Task- 5

BOP (BALANCE OF PAYMENT) ANALYSIS

Balance of Payments
The balance of payments of a country is the difference between all money flowing into the
country in a particular period of time and the outflow of money to the rest of the world. It
includes both current account and capital account and can be considered as a method to
monitor all the international transactions of a country.

Trend of BoP in India

Year
20 200 20 201 201 20 201 201 20 20 20 201
07 8 09 0 1 12 3 4 15 16 17 8
BOP - - - - - - - - - - - -
Analysis 3. 0.9 6.9 4.3 1.5 5.7 7.70 2.58 9.6 7.3 3.5 2.6
59 3 1 6 2 2 2 6 1 6

Current account deficit grew like anything since 2007-08, the period witnessed financial
crisis. The current account balance of India during 2011-12 is recorded to be $ - 78155
million, signifying a deficit eight times that of the figures of 2007-08. Huge negative debits
and comparatively low positive credits caused for this negative value in current account.
There is also an increase in BOP deficit due to the demonetization in the year 2016. The
Economy is slowing recovering, but likely to fall due to the Corona Virus Outbreak.

Capital Account and Current Account Balances

Both the current account and capital accounts are two components of a nation's Balance of
Payments.

 Current Account: Difference between country's savings and investments.

 Capital Account: Records the net change of assets and liabilities during a certain
period of time.

The sum of the current account and capital account reflected in the balance of payments will
always be zero.
Comparative Analysis of current BOP of India, China, Brazil, US
and Russia

Country BoP

India -65,59,94,39,052
China 49,09,15,88,369

United States -49,09,91,00,000

Brazil -41,53,96,92,295

Russia 1,13,45,49,30,000
(Data as of 2018 from world bank)

1. India

India witnessed a negative BOP at -65,59,94,39,052. Weakening of global demand and the
increase in trade tensions over 2018-19 have led to a decline in the merchandise exports-to-
GDP ratio to 11.3 per cent, as per the Economic Survey 2019-20. The BoP position, however,
improved as the merchandise imports-to-GDP ratio also declined, resulting in a net positive
impact.

2. China

China witnessed a positive BOP at 49,09,15,88,369. China's trade surplus has been dampened
by an increasing deficit in services driven by tourism.

3. USA

USA witnessed a negative BOP at -49,09,91,00,000. To recover from the subsequent

recession, governments lowered prime lending rates. That created an excess of cash looking
for a safe investment.

4. Brazil

Brazil saw a negative BOP at -41,53,96,92,295. These economic difficulties were associated
with the political crisis owing to the loss of congressional support for the government and
lawsuits brought against several parties and politicians on issues of corruption and electoral
campaign financing. Mounting uncertainty exacerbated the recessionary trend of the
Brazilian economy throughout 2015. Following the change of administration in May 2016,
economic policy placed greater emphasis on controlling public expenditure and bringing
down the public debt.

5. Russia

Russia saw a positive BOP at 1,13,45,49,30,000. Russia’s decline from the highs of just a few
years ago are made plainly visible in the above sections on Balance of Payments and Exports
& Imports. The global fall in commodity prices and the subsequent dire economic situation
they find themselves in currently clearly exposes their reliance on commodities for growth
-unbalancing their payments and halting exports. Recent geo political issues certainly haven’t
helped matters either and the future is uncertain as a result. However, economic conditions
have begun to look up.

CURRENT ACCOUNT DEFICIT ANALYSIS

The current account deficit 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.

Exports < Imports

Contraction in CAD is always at risk of seeing the value of the currency fall. If there is
insufficient capital flows to finance the deficit, the exchange rate will fall to reflect the
unbalance of foreign flows to fund. It is good in a normal year where imports rise when the
growth picks up.
Factors affecting current account deficit:
1. Exchange rate (overvalued exchange rate would cause large deficit)
2. Level of consumer spending (economic growth) and hence import spending
3. Capital flows to finance deficit in long-term
4. Saving rates – influencing level of import spending
5. Relative inflation/competitiveness

Impact Of Unauthorized Exports And Imports In CAD:

CA = (X-M) + NY + NCT

CA: Current Account

X-M: Exports - Imports

NY: Net Income from Abroad NCT: Net Current Transfers.

