The Key Highlights of FTP 2021-26 is given below:

1) Targeting a 5 Trillion $ Economy:

2) District Level Export Hub

The government also enhanced the scope of Merchandise Exports from India Scheme
(MEIS) and Service Exports from India Scheme (SEIS) to aide exporters, especially
MSMEs.

CHECK YOUR PROGRESS III:

Q1: True/False

Foreign Trade Policy 2015-2020 has been extended till 30th Sep 2021.

Q2: The new FTP 2021-26 aims:

 To make India a global leader in the world

 Drive India to achieve $5 trillion economy
 Boost India’s exports
 Any of these

Q 3: True/False

Import substitution policy means substitution of domestic goods with foreign goods?

7.5 BALANCE OF PAYMENTS (BoP)

Now, in this sub-section you will understand the concept of balance of payments, their
components and trends. The Balance of Payments is the systematic records of all the
economic transactions that take place between the residents of a country with rest of the
world during a year. It is a principle tool for analysing the monetary aspects of foreign trade.
Balance of payments is like the balance sheets of a bank account where you can see debit
(payments made) and credit (payments received) of your transactions. The only difference
between bank accounts book and balance of payments statements is that in bank accounts
book debit items are recorded in the left side and credit items are recorded in the right side
while just the opposite in case of BoP statements. In accounting sense, balance of payments is
always ‘Balanced’ for a country. That means if there is deficit in Current Account then there
is a surplus in Capital Account. The subsequent sub-units explain these components of
balance of payment.

In the first quarter (Q1) of 2020-21, India registered a surplus of US$ 19.8 billion (3.9% of
GDP) in current account balance (CAB) while a year ago during 2019-20, India recorded a
current account deficit of US$ 15 billion (2.1% of GDP). The surplus in current account was
due to steep decline in merchandise imports comparative to exports and hence, there was a
sharp contraction in trade deficits. Though, the net services receipts remained stable mainly
because of net earnings of IT and ITeS (IT enabled services). On the other hand, the capital
account balance has registered a deficit of US$ 19.3 billion in the Q1 of 2020-21 while a year
ago it was recorded surplus of US$ 14.6 billion. The deficit in capital account was due to the
outflow of US$ 0.4 billion of FDI and US$ 0.6 billion of FPI (foreign portfolio investments);
outflow of external commercial borrowings by US$ 1.1 billion and higher repayments (RBI
Press Release, Sep 30, 2020).

7.5.1 COMPONENTS OF BALANCE OF PAYMENTS

There are three broad components of BoP – current account, capital account and errors and
omissions shown in Figure 7.8 below:
 Balanceof
Payments

Current Capital Errors &

Account Account Omissions

Visible Invisible Foreign

External External
Items Items Investment
Borrowings Assistance
s

Unilateral Direct Portfolio

Service Net Income Investments - Investments -
Transfers
FDI FIIs
Fig 7.8: Components of Balance of Payments
Source: MoSPI, Statistical Year Book, 2017

7.5.1.1 CURRENT ACCOUNT

According to IMF’s ‘Balance of Payment Manual’, the current account includes all
economic transactions except financial items between the residents of the country and
rest of the world. It is one of the components of balance of payments that deals with the
visible and invisible items. Visible items refer to transactions in goods while invisible
items include trade in services, net income and unilateral transfers.

 Visible Items: Visible items means ‘trade in goods’ i.e. the imports and exports of
goods from/into India. It is called visible and tangible items as goods can be seen as
well as touched and feel such as leather shoes, garments, food and beverages,
machine and equipment, laptops, smart phones etc. The export values are classified
under credit items as exports bring foreign currencies to the country while import
values are classified under debit items as for importing goods we have to made
payments. So, there is an outflow of foreign currency from the country. The net
balance shown in the statement is called ‘Balance of Trade’. Balance of trade (BoT)
refers to the difference between exports and imports of commodities/goods only.
 Therefore, you should always remember that BoT never includes trade in services or
any other item.

 Invisible Items: Invisible items mean the items which cannot be seen and touched.
It is further classified into 3 categories - trade in services, net income and unilateral
transfers.

