SECOND LECTURE ON

BALANCE OF PAYMENTS
Content
◦ Indian BOP (1990-91 to 2018-19)
◦ Assessment of BOP and BOP Disequilibrium
◦ Correct Measures
Indian BOP
Overall BOP balance = Current account balance + Capital account total
◦ Overall balance of the nation needs to be cleared by the end of the accounting year

Items of 1990-91 1995-96 2000-01 2007-08 2018-19

Transaction
A. Current Account (US$ 000’ Billion)
1.Imports 27.915 43.670 59.264 257.789 337.2
2.Exports 18.477 32.311 44.894 166.163 517.5
3.Trade
– 9.438 – 11.359 – 14.370 – 91.626 -180.3
Balance

Trade balance = Exports – Imports

Indian BOP …contd.
Items of 1990-91 1995-96 2000-01 2007-08 2018-19
Transaction
A. Current Account (US$ 000’ Billion)
4. Invisibles
(a) Receipts 7.464 17.676 34.786 148.604 306.483
(b)
7.706 12.216 24.006 74.012 183.457
Payments
(c)Net – 242 5.460 10.780 74.592 123.026
Current
Account
– 9.680 – 5.899 – 3.590 – 17.034 -57.256
Balance
[3+4(c)]

Current account balance = Trade balance ± Net Invisibles

 Indian BOP …contd.
Items of Transaction 1990-91 1995-96 2000-01 2007-08 2018-19
B. Capital Account (US$ 000’ Billion)
(i) Foreign investment .103 4.604 5.862 44.957 30.094
(ii) Loans
(a) External assistance 2.204 .867 .410 2.114 3.413
(b) Commercial borrowings 3.329 1.334 3.842 39.816 10.416
(c ) Short Term To India 2.021
(iii) Banking Capital .682 .762 .811 11.757 7.433
(iv) Rupee debt service – 1.193 – .952 – .617 – .121 -.31
v) Other capital transactions 1.931 – 2.537 – .290 9.470 1.057
(vi) Errors and omissions .132 .600 – .588 1.205 -.486
Total Capital Account [i to
vi] 7.188 4.678 10.018 109.198 53.917
 Indian BOP …contd.
Items of Transaction 1990-91 1995-96 2000-01 2007-08 2018-19
C. Overall Balance(US$ 000’ Billion)=Current Account + Capital Account
Overall Balance – 2.492 – 1.221 5.856 92.164 -3.339

D. Monetary
Transactions/Monetary
Movements Overall balance = Current account balance – Capital account total
(a) IMF Transactions —
1.214 – 1.715 – .026 —

(b) Foreign Exchange

1.278 2,936 – 5.830 – 92.164 3.339
Reserves

Overall balance = Current account balance – Capital account total

Source: Economic Surveys,—2000–01 and 2003–2004, 2008–09, 2019-20 Ministry of Finance, Government of India.
Facts about Indian BOP
◦ India’s BOP, i.e., the Overall Balance, has been of deficit nature in most years.
◦ Main concern: Current account balance is deficit in most year, and rising over time
◦ If BOP deficits (or even surplus) are of large magnitude and increase over years, then, the BOP is said to
be in disequilibrium.
◦ A deficit in the current account is offset either by a surplus on the capital account or by running
down the gold and foreign exchange reserves.
 ASSESSMENT OF BALANCE OF
PAYMENTS
◦ BOP disequilibrium means a deficits (or even surplus) BOP.
◦ BOP disequilibrium is assessed on the basis of the difference between the autonomous
and induced transactions or accommodating capital flows.
◦ Autonomous transactions that are carried out with business motives or to meet the
goods and the financial need of the country.
◦ The autonomous transactions take place on both current and capital accounts.
◦ On the current account, merchandise exports and imports of goods are autonomous transactions.
◦ If in case merchandise exports and imports are equal in value terms, then there will
be no other transactions and BOP will be in equilibrium.
◦ Practically, exports are not equal to imports, so requires some balancing transactions
 ASSESSMENT OF BALANCE OF
PAYMENTS
◦ Balancing transactions are in the form of international borrowing or lending that lead to short-term capital inflows or
outflows or for making payments for deficits in the balance of trade. Such balancing transactions are called induced or
accommodating transactions.
◦ Please not: unrequited items like gifts, donations and aid are voluntary and are treated as autonomous transactions.
◦ On the capital account
◦ international investments or exports and imports of long-term capital are autonomous transactions.
◦ Also, the short-term flows motivated by a desire to invest abroad are autonomous transactions.
◦ The short-term capital movements (like gold) and accommodating capital flows on account of the autonomous transactions are
induced transactions. Such induced transactions result in either rise or fall in gold and foreign exchange reserves of the country.
 Assessment of BOP Disequilibrium
◦ In BOP assessment, only autonomous transactions are taken into account.
◦ Mostly, total receipts from and payments for autonomous transactions are substantially unequal, it
means BOP disequilibrium
Autonomous receipts > Autonomous payments, BOP disequilibrium (surplus)
◦ Results in: increase in capital account surplus and reflects ultimately in the form of increase in foreign
exchange reserves

Foreign payment requirements > Foreign receipts, BOP disequilibrium (deficit)

◦ Results in: sale of foreign assets, if any, or borrowing abroad which results in foreign indebtedness
◦ BOP disequilibrium of deficit nature is often a matter of concern for the policy makers, especially when
the magnitude of deficit is very high
Correct Measures(Adjustment)
◦ In case of current account deficit, it has to be financed either by sale of foreign assets or by net
borrowing, i.e., net capital inflow.
Current account deficit = Net capital inflow
◦ Note: current account deficit is the result of autonomous transactions and the net capital inflow is
induced transaction
◦ Current account deficit can be financed by
◦ borrowing abroad
◦ central bank has to sell foreign currency to the private sector for making payment abroad

BOP deficit = decrease in official foreign exchange reserves

or, = current account deficit + net capital inflow
 Correct Measures (Policy)
◦ Mundell’s rule of policy assignment

Source: Dwivedi DN (2010) Macroeconomics: Theory and Policy. 3rd edn. Tata McGraw-Hill Education, New Delhi
MCQs
1. Final balance of payments of a country is:
A. Always balanced
B. Always deficit
C. Always surplus
D. Fluctuates

2. If Japanese import more goods from India (other things remain same)
A. Our balance of payments will improve
B. Japan's BOP will deteriorate
C. Our BOP will deteriorate
D. (a) and (b) of above
MCQs Cont
3. It helps countries to meet deficit in balance of payments:
A. IMF
B. WTO
C. World Bank
D. UNO

4. The balance of payments of country means

A. Balance in income and expenditure of govt.
B. Balance in demand and supply of money
C. Balance in export and import earnings
◦ D. The annual account of foreign trade
MCQs Cont
5. If balance of payments of country is in deficit, then:
A. Current account will be in deficit
B. Country can increase money supply to meet deficit
C. The country can borrow from abroad
D. (a) and (c) of above
References
◦ https://m.rbi.org.in/scripts/SDDS_ViewDetails.aspx?Id=5&IndexTitle=Balance%20of%20Payment
◦ http://mospi.nic.in/109-balance-payments
◦ Economic Surveys, GOI
◦ Agarwal V (2010) Macroeconomics Theory and Policy. Pearson Education,
◦ Dwivedi DN (2010) Macroeconomics: Theory and Policy. 3rd edn. Tata McGraw-Hill Education, New
Delhi
◦ Mankiw NG (2020) Principles of Macroeconomics. Cengage Learning,