TASK 5: A public opinion poll is no substitute for thought

MACROECONOMIC ANALYSIS

BALANCE OF PAYMENTS:
The balance of payments (BOP), also known as balance of international payments, summarizes
all transactions that a country’s individual, companies, and government bodies outside the
country. The balance of payments includes both the current and the 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
transactions in financial instruments and central bank reserves.
Measure – national currency billion
Frequency - annual
Year Current account Capital account Overall balance
balance balance
2010 -2196.5 2911.7 594.5
2011 -3759.7 3190.3 -685
2012 -4796.1 4857.3 207
2013 -1871.4 2898.2 960.5
2014 -1633.1 5475.5 3779.2
2015 -1437.6 2663.4 1158.3
2016 -969.2 2443.4 1442.3
2017 -3141.3 5891.2 2808.2
2018 -4002.3 3834 -202
2019 -1724.3 5885.8 4232.1

Balance Of Payments
8000

6000

4000

2000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
-2000

-4000

-6000

Current account balance Capital account balance Overall balance

Balance of payments have showed a slight improvement in 2010 compared to the previous
year, which was due to the back of a strong pick-up in exports mainly led by diversification of
trade in terms of composition as well as direction, it proved to be short lived. BoP again came
under stress during the years 2011 and 2012 as slowdown in advanced economics spilled over
to emerging and developing economics (EDES), and there was sharp increase in oil and gold
imports. The stress in India’s BoP, which was observed during 2011-12 as a fallout of the euro
zone crisis and inelastic domestic demand for certain key imports, continued through 2012-13
and the first quarter of 2013-14. The BoP has improved drastically for the next 4 years, this
was mainly due to the measures taken by the government and the reserve bank of India (RBI)
and in some part, to the overall macroeconomic slowdown that fed into the external sector.
Trade tensions increasingly took in a toll in 2018 on business confidence and financial market
sentiment which tightened financial conditions for vulnerable emerging markets in the spring
of 2018. Net outflows of foreign portfolio investments (FPI) mainly led to net capital flows
falling short of the funding requirements of CAD. This resulted in modest depletion of foreign
exchange reserves during the year.
Comparative analysis of BoP current account balance of USA, China, Brazil, Russia &
India:
Measure – million US dollars
Frequency - annual
Country 2020
Brazil -24074.0
China 273980.4
India 33514.6
Russia 32891.4
USA -647210.0

400000

200000

0
Brazil China India Russia USA

-200000

-400000

-600000

-800000

Brazil: A combination of an exchange rate depreciation of more than 30% in the year and a
shrinking trade deficit driven largely by a steep fall in imports resulted in the current account
balance. There has also been a decline in the primary income and services deficits.
China: The current account returned to surplus in the second quarter in 2020 due to the better-
than expected exports and reduced overseas travel during the pandemic. The shrinking services
deficit was due to the collapse in outbound tourism during the pandemic and also fewer inbound
shipments, as China had to pay less in freight fees. China’s trade surplus stayed at a high level
in the second quarter on rising demand for goods including medical supplies, a gradually
reopening world economy, and falling imports.
India: The current account in the balance of payments ended in a deficit during the quarter
ended December'20 for the first time in the current financial year as the economy unlocked
and the demand revived amid rising crude and commodity prices. Besides, foreign investors
also took back home higher amounts from their investments in India. The trade deficit was
largely on account of rise in import bill reflecting a rise in import demand as economy started
recovering post the lockdown. But earnings from software services exports were higher at
$23.4 billion compared to $ 21. 5 billion in the same period last year.
Russia: Even though Russia marked the sharpest contraction in exports since June 2016. The
current account balance is close to zero, as the positive effect of improvement in the oil price
environment and persisting travel restrictions will be offset by a recovery in merchandise
imports, and catching up on the dividend outflow in favour of non-resident shareholders.
USA: The country experienced the largest shortfall since 2008 as the COVID-19 pandemic
severely disrupted exports and could remain elevated this year as an economic recovery
driven by massive fiscal stimulus draws in imports.
Relationship between capital and current account balances:
The current and capital accounts represent two halves of a nation's balance of payments.
The current account represents a country's net income over a period of time, while the capital
account records the net change of assets and liabilities during a particular year. In economic
terms, the current account deals with the receipt and payment in cash as well as non-capital
items, while the capital account reflects sources and utilization of capital. The sum of the
current account and capital account reflected in the balance of payments will always be zero.
Any surplus or deficit in the current account is matched and cancelled out by an equal surplus
or deficit in the capital account.

CURRENT ACCOUNT DEFICIT ANALYSIS:

Current Account Deficit or CAD is the shortfall between the money flowing in on exports,
and the money flowing out on imports. Current Account Deficit (or Surplus) measures the
gap between the money received into and sent out of the country on the trade of goods and
services and also the transfer of money from domestically-owned factors of production
abroad. The current account includes net income, such as interest and dividends,
and transfers, such as foreign aid, although these components make up only a small
percentage of the total current account. The current account represents a country’s foreign
transactions and, like the capital account, is a component of a country’s balance of
payments (BOP).