India has faced a rise in the CAD for the last 10 years due to high imports than exports. In
addition, un-recordable and illegal export transactions may be a vital reason for this high
CAD. India is a leading Crude Oil and Gold importer. The small price shift of these products
can also have a big effect on India. Another explanation we may point out is a decline in the
Indian currency's value. Foreign Indian citizens spend most of their wages abroad and send a
small portion of the savings to India that doesn't boost economic growth. Foreign investors
withdraw their investments through the currency depreciation, and the trade war between the
US and China will also have a negative impact on Indian exports. More unlicensed exports &
imports would lead to more expenditure to a considerable variation in CAD calculation. If
there are more unauthorized imports, the CAD will reduce (+ ve impact) and the CAD will go
high (-ve impact) if there are high unauthorized exports. There will be differences in all the
cases.

Relationship Between CAD And Retail Consumer Spending:

A duration of consumer-led economic growth would be causing the current account to
deteriorate. Higher consumer spending will result in higher import spending. Consumers
often have a high marginal importation propensity – meaning a high percentage of additional
income goes to imports. Therefore, we see a significant increase in import spending in
periods of economic growth, which can lead to a rise in CADs.
 Most Indians live in rural areas, so that they don't consume more gold and fuel which are
India's most imported items. People in rural areas would buy more of their disposable income
from essential commodities. They will not have any FDI, or other revenue sources.

While in urban areas most of the people are dependent on gold, electrical utensils like TV,
washing machines and they own more than 1 vehicle so they will have to consume a huge
amount of fuel this will have an adverse effect on CAD. The more they consume there is a
huge probability for rise in CAD.

FISCAL DEFICIT
A fiscal deficit is a shortfall in a government's income compared with its spending. Fiscal
Deficit is the difference between the total income of the government (total taxes and non-debt
capital receipts) and its total expenditure. A fiscal deficit situation arises when the
government spends more than its own earnings. The difference is measured in absolute terms
as well as a percentage of the country's Gross Domestic Product (GDP). A recurrently high
fiscal deficit means the government has spent beyond its means.

Fiscal Deficit Of India For The Past 5 Years:

Year 2015-16 2016-17 2017-18 2018-19 2019-20

% of Fiscal 3.9 3.51 3.2 3.4 3.3

deficit in
GDP

Fiscal Position Of India:

International Monetary Fund (IMF) states that Fiscal deficit in India (7.5 per cent of GDP) is
the largest cohort in 2019.Joint deficit (together with Brazil) significantly higher than the EM
average (3 percent of GDP).

Its tax collection was a big reason for India's unstable fiscal situation challenges ahead. In
2018-19, India's center-to-state tax-GDP ratio was 17.1%, lower than the EM average
(20.9%) behind larger economies such as China, Brazil, and Russia. More crucially, India's
tax revenue growth has set a plateau in the last few years.
Fiscal Position Of China:
China's Consolidated Fiscal Balance reported a deficit equal to 4.9 per cent of its Nominal
GDP in December 2019, compared to a deficit equivalent to 2.6 per cent the year before.
China's consolidated fiscal balance with GDP data is revised on a quarterly basis, available
between December 1952 and December 2019, with an average ratio of -0.9%.

The data reached an all-time high of 1.6 per cent in December 1962 and a record low of -4.9
per cent in Dec 2019. CEIC measures the consolidated fiscal balance as a share of the
nominal GDP from the consolidated annual fiscal balance and the nominal annual GDP. The
Ministry of Finance provides for a consolidated fiscal balance in local currency. National
Bureau of Statistics. denominated GDP is issued in local currency.

In Q1 2020, the Chinese economy shrank by 6.8 per cent, following a 6 per cent growth in
Q4 and compared to a 6.5 per cent decline in market forecasts. It is the first GDP contraction
since records started in 1992, reflecting the severe damage done by the COVID-19 outbreak
after a nearly two-month suspension of all non-essential business activity was imposed by
authorities.

PREPARED BY:

Abin Som

Christ University Bangalore

Junior Research Analyst

(21FMCG30 B5)