Name: Vinayak Bali

Class: S.Y.B.B.A.
Div: A
Roll No: 18
Subject: International Business Management
Topic: Analysis of India’s Balance of Payments
Submitted to: Dr. Deepa Dani

ANALYSIS OF INDIA’S BALANCE OF PAYMENT

What is balance of payment?

The balance of payments (BOP) is a systematic record of all economic transactions between residents of
one country and the rest of the world over a specified period, typically a year or a quarter. It includes
both visible and invisible transactions.

The balance of payments is important for understanding a country's economic health and its position in
the global economy. A surplus in the balance of payments indicates that a country is exporting more than
it imports, while a deficit indicates the opposite. Persistent deficits can lead to a build-up of debt, while
persistent surpluses can signify an imbalance in the economy or excess savings.

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Features of Balance of Payment

1. Comprehensiveness: The balance of payments accounts for all economic transactions between
residents of a country and the rest of the world. This includes trade in goods and services, financial
transactions, and transfers of assets and liabilities.
2. Double Entry System: Similar to accounting principles, the balance of payments follows a double-
entry system, where each transaction is recorded twice, once as a credit and once as a debit. This
ensures that the overall balance is zero, as credits and debits must balance out.
3. Classification: Transactions in the balance of payments are classified into different categories based
on their nature and purpose. These categories typically include the current account, the capital
account, and the financial account, each reflecting different types of transactions.
4. Currency: Transactions in the balance of payments are usually recorded in the currency of the
reporting country. However, for international comparison purposes, transactions can also be
expressed in a common currency, such as the US dollar or the euro.
5. Frequency: Balance of payments data is typically reported on a regular basis, such as quarterly or
annually. This allows policymakers, economists, and investors to track changes in a country's
economic position over time.
6. Statistical Sources: Balance of payments data is compiled from various sources, including customs
records, financial institutions, government agencies, and surveys of businesses and households

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Structure of Balance of Payments

There are three main components that form the basis of the structure of balance of payments. The financial
account, capital account, and current account.

Current Account

The current account is useful for monitoring inflow and outflow of goods and services. Thus, this account
covers all the payments and receipts that are made with respect to manufactured goods and raw materials.
Furthermore, it also includes receipts from tourism, engineering, business services, transportation, etc.

There are many categories of trades that occur between the countries. These trades could be visible or
invisible. When trades happen in goods between the countries than it is called as visible items. While the
trade happening in import or exports of services, is referred to as invisible items.

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Capital Account

The capital transactions that occur between the countries are monitored under the capital account. Thus,
capital transactions include the sale and purchase of assets like properties. Furthermore, the capital account
also includes the flow of taxes, sales and purchases of fixed assets for a migrant moving in or out of the
country. The three major elements of the capital account are investments, foreign exchange reserves, and
loans and borrowings.

Financial Account

The flow of funds to and from foreign countries via various investments in real estate, FDI, business
ventures, etc are monitored through the financial account. Also, this account measures the variation in
foreign ownership. When you analyze this, you can understand whether a country us acquiring more or
selling more.

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 APPENDIX TABLE 8: INDIA’S OVERALL BALANCE OF PAYMENTS
(US$ million)
2018-19 2019-20 2020-21 2021-22 2022-23
(P)
1 2 3 4 5 6

CURRENT ACCOUNT
1 Exports, f.o.b. 3,37,237 3,20,431 2,96,300 4,29,164 3,40,322
2 Imports, c.i.f. 5,17,519 4,77,937 3,98,452 6,18,623 5,54,341

3 Trade Balance -1,80,283 -1,57,506 -1,02,152 -1,89,459 -2,14,018

4 Invisibles, Net 1,23,026 1,32,850 1,26,065 1,50,694 1,46,937

a) ‘Non-factor’ Services of which : ANNUAL REPORT81,941

2022-23 84,922 88,565 1,07,516 1,04,218

Software Services 77,654 84,643 89,741 1,09,540 96,914

b) Income -28,861 -27,281 -35,960 -37,269 -33,395

c) Private Transfers 70,601 76,217 74,439 81,230 76,696

5 Current Account Balance -57,256 -24,656 23,912 -38,766 -67,081

B. CAPITAL ACCOUNT
1 Foreign Investment, Net (a+b) 30,094 44,417 80,092 21,809 18,190
a) Direct Investment 30,712 43,013 43,955 38,587 21,678

b) Portfolio Investment -618 1,403 36,137 -16,777 -3,488

2 External Assistance, Net 3,413 3,751 11,167 5,366 3,803

3 Commercial Borrowings, Net 10,416 22,960 -134 8,135 -5,584

4 Short Term Credit, Net 2,021 -1,026 -4,130 20,105 8,123

5 Banking Capital, of which: 7,433 -5,315 -21,067 6,669 25,030

NRI Deposits, Net 10,387 8,627 7,364 3,234 5,408

6 Rupee Debt Service -31 -69 -64 -71 -61

7 Other Capital, Net& 1,057 18,462 -2,143 23,794 3,994

8 Total Capital Account 54,403 83,180 63,721 85,807 53,495

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C. Errors & Omissions -486 974 -347 459 -1,129
D. Overall Balance [A(5)+B(8)+C] -3,339 59,498 87,286 47,501 -14,715
E. Monetary Movements (F+G) 3,339 -59,498 -87,286 -47,501 14,715
F. IMF, Net 0 0 0 0 0
G. Reserves and Monetary Gold (Increase -, Decrease 3,339 -59,498 -87,286 -47,501 14,715
+)
of which: SDR Allocation 0 0 0 -17,862 0

