiscal year. However, the country's fiscal position is
expected to remain weak in 2021, posing a key credit risk.

Restarting the Economy is a term used to describe the process of reviving The Covid-19
crisis has resulted in a new medium-term fiscal road map. "We intend to continue on our path
of fiscal consolidation and target to reach a fiscal deficit level below 4.5 percent of GDP by
2025-2026 with a reasonably steady decline over the period," the finance minister said in her
budget speech.

For the current fiscal year, India's fiscal deficit would be the highest since the country's
liberalisation in 1991. Finance Minister Nirmala Sitharaman announced in her Budget 2021
speech that the country's fiscal deficit was 9.5 percent in 2020-21 and would be 6.8 percent in
2021-22.

The central government expected a fiscal deficit of 3.5 percent for FY21 in the last budget
before the Covid-19 crisis.
 10

China’s Fiscal Position

According to the Chinese legislature, the authorities would progressively withdraw fiscal
policy support to ensure the economy's long-term recovery from the coronavirus shock.

China's fiscal deficit for 2019 has been set at 4.89 percent, up from 2.58 percent the previous
year. According to the most recent data, China's national government debt hit $2,262.6 billion
in December 2018. In December 2019, China's nominal GDP hit $3,947.3 billion.

The government's fiscal consolidation plans for 2021 will be more modest than anticipated,
but thanks to good land sales and lower-than-expected public spending last year, the starting
point will be higher. The key target of the government is to reduce the deficit from "above 3.6
percent" in 2020 to 3.2 percent in 2021.

But China had not exceeded 3% of economic output for more than a decade. Now it is
estimated that the fiscal deficit will rise due to the outbreak of Covid-19

The government's reintroduction of a "over 6%" growth goal aligns with the annual growth
goals set out in the 14th Five Year Plan (2021-2025). These goals have the potential to lead to
unsustainable credit growth in the past. For the time being, the NPC work report allays these
fears by stating that the government intends to keep M2 and social financing development in
line with nominal GDP growth

Conclusion
Comparing these two countries we can say in terms of Fiscal policy China was ahead of
others but in future it is difficult to say anything as due 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 package to handle the pandemic allotted to the various heads
and India will miss its fiscal target for FY 20-21 as of now.