CHRIST (DEEMED TO BE UNIVERSITY)

ECONOMICS CIA 3
Balance of Payments in India: the recent current account surplus
amid demand drops due to Covid 19
Liya Elizabeth Thomas
2140881

THE ELEMENTS THAT ENTER THE BALANCE PAYMENTS AND IT’S

SIGNIFICANCE
An economy's Balance of Payments (BoP) statement is a thorough account of every economic transaction
that took place between a nation and the rest of the world over a given time period, usually one year.
There are three primary parts to it.

1. Current Account: The current account measures a country's trade in goods and services,
as well as transfers such as remittances and foreign aid. It includes the following sub-
components:

Goods: The value of physical goods traded between the country and the rest of the
world.

Services: The value of services traded between the country and the rest of the world, such
as tourism, transportation, and financial services.

Income: The net income earned by residents of the country from their foreign
investments, and the net income earned by foreigners from their investments in the
country.

Current transfers: The value of gifts, grants, and other transfers between the country and
the rest of the world.

2. Capital Account: The capital account measures the inflow and outflow of capital for
investment purposes, including foreign direct investment, portfolio investment, and debt
flows. It includes the following sub-components:

Capital transfers: The value of capital transfers between the country and the rest of the
world, such as grants and gifts.

Acquisition/disposal of non-produced, non-financial assets: The value of non-financial

assets, such as patents and copyrights, that are acquired or disposed of by residents of the
country or foreigners.

Financial derivatives: The value of financial derivatives such as options and futures that
are traded between the country and the rest of the world.
3. Financial Account: A nation's ownership of international assets and liabilities is tracked
using the financial account. It has the following supporting elements:

Direct investment: The amount of local and international direct investments made in a
certain nation.

Investments in a portfolio include the value of foreign capital placed in the nation's stock
and bond markets as well as the value of domestic capital placed in international stock
and bond markets.

The value of loans and deposits made between the nation and the rest of the globe,
including trade credits, cash deposits, and bank loans.

The value of a nation's gold and foreign currency reserves, as well as other reserve assets
held by the central bank.

REASONS FOR DISEQUILIBRIM IN BoP

1. Trade Cycles

Cyclical disequilibrium is typically caused by cyclical fluctuations, their phases and

amplitudes, and disparities between different countries.

2. Huge Development and Investment Programs

The imbalance in these nations' balance of payments is mostly caused by massive

development and investment initiatives in their economies. Due to a lack of funding
for quick industrialization, their inclination to import continues to rise, although
exports may not be much increased given that they are the main producing nations.

Additionally, the amount of primary goods they export can decrease since emerging
local businesses might need them. As a result, the balance of payments will change
structurally, leading to structural disequilibrium.

3. Changing Export Demand

The need for imports from the agrarian undeveloped countries has lessened as a result
of a significant growth in domestic production of food, raw materials, substitute
goods, etc. in developed countries. Thus, there is structural disequilibrium in these
countries as a result of the significant change in export demand.

4. Population Growth

Poor countries' high rates of population increase also have a negative impact on the
state of their balance of payments. It is clear that as population grows, these countries'
requirements for imports rise while their ability to export declines.
 5. Inflation

Owing to rapid economic development, the resulting income and price effects will
adversely affect the balance of payments position of a developing country. With an
income, the marginal propensity to import being high in these countries, their demand
for imported articles will rise.

6. Demonstration Effect

Demonstration effect is another most important factor causing deficit in the balance
of payments of a country — especially of an underdeveloped country. When people
of underdeveloped nations come into contact with those of advanced countries
through economic, political or social relations, there will be a demonstration effect on
the consumption pattern of these people and they will desire to have western style
goods and pattern of consumption so that their propensity to import increases,
whereas their export quantum may remain the same or may even decline with the
increase in income, thus causing an adverse balance of payments for the country.

7. Reciprocal Demands

Since intensity of reciprocal demand for products of different countries differs, terms
of trade of a country may be set differently with different countries under multi-trade
transactions which may lead to disequilibrium in a way.

METHODS FOR CORRECTING DISEQUILIBRIUM IN

1. Fiscal policy: The trade deficit can be decreased through the employment of
fiscal policy. To boost domestic industries' competitiveness in the global market,
a nation can raise import taxes, cut back on spending, or give them subsidies. As a
result, the current account balance can improve as exports rise and imports fall.