Memo: As a ratio to GDP

1 Trade Balance -6.7 -5.6 -3.8 -6.0 -8.5
2 Net Services 3.0 3.0 3.3 3.4 4.1

3 Net Income -1.1 -1.0 -1.3 -1.2 -1.3

4 Current Account Balance -2.1 -0.9 0.9 -1.2 -2.7

5 Capital Account, Net 2.0 2.9 2.4 2.7 2.1

6 Foreign Investment, Net 1.1 1.6 3.0 0.7 0.7

P: Data are provisional and pertain to April-December 2022.

&: Includes delayed export receipts, advance payments against imports, net funds held abroad, and advances received
pending the issue of shares under FDI.
Note: 1. Gold and silver brought by returning Indians have been included under imports, with a contra entry in private
transfer receipts.
2. Data on exports and imports differ from those given by DGCI&S on account of differences in coverage, valuation, and
timing.
Source: RBI.

Analysis of the Balance of Payments:

The above section represents India's Overall Balance of Payments for the years 2018-2019, 2019-2020,
2020-2021, 2021-2022, and provisional data for 2022-2023. The data includes various components of
India's balance of payments, such as exports, imports, trade balance, Invisibles (net), current account
balance, capital account, errors & omissions, overall balance, and monetary movements.

1. Current Account Analysis:

 Exports, f.o.b. (Free on Board): The value of exports increased from 3,37,237 million
US dollars in 2018-2019 to 4,29,164 million US dollars in 2021-2022. It then slightly decreased
to 3,40,322 million US dollars in 2022-2023.

 Imports, c.i.f. (Cost, Insurance, and Freight): The value of imports also saw a similar
trend, rising from 5,17,519 million US dollars in 2018-2019 to 6,18,623 million US dollars in

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 2021-2022 and then decreasing to 5,54,341 million US dollars in 2022-2023.

 Trade Balance: The trade balance shows the difference between exports and imports. India
had a negative trade balance, indicating a trade deficit, throughout the analyzed period, with the
highest deficit of -2,14,018 million US dollars in 2022-2023.
India's trade balance has consistently been negative, indicating that the value of imports exceeds
the value of exports. This signifies a persistent trade deficit, which implies that India relies
heavily on imports to meet its domestic demand.

 Invisibles, Net: This category represents the balance of services, income, and private
transfers. Net invisibles increased from 1,23,026 million US dollars in 2018-2019 to 1,50,694
million US dollars in 2021-2022, and then slightly declined to 1,46,937 million US dollars in
2022-2023.
India has been able to offset some of its trade deficit through earnings from services, income,
and private transfers. Notably, software services have been a significant contributor to India's
invisible earnings.

a) 'Non-factor' Services: This subcategory within invisibles includes services other than
factor services, such as software services. It has been increasing steadily, reaching 1,04,218
million US dollars in 2022-23.

b) Income: Income from various sources, including investments and compensation,

experienced fluctuations, but overall showcased a negative trend, with -33,395 million US
dollars in 2022-23.
c) Private Transfers: Private transfers, which mainly include remittances from Indians
abroad, have been increasing gradually and amounted to 76,696 million US dollars in 2022-23.

 Current Account Balance: The current account balance, obtained by subtracting the trade
balance and net invisibles from the overall balance, shows the net inflow/outflow of goods,
services, and transfers. India had a negative current account balance for most years, with the
largest deficit of -67,081 million US dollars in 2022-2023.
Despite the positive contributions from Invisibles, India's current account balance has generally
been negative. This suggests that India is spending more on imports and external services than it
earns from exports and other invisible sources.

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2. Capital Account Analysis:

 Foreign Investment, Net: Foreign investment includes direct and portfolio investments.
Net foreign investment increased from 30,094 million US dollars in 2018-2019 to 80,092
million US dollars in 2020-2021 and then declined to 18,190 million US dollars in 2022-2023.
India has been successful in attracting foreign investment, particularly through direct
investments. However, portfolio investment has been volatile, leading to fluctuations in the
overall foreign investment.

 a) Direct Investment: Direct foreign investments showed a mixed trend, with a high of
43,955 million US dollars in 2020-21.

 b) Portfolio Investment: Foreign portfolio investment also witnessed fluctuations, with a

notable decrease of -16,777 million US dollars in 2021-22.

 External Assistance, Net: This category refers to the net inflow of external financial
assistance. It fluctuated over the analyzed years, ranging from 3,413 million US dollars in 2018-
2019 to 11,167 million US dollars in 2020-2021.
India has received varying levels of external assistance over the years, which has contributed
positively to the capital account.

