BALANCE OF PAYMENT

(India’s BOP)
 BALANCE OF PAYMENT
• BOP is an accounting statement that
summarizes all the economic transactions
between residents of home country and
residents of all other countries.
• The data includes transactions as trade in
merchandise and service, transfer
payments, FDI,loans and short term
investments.
 Components of BOP
• Current Account: Records flow of
Goods, Services, and Transfers.

• Capital Account: Shows public and

private investment and lending activity.

• Official Reserve Account: Which

measures changes in holdings of gold
and foreign currency - reserve assets -
by official monetary institutions.
 CURRENT ACCOUNT
• The balance on current account
reflects the net flow of goods and
unilateral transfers. It includes export,
import of merchandise and service
transactions/ invisibles
• INVISIBLES: Software, Tourism,
investment income, travel
,transportation, insurance, banking
charges etc.
 CAPITAL FLOWS

• FDI
• PORTFOLIO INVESTMENT
• EXTERNAL ASSISTANCE
• NRI DEPOSITS
• EXTERNAL COMMERCIAL
BORROWINGS
• SHORT TERM CREDITS
 OFFICIAL RESERVES
• The change in official reserves
measures a nation’s surplus or deficit
on its current and capital account
transaction by netting reserve liabilities
from reserve assets. A surplus will lead
to an increase in official holdings of
foreign currencies and gold.
India’s Balance of Payments: April-
March 2004-05
(US $ million) April-March April-March
2004-05 2003-04
Exports 80,832 64,723
Imports 118,961 80,177
Trade Balance -38,129 -15,454
Invisibles 31,697 26,015
Current Account -6432 10,561

Capital account 32,592 20,860

Change in 26,159 31,421
reserves
 India's Balance of Payments: 2007-08
(April-March)
(US $ million) 2005-06 2006-07 2007-08
• Exports 128,083 158,461
105,152
Imports 157,056 191,254 248,521
Trade Balance -51,904 -63,171 -90,060
Invisibles, net 42,002 53,405 72,657
Current Account -9,902 -9,766 -17,403
Capital Account 24,954 46,372 109,567
Change in
15,052 36,606 92,164
Reserves
 India's Balance of Payments:
(April-March)
(US $ billion) 2008-09 2009-10 2010-11
• Exports 182.2 250.5
189.0
Imports 308.5 300.6 380.9
Trade Balance -119.5 -118.4 -130.5
Invisibles, net 91.6 80.0 86.2
Current Account -27.9 -38.4 -44.3
Capital Account 7.8 51.8 57.3
Change in
-20.1 13.4 13.1
Reserves
 India's Balance of Payments:
(April-March)
(US $ billion) 2015-16 2016-17 2017-18
• Exports 280 309
266
Imports 396 392 469
Trade Balance -130 -112 -160
Invisibles, net 108 97 111 (72)
Current Account -22 -15 -49
Capital Account 40 36 91 (30)
Change in 18 21 42
Reserves
 Merchandise Trade

• Merchandise exports recorded an

increase of 23.7 per cent during 2007-
08 (21.8 per cent in the previous year).
• Merchandise import payments, on BoP
basis, showed a growth of 29.9 per cent
in 2007-08 (21.8 per cent in 2006-07)
• Agriculture and allied products,
engineering goods, gems and jewellery
and petroleum products were the
mainstay of exports, as these items
contributed about 72 per cent of the
export growth during April-February
2007-08.

• POL imports during 2007-08 at US $

76.9 billion recorded a growth of 34.6
per cent (30 per cent in 2006-07), driven
mainly by the surge in international
crude oil prices, while imports in terms
of quantity showed subdued growth.
• The average import price of Indian basket
of crude oil (a mix of Oman, Dubai and
Brent varieties) stood at US $ 79.5 per
barrel during 2007-08
• Which was higher by 27.3 per cent than
the average price of US $ 62.4 per barrel
in 2006-07
• According to the DGCI&S data, non oil
imports increased by 23.5 per cent in
2007-08 (22.2 per cent in 2006-07) mainly
led by strong growth in imports of capital
goods and gold and silver.
• Capital goods accounted for 40 per cent
of the non-oil imports excluding gold
and silver.

• The other major non-oil products which

showed accelerated growth in imports
during the period were edible oil,
fertilisers, iron and steel, pearls,
precious and semi-precious stones,
chemicals, textiles, coal, and coke.
 Invisible Account
Receipts
• Invisible receipts, comprising services,
current transfers and income, rose by
26.2 per cent during 2007-08 (28.3 per
cent in 2006-07) mainly due to the
momentum maintained in the growth of
software services exports, travel,
transportation, along with the steady
inflow of remittances from overseas
Indians
 Capital Account
• Both capital inflows to India and
outflows from India remained large
during 2007-08 reflecting the increased
liberalisation of capital account,
investors’ optimism and sustained
growth momentum of India. The gross
capital inflows to India amounted to
US $ 428.7 billion as against an
outflow of US $ 320.7 billion during
2007-08
• NRI deposits recorded a marginal net
inflow (US $ 179 million) during 2007-08  
(as against a large inflow of  US $ 4.3
billion in 2006-07) on account of prevailing
interest rates on such deposits and large
withdrawals from the NR(E)RA for
domestic use.
 Reserves Accretion
• At the end of March 2008, with
outstanding foreign exchange reserves
at US $ 309.7 billion, India held the third
largest stock of reserves among the
emerging market economies and fourth
largest in the world.
 Foreign Exchange Reserves
 
