Balance of Payments

INDIA 2006-12
COURSE ORGANIZATIONAL BEHAVIOUR
PGDM PT

VARUN GANDHI (038)

VISHWAROOP SEN
YOGESHWAR SINGH
VISHWANATHAN BALASUBRAMANIAN
VINOD RANA

What is BOP
It is a record of transactions done by
resident country with the rest of world.
Resident country: India
Sources of fund for nation: exports or
receipts of loans and investments, are
recorded as positive or surplus items.
Uses of funds: imports or to invest in
foreign countries, are recorded as negative
or deficit items.

When all components of the BOP accounts

are included they must sum up 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 inflows, by running
down existing central bank reserves or by
accepting loans (with stringent
conditionalities) from outside.

Structure of BOP
BOP

Current Account

Capital Account

Reserves

Trade

FDI/FIIs

Gold
Reserves

Transfer /
factor
Payments

Portfolio
Investment
s

Forex
Reserves

Invisibles

NRE/NRI
A/cs

IMF Loans

Components of BOP

Current Account (CA):That part of balance of payments recording a nations

export and import of goods and services and transfer pay.

Balance of trade,

Net factor income,

Net transfer payment.

CA = Exports (X) Imports (M)

Components of BOP
Capital Account (KA):That part of balance of payments that reflects net change in
national ownership of assets.
Capital Account = Foreign direct investment
+Portfolio investment
+Other investment
KA = Capital Inflow (cr) Capital Outflow (dr)

Components of BOP
Official Reserves:

Records the purchase or sale of official reserve assets by the

Central Bank. These assets include
Commercial Paper, Treasury Bills and Bonds
Foreign Currency
Money deposited with the IMF

This account shows the change in foreign exchange reserves

held by the Central Bank.
The Balance of

Since the BOP must balance

CA + KA + RFX = 0

CA + KA = RFX

Payments
Identity

Summary of BOP 2006-12

Main Components affecting

During 2010-11, exports crossed the US$ 200 billion mark for the
first time, increasing by 37.3 per cent from US$ 182.4 billion in
2009-10 to US$ 250.5 billion.

Like exports, imports also recorded a 26.8 per cent increase to

US$ 381.1 billion in 2010-11 from US$ 300.6 billion in 2009-10. Oil
imports showed an increase of 19.3 per cent in 2010-11.

The trade deficit increased by 10.5 per cent to US$ 130.6 billion as
compared to US$ 118.2 billion in 2009-10.

USES OF BOP:

The BOP provides an extremely useful data for

the economic analysis of the countrys
weakness and strength as a partner in
international trade.
BOP also reveals the changes in the
composition and magnitude of foreign trade.
BOP also provides indications, future
repercussions of countries past trade
performances.

DISEQUILIBRIUM

Total receipts and total payments inequality shows

disequilibrium of balance of payments account

B=RP
Where, B stands for balance of payments,
R denotes receipts from foreigners,
P stands for payments made to foreigners
A country whose balance of payments is positive is
called as surplus country (R>P)
A country whose balance of payments is negative is
called as deficit country (P>R)

Types of Disequilibrium

Cyclical disequilibrium: It occurs on account of

Structural disequilibrium: It is caused because

Short run disequilibrium: When a country

Long run disequilibrium: It occurs because of

trade cycles. Cyclical fluctuations in demand are caused

by changes in Income, employment, output & price.
of fluctuation in the demand based on changes in
tastes, fashions, habits, income, economic progress etc.
borrows or lends internationally, it will have short run
disequilibrium, as these are usually for short period.
accumulation of deficits or surpluses over a long period.

Causes for Indias BOP deficit

Huge development & investment programs :
Due to huge development and investment programs , Import
goes on increasing , requirement of capital for rapid
industrialization, while exports may not be boosted up to that
extent. Thus, there will be structural changes in the balance of
payments and structural equilibrium will result.

Causes for Indias BOP deficit

Population growth: High population growth in

poor countries has adverse impact on their
balance of payments. Increase in the population
increases the needs of these countries for
imports and decreases the capacity of export.
Huge external borrowing: A country will have
adverse balance of payments when it borrows
heavily from another country
Inflation: Rapid economic development, increase
in the income & price will
adversely affect
BOP position of a developing country like India.

How to correct the Balance of

Payment ?
Earning more foreign exchange through
additional exports or reducing imports
Quantitative changes in exports and
imports require FURTHER policy changes
Such policy measures are in the form of
monetary, fiscal and non-monetary
measures.

Conclusion

1. The Quantitative Easing Tapering Policy announced in Aug 2013 by the US

Federal Reserve Bank by which Additional Supply of 80 Billion $ per Month will
cease, caused the flight of FII. Therefore hereafter FII should be taken as only
birds of passage and treated as opportunistic investors. The Rupee lost 19 % of
its value. We must plan for CAD to come under 1% of GDP over the next 4 years.
2. Even a small nation like S. Korea exports manufactured goods 10 times that of
India! A nations competitiveness is judged by its manufacturing and marketing
efficiency. Thus there is the urgent need for political direction, bureaucratic
coordination, a supporting financial system (sub 10 % interest rates), all out
emphasis on infrastructure improvements, and a separate Ministry of
International Trade & Exports.
3. We must convert this CAD Problem and Rupee Downslide situation into an
Opportunity, by taking strong Policy Measures over the next 3 Months speeding
up Investments internally, bringing in Monthly Performance Accountability Audit
in all Govt Depts, taking all Measures to double Indias Manufactured Goods
Exports over the next 4 Years, and creating Brand India value abroad. The Nation
should live the CREDO of doing International Commerce, for generating Growth.