 Commercial Borrowings, Net: Commercial borrowing shows the net inflow/outflow of

funds borrowed from commercial sources. It saw significant fluctuations, with a high of 22,960
million US dollars in 2019-2020 and a low of -134 million US dollars in 2020-2021.
The net commercial borrowings have fluctuated, indicating changes in India's borrowing

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 behavior and its ability to repay external debt.

 Short-Term Credit, Net: This category represents the net inflow/outflow of short-term
credit. It varied widely, from a high of 20,105 million US dollars in 2021-2022 to a low of -4,130
million US dollars in 2020-2021.
Fluctuations in short-term credit reflect changes in India's short-term financing needs and its
ability to access credit from international markets.

 Banking Capital: It refers to the net inflow/outflow of capital related to banking activities.
Banking capital showed fluctuations, ranging from -21,067 million US dollars in 2020-2021 to
25,030 million US dollars in 2022-2023.
NRI deposits have been an important component of India's banking capital, reflecting the
confidence of non-resident Indians in the Indian economy.

 Rupee Debt Service: Rupee debt service indicates the repayments of debt in local currency.
It showcases minor fluctuations over the years, with a decrease of -61 million US dollars in
2022-23.

 Other Capital, Net: This category captures other capital inflows/outflows not included in the
previous categories. It ranged from -2,143 million US dollars in 2020-2021 to 23,794 million US
dollars in 2022-2023.
This category captures various forms of capital flows not included in other components. The
volatility in this category suggests uncertainty or variability in certain types of capital flows.

 Total Capital Account: The total capital account represents the sum of all capital
inflows/outflows. It increased from 54,403 million US dollars in 2018-2019 to 85,807 million
US dollars in 2021-2022 and then decreased to 53,495 million US dollars in 2022-2023.

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3. Errors & Omissions:

Errors & Omissions: This category represents the statistical discrepancy in the balance of
payments. It indicates the degree of accuracy in the recorded transactions and their alignment
with the fundamental accounting identity. Over the analyzed years, errors and omissions
fluctuated, with values ranging from -1,129 million US dollars to 974 million US dollars.
While errors and omissions are relatively small, they indicate discrepancies in the recorded
balance of payments. These discrepancies could arise from data reporting issues or unrecorded
transactions.

4. Overall Balance and Monetary Movements:

 Overall Balance: The overall balance is the sum of the current account balance, capital
account balance, and errors & omissions. The overall balance shifted from a deficit of -3,339
million US dollars in 2018-2019 to a surplus of 87,286 million US dollars in 2020-2021 and
then declined to a deficit of -14,715 million US dollars in 2022-2023.

 Monetary Movements: This section shows the impact of the overall balance on monetary
reserves. Positive values indicate an increase in reserves, while negative values represent a
decrease. The data suggests a net decrease in reserves during 2020-2021 and 2022-2023, while
there was an increase in reserves during 2018-2019 and 2019-2020.

a) IMF, Net: This category represents net transfers to or from the International Monetary Fund
(IMF) and shows a consistent value of 0 million US dollars.

b) Reserves and Monetary Gold: Reserves and monetary gold indicate the change in the stock
of international reserves held by the central bank. It reflects positive movements, with an
increase of 14,715 million US dollars in 2022-23.
India's overall balance has fluctuated over the years, with periods of surplus and deficit.
Monetary movements, including changes in reserves and monetary gold, have played a crucial
role in offsetting these balances.

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 C to G
100000
80000
60000
40000
20000
0
-20000 1 2 3 4 5
-40000
-60000
-80000
-100000

C. Errors & Omissions

D. Overall Balance [A(5)+B(8)+C]
E. Monetary Movements (F+G)
F. IMF, Net
G. Reserves and Monetary Gold (Increase -, Decrease +)

As a ratio to GDP:
The table also provides ratios of various components to GDP, allowing for a comparison relative to the
size of the economy.
Ratios provide a perspective on the relative size of various components of the balance of payments
compared to India's GDP. Negative ratios indicate deficits, while positive ratios indicate surpluses,
relative to GDP.

Memo: As a ratio to GDP

Memo: As a ratio to GDP 1 Trade Balance 2 Net Services 3 Net Income

4 Current Account Balance 5 Capital Account, Net 6 Foreign Investment, Net

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In conclusion, the financial analysis of India's overall balance of payments shows a widening trade
deficit, fluctuating components of the current and capital accounts, discrepancies in errors & omissions,
and changes in reserves and monetary gold. These indicators highlight the importance of managing and
monitoring India's international trade and financial transactions.
In addition to the balance of payments analysis, the memo section provides information on the selected
indicators' ratios to GDP, reflecting their significance relative to the size of the Indian economy.
While India has been successful in attracting foreign investment and earning income from services, it
faces challenges related to persistent trade deficits and fluctuations in capital flows. Continued efforts to
enhance export competitiveness, attract stable foreign investment, and manage external debt will be
essential for maintaining external balance and stability.

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