(i) Services trade: The trade in services represents export and import of services
like banking, tourism, transportation, financial and insurance services, legal services,
and consultancy. Government not included elsewhere (GNIE) and miscellaneous
like communication, news agency, royalty, software etc.
(ii) Net Income: Net income includes investment income and compensation of the
employees. Investment income refers to income receipts and income payments
associated with resident’s holding external financial assets as well as resident’s
liabilities to non-residents of the country. It also includes receipts and payments due
to profits, discounts, interests and dividends on foreign loans such as IMF.
(iii) Unilateral Transfers: Unilateral transfers are one sided for which there is
nothing exchange in return. They are one-sided transfer of items like grants and aids
received from foreign country. Unilateral transfers include remittances (i.e. suppose
an Indian citizen working in a software company in USA and every month sending
money to his/her parents in India for maintenance is called remittances); repatriation
of savings (means converting your saving amount into foreign currency like US $
into Indian currency i.e. Rupee); donations to religious or charitable organisations
etc.

7.5.1.2 CAPITAL ACCOUNT OF BOP

By capital account we can understand the country’s economic transaction in capital

assets and liabilities. It represents the transfer of money and other capital items
besides changes in the nations’ foreign assets and liabilities that results from the
transaction records of the current account. The capital account consists of foreign
investment that is FDIs (Foreign Direct Investment) and Portfolio Investment like FIIs
(Foreign Institutional Investors); loans that includes external commercial borrowings,
 external assistance and short-term loans and; Bank deposits including NRI (Non-
Resident of India) deposits.

7.5.1.3 BALANCE OF PAYMENTS AND BALANCE OF TRADE

As we have discussed earlier balance of trade is a part of current account of balance of

payments (BoP). So, BoP is a broader term while BoT is a narrower term. Now, the question
here is why we assess BoP and BoT separately? For framing economic policies related to
merchandise trade, the absolute figures of exports/receipts (credits items) and
imports/payments (debit items) of goods are required. Their net difference gives the clear
picture of the deficit or surplus which is important for the purpose of policy making.

On the other hand, balance of payment is a comprehensive term which not only incorporates
trade in visible items but also invisible items, items in the capital account and errors and
omissions as discussed above. So, balance of payment includes receipts and payments in both
current account as well as capital account.

7.5.1.4 CAPITAL ACCOUNT CONVERTIBILITY

Capital account convertibility represents freedom of a country in capital transactions like

loans and investments – both short-run and long-run along with speculative capital flows like
stock and bond markets. For instance, if you are willing to acquire any foreign asset you have
the freedom to convert Indian Rupee into any other country’s currency without any
restrictions. Similarly, if an NRI (Non-Resident Indian) is willing to acquire/purchase any
assets in India, they can convert their currencies of resident country like US dollar or dirhams
into Indian currencies without any restrictions. Hence, it removes all the constraints on
international flow of country’s capital account. It’s a way to convert domestic financial assets
into foreign financial assets at the exchange rate determined by the market.

According to the recommendations of Tarapore Committee (1997, 2006), India is moving

towards full capital account convertibility. Although, India has not yet adopted full capital
account convertibility but partial convertibility of 40:60 ratio in capital account. The
government has undertaken several initiatives like increasing the limits of foreign portfolio
investment in the Indian debt markets via Fully Accessible Route (FAR). This initiative will
help the NRIs to invest in specific government securities without any restrictions and also
ease the external commercial borrowing by reducing end-users restrictions.

14000
Fig 7.9: Trends in BoP (2010-11 to 2019-2020)
12000

10000

8000
in US $ Billion

6000

4000

2000

0
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20
-2000
Credit Debit Net

Source: DGCI&S

CHECK YOUR PROGRESS IV:

Q1. ___________ is the systematic records of all the economic transactions that take place
between the residents of a country with rest of the world during a year.

Q2. Which of the following is a part of current account?

a) Trade in visible items

b) Trade in invisible items
c) Unilateral transfers
d) Any of these

Q3: Which of the following is a part of capital account?

a) Foreign Direct Investment

b) NRI deposits
c) Bank capital
d) Any of these