BOP AND CAD

Presented by-
VINAY MANGIRE
GIBIN VENUGOPAL
PRIYADHA RAMESH
SALIKA KIRANKUMAR
 DEFINITION
The Balance Of Payments of a country is a
systematic record of all economic transactions between
the residents of a country and the rest of the world

Balance of payments is one of the major indicators of a

country's status in international trade
 CONTENTS OF
BOP
Current account
Capital account
Financial account
Net errors and omissions
account
Reserves and related items:
official reserve account
CURRENT ACCOUNT
Net export/import of goods (trade balance)
Net export/import of services

Net income (investment income from direct and

portfolio investment plus employee compensation)
Net transfers (sums sent home by migrants and
permanent workers aboard, gifts, grants and
pensions)
CAPITAL ACCOUNT
Capital transfers related to the purchase and sale of
fixed assets such as real estate

If foreign ownership of domestic financial assets has

increased more quickly than domestic ownership of
foreign assets in a given year, then the domestic
country has a capital account surplus.

On the other hand, if domestic ownership of foreign

financial assets has increased more quickly than
foreign ownership of domestic assets, then the
domestic country has a capital account deficit.
 FINANCIAL
ACCOUNT
Net foreign direct investment
Net portfolio investment

Other financial items

 NET ERRORS AND
OMISSIONS ACCOUNT
Missing data such as illegal transfers

principally exists to correct any possible errors made

in accounting for the other accounts

They are often referred to as "balancing items".

OFFICIAL INTERNATIONAL
RESERVES
The official international reserve account records
the change in stock of official international
reserve assets (also known as foreign exchange
reserves) at the country's monetary authority .

Official reserves assets include gold reserves,

foreign currencies, SDRs, reserve positions in
the IMF.

{Special Drawing Rights (SDRs) are potential

claims on the freely usable currencies of IMF
members.}
 When all components of the BOP accounts are
included they must sum to zero with no overall
surplus or deficit.

For example, if a country is importing more than

it exports, its trade balance will be in deficit, but
the shortfall will have to be counterbalanced in
other ways such as by funds earned from its
foreign investments, by running down central
bank reserves or by receiving loans from other
countries
THE CRISIS
BOP CRISIS- FACTORS AND CAUSES

Economic factors
Huge development expenditure owing to which there are large
scale imports
Business cycles in terms of recession, depression, recovery and
boom
High rate of inflation running up to large scale imports of
essential goods (Gulf war).
Decline of import substitutes which would necessitate and
increase in imports
Change in cost structure of trading partners
Political factors
Political Instability leading to decline in FDI and FII
Populism policies which may encourage imports
Social factors
Change in tastes and preferences leading to demand changes
Cross border prejudices which may lead to expensive sources of
imports
BALANCE OF PAYMENTS: THE
UNBALANCE
Foreign reserves very low at $1.2 billion
Overshot IMF SDR reserves
Simultaneous outflow of NRI deposits
Serious difficulties in rolling over of short
term loans
Current account deficit of $9.7 billion almost
impossible to finance
IMPORT COMPRESSION
Curb imports to reduce deficit
Surcharge on oil imports
Cash margin
FOREIGN EXCHANGE RESERVES
THE RESPONSE
As a first step, in May 1991, the government leased
20 tonnes of confiscated gold to the State Bank of
India for $200 million
Later, RBI moved in four installments 47 tonnes of
the gold held by it to the vaults of the Bank of
England to raise a temporary loan of $405 million
jointly from the Bank of England and the Bank of
Japan
Loan repaid in Sep-Nov. and the pledged gold was
redeemed
New government assumed charge in June ,1991
SHORT TERM STRUCTURAL
CHANGES
Two-step downward adjustment in the exchange rate
of rupee was effected on July 1 and 3, 1991
This effectively translated into devaluation of 18-19
per cent against major international currencies
This was coupled with the liberalisation of the trade
regime and lower import tariffs
Besides exceptional financing arrangements with the
World Bank, Asian Development Bank and a few
industrial countries were also negotiated
Due to the currency devaluation the Rupee fell from
17.50 per dollar in 1991 to 26 per dollar in 1992
REFORMS UNDERTAKEN
Industrial Policy Reforms:
80 % of the industries were taken out from
the licensing framework.
MRTP Act was amended to eliminate the
need for prior approval by large companies
for capacity expansion or diversification.
Areas reserved for public sector was
narrowed down and greater participation
was permitted from the private sector.
BALANCE OF PAYMENTS: 1992-93
Foreign exchange reserves had been build up
to respectable level of $5.63 billion from a low
of $1.29 billion at the end of July 2001.
Introduction to LERMS( Liberalized
exchange rate management system)
Mobilization of external assistance from IMF,
World Bank , ADB and Bilateral donors to
support the BOP
EFFECT OF CAD ON INDIAN
ECONOMY
Causes of Current Account Deficit
Weak Exports.
Heavy gold import.
Crude oil import.
Other non-essential import .
Current Account Deficit Good or Bad???
Depends on the factors giving rise to that deficit.

Deficits reflect underlying economic trends,which may

be desirable or undesirable for a country.

Current Account Deficit is good

At the developing stages in short run.

Current Account Deficit is bad

At the developed stage in the long run.
Impact Of Current account Deficit on
Indian Economy
Willingness of foreign investors to pump capital into
country to drive economic growth.

Local currency depreciates,push up foreign remittance

also push up export.

Deficit is good if it is arises due to import of capital

machinary.

.But these are for short run.

.

Leads to loss of aggregate demand and slower growth.

In the long run ,persistent trade deficits undermine

Standard of Living.

Leads to loss of jobs.

Needs to import financial capital to achieve balance.

 Leads to currency weakness and higher inflation .

Country may run short of vital foreign currency reserve

Trade deficit a reflection of lack of price/non price

competitiveness.Currency weakness leads to loss of
investor confidence.
Consequences Of Current Account Deficit In India
Cut back of FDI($15.7 B to $12.8 B).
Slow economic growth(GDP 6.2% to 5%).

Unemployment.

Higher inflation(4.86 to 5.79 in terms of CPI).

Currency depreciation(1 INR=65.2 USD)

 Following figure shows the increase in Current
Account Deficit from July 2012 to September
2013.
Trends Of CAD And FDI
From 1960 India is facing Current Account Deficit.

Foreign direct investment in India has shown a rising trend

from 2000-01, increasing substantially after 2005-06.

The foreign direct investment inflows increased from US$

165 million in 1990-91 to US$ 91 billion in 2012-13 as per
international best practices (DIPP, 2009).

The cumulative amount of FDI from August 1991 to March

2009 is US$ 253 billion
Thank
You