2. Monetary policy: A BoP deficit may also be addressed by monetary policy. The
central bank of a nation can raise interest rates to entice foreign investment if
there is a capital account deficit. In contrast, the central bank can lower interest
rates if the country has a current account deficit in order to boost domestic
demand and boost exports.

3. Exchange rate modification: A nation may modify its exchange rate to boost its
BoP. Overvaluation of the currency might result in a decrease in exports and an
increase in imports. In this situation, the nation may devalue its currency to
increase the affordability and competitiveness of its exports on the international
market. Devaluation, however, can also result in inflation and lower consumer
purchasing power.
 4. Capital controls: To restrict capital outflow and lower the current account deficit,
a nation may enact capital controls. This can include placing taxes on capital
outflows, capping the amount of money that can be sent overseas, or prohibiting
foreign investment.

5. Structural reforms: To boost exports and become more competitive, a nation

might also implement structural reforms. This can entail lowering trade barriers,
enhancing infrastructure, making investments in training and education, or
fostering innovation and technology.

ANALYZING THE RECENT CURRENT ACCOUNT SURPLUS DESPITE

DECREASED DEMAND DUE TO COVID 19 IN INDIA

Taking the data and comparing the July-September 2022 and July-September 2021

 India’s current account balance recorded a deficit of US$ 36.4 billion (4.4 per cent of
GDP) in Q2:2022-23, up from US$ 18.2 billion (2.2 per cent of GDP) in Q1:2022-23 and
a deficit of US$ 9.7 billion (1.3 per cent of GDP) a year ago [i.e., Q2:2021-22]
 Services exports reported a growth of 30.2 per cent on a year-on-year (y-o-y) basis on the
back of rising exports of software, business and travel services. Net services receipts
increased both sequentially and on a y-o-y basis.
 Private transfer receipts, mainly representing remittances by Indians employed overseas,
amounted to US$ 27.4 billion, an increase of 29.7 per cent from their level a year ago.
 In the financial account, net foreign direct investment decreased to US$ 6.4 billion from
US$ 8.7 billion a year ago.
  India recorded a current account deficit of 3.3 per cent of GDP in H1:2022-23 on the
back of a sharp increase in the merchandise trade deficit, as compared with 0.2 per cent in
H1:2021-22.

In the upcoming fiscal, India is anticipated to record a balance of payment deficit

for the second consecutive year, marking the first time in 20 years that this has
happened. In contrast to a surplus of $47.5 billion the previous year, the foreign
bank anticipates that the nation would record a BoP deficit of $24 billion this fiscal
year and $5.5 billion in the following.

The foreign bank expects current account balance to slip into a deficit of 3% of gross
domestic product this financial year from a surplus of 0.9% last year, before narrowing to
2.6% in fiscal year 2023-2024. The BoP dynamics next year could be dominated by an
absolute CAD financing requirement of around $100 billion, given the chances of higher
global rates keeping debt-investment inflows cautious, the bank said. The potentially
improved risk appetite in the second half of the year could lead to net positive portfolio
inflows, while an increased volatility in the banking capital segment may keep BoP
forecasting "challenging," it added.

India's balance of payments position has been impacted by the Covid-19 pandemic, with the
country experiencing a current account surplus in recent times. The current account surplus for
the second quarter of the financial year 2020-21 was $19.8 billion, which is the highest in the
last 17 years. This is primarily due to a significant reduction in imports, particularly non-oil
imports, amid a drop in demand as a result of the pandemic.

The reduction in imports was driven by lower domestic demand, supply chain disruptions, and
restrictions on imports due to lockdown measures. India's imports fell by 47.6% year-on-year in
the second quarter of 2020-21. The fall in imports was mainly in non-oil imports, which fell by
38.6% during this period, while oil imports decreased by 59.7%. The decline in imports has
helped India's current account balance to shift from a deficit to a surplus.

CONCLUSION
In conclusion, the recent shift in India's current account balance is a positive development for the
country's economy, driven in large part by the growth of services exports. However, India will
need to continue to address its fiscal deficit and invest in infrastructure and education in order to
sustain this growth over the long term.