The current account constitutes net income, interest and dividends and transfers such as
foreign aid, remittances, donations among others. It is measured as a percentage of GDP.
• Trade gap = Exports – Imports
• Current Account = Trade gap + Net current transfers + Net income abroad
A country with rising CAD shows that it has become uncompetitive, and investors are not
willing to invest there. They may withdraw their investments.
The various factors which could cause a current account deficit:
• Overvalued exchange rate
• Economic growth
• Decline in competitiveness/export sector
• Higher inflation
• Recession in other countries
• Borrowing money
• Financial flows to financial current account deficit.

Impact of unauthorized exports and imports influencing the variations of CAD:

• A country spends more on imports than it receives on exports then CAD occurs.
• Imports can be restricted to some extend by tariffs and quotas or can emphasize policies
that promote export.
• The country can reduce its existing debt by increasing the value of its exports relative to
value of imports.
Relationship between current account deficit & retail consumer spending:
CAD means the country spending more on imports than exports whereas Retail Consumer
Spending means the consumer spending for purchasing the finished goods and services. In rural
areas, retail consumer spending fell by 7.6% due to decrease in demand whereas in urban areas
it went up by 3.8% due to increase in demand for goods and services. As there is increase in
demand for goods and services that means more retail consumer spending which will lead to
Current account deficit (CAD).

FISCAL DEFICIT:
A government creates a fiscal deficit by spending more money than it takes in from taxes and
other revenues excluding debt. The gap between income and spending is closed by government
borrowing. The U.S. government has had a fiscal deficit in most of the years since World War
II. Fiscal deficit is calculated both in absolute terms and as a percentage of the country’s gross
domestic product (GDP). The fiscal deficit of a country is calculated as a percentage of its GDP
or simply as the total money spent by the government in excess of its income. In either case,
the income figure includes only taxes and other revenues and excludes money borrowed to
make up the shortfall.

FRBM ACT:

The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the
parliament of India in the year 2000 by Atal Bihari Vajpayee Government for providing legal
backing to the fiscal discipline to be institutionalized in the country. Subsequently, the FRBM
Act was passed in the year 2003. It is an act of the parliament that set targets for the Government
of India to establish financial discipline, improve the management of public funds, strengthen
fiscal prudence, and reduce its fiscal deficits.
INDIA’S DEFICIT TREND (in % of GDP)

FINANCIAL YEAR FISCAL DEFICIT

2015-16 3.9%
2016-17 3.5%
2017-18 3.5%
2018-19 3.4%
2019-20* 3.8%
2020-21** 3.5%
*Revised estimate **Budget estimate

India's deficit trend

4.00%
3.90%
3.80%
3.70%
3.60%
3.50%
3.40%
3.30%
3.20%
3.10%
2015-16 2016-17 2017-18 2018-19 2019-20* 2020-21**

Analysis:
In financial year 2020, the gross fiscal deficit in India was estimated to be a little over three
percent of the GDP for that year. This was a decrease from the budget estimate of the previous
year's deficit in the country. The fiscal deficit of the government is the difference between the
total expenditure incurred and the total non-debt capital receipts of the government. It indicates
the total borrowing requirements of the government.
The economic slowdown: The June-September quarter of 2018 saw a slowdown in the GDP
growth, although market conditions in the beginning of the year were promising. It reduced the
government’s tax revenue collections, in turn adding pressure to government expenditure. In
2017, India registered the highest primary revenue deficit of recent years. However, the
revenue deficit in relation to the GDP, displayed a gradual reduction over the recorded period
of time.
Impact from the pandemic: With concerns over gradually slowing economic growth, the
government increased its fiscal spending in early 2019. With the onset of the coronavirus and
consequent lockdown, the unprecedented financial stimulus package led to the worsening of
the gross fiscal deficit. This further stressed the tax revenue system across the country. A major
impact of the pandemic was the projection of negative quarterly growth of GDP in June 2020
across India. The fiscal deficit, as of May 2020, was estimated to be approximately two trillion
Indian rupees.
FISCAL POSITION OF US & CHINA
• China Consolidated Fiscal Balance recorded a deficit equal to 5.8 % of its Nominal
GDP in Mar 2021, compared with a deficit equal to 6.5 % in the previous quarter. China
Consolidated Fiscal Balance to GDP data is updated quarterly, available from Dec 1995
to Mar 2021, with an average ratio of -1.8 %. The data reached an all-time high of 1.1
% in Jun 2008 and a record low of -6.5 % in Dec 2020.
• In US, the government will run a $3.3 trillion deficit this year, the largest since 1945 as
a share of the economy. It's also more than triple the shortfall recorded last year. As a
result, debt will rise sharply, reaching 98% of GDP in 2020, CBO said. Debt is projected
to exceed the size of the economy in 2021 and increase to 107% in 2023. The debt was
79% the size of the economy at the end of 2019 and 35% of GDP in 2007, before the
start of the previous recession.

MEGHNA B RAJ
JUNIOR RESEARCH DATA ANALYST
FINANCE_21 FMCG60 B4
AMRITA SCHOOL OF BUSINESS