• People's Republic of China $925
• Japan $864  
• Republic of China (Taiwan) $260
•  Russia $251
•  Republic of Korea $224
•  India $162
•  Singapore $128
•  Hong Kong $126
Foreign Exchange Reserves
 FDI & THE BOP
• Given the current account deficits, the BOP
effects of FDI can be an important
consideration for the Govt. The three
potential consequences of FDI on BOP are:
• 1. Initial capital inflow, which is one time
effect- this is credit. Next is the outflow of
earnings to the foreign parent co.-
• 2. If the FDI is a substitute for imports of
goods or service it helps in the current
account. e.g: Japanese automobile COs.
• 3. The third potential benefit is the MNC
uses a foreign subsidiary to export
goods and services to other countries.
This is sometimes a pre requisite by the
host country to allow a MNC to set up
base. Example: Hyundai, Pepsi.
Costs for a host country due to
FDI:
• 1. Adverse effects on the competition:
Money power of the MNC. Infant industry
concern.
• 2. Adverse effect on the BOP:
Outflow of dividends and profits. - this is
tackled by restricting the amount
repatriated.
• 3. National sovereignty & autonomy.
(US producing PCs in Mexico-
Comparative adv.)
Review of Trade performance
in India’s Five year Plans:

• First Five Year Plan: With comfortable level

of Sterling Balances accumulated in the pre-
independence period, there was indifference to
exports.
• Second Five Year Plan: Exports of primary
and traditional manufactures were seen as low
in global demand. To take care of the BoP,
import substitution through industrialisation
became the major element of trade policy in
the late 50s. Export suffered relative neglect.
• Third Five Year Plan: Showed a
distinct change in the perception about
the role of exports. Exports were
accorded high priority in the plan and
this shift in policy approach was
followed by introduction of export
promotion measures.
• Poor harvest and successive droughts in
the mid 60s, led to foreign trade
development strategies.
• Fourth Plan: Renewed the
emphasis on exports, but again as
a means of financing imports and
progressively eliminating the
dependence on foreign aid.
• Fifth Plan: Took into account the
expanding market potential for
new and dynamic exports:
Engineering goods, Garments,
Leather, and Marine products.
• There was no discernable shift in
foreign trade policy, except for
preference for exports not needing
a subsidy and use of imports to
build buffer stocks of mass
consumption goods as a contra-
inflationary measure.
Volume of export growth:
• 1950s: 2.9 % • Cotton textiles,
• 1960s: 3.4 % tea, and Jute
• 1970s: 7.6 % manufactures >
50 %
Volume of export growth:
• 1950s: 2.9 % • Engineering
• 1960s: 3.4 % Goods, Leather,
• 1970s: 7.6 % Chemicals,
Garments, marine
products.
 Liberalisation:
• The Gulf war of 1990, made the situation
worse.
• Sharp rise of international oil price and spot
purchases made to prevent the emergence of
shortages in the domestic economy.
• Airlifting of India workers in Kuwait,
• The cessation of their remittance and,
• Disruption of exports to West Asia contributed
to the poor trade performance and BoP.
• With the increasing erosion of
confidence in the Govt’s ability to
manage the economy, from August
1990 to May 1991 saw a series of
steps reductions in international
credit rating. Of India.
• Drying up of external commercial
loans and NRI deposits were
significant contributors to the BoP
crisis.
• India had to draw US $ 2.4 billion
from IMF in July 1990 and Jan
1991. In spite of this there was a
sharp decline in Forex reserves.
• In July 1991 forex reserves were
about Rs. 2600 crores which was
sufficient to finance imports for 15
days.
• Under these circumstances, the
new minority Govt. In June 1991
brought about economic reforms.
1. Withdrawal of cash subsidy for
exports.
2. Devaluation of 23 % in the
exchange rate of Rupee.
3. Imports were linked to exports
through EXIM Scrips.
4. Most exports were entitled to get
EXIM Scrips @ 30 % of export
value.
5. The Scrips were tradable.
INSTRUMENTS OF TRADE
POLICY:
(Import trade restrictions / Trade
protectionism)
• Protecting home market from foreign
competition (but trying to gain access to
the markets of others for their exports)-
WHY ?
• REASONS:
• Political + Economic reasons
• To protect domestic producers and jobs
from foreign competition.
 METHODS OF TRADE
PROTECTION:
• 1. Tariffs: It is the oldest and simplest form of
trade barrier. It is a tax levied on exports.
• Specific tariffs: are levied as a fixed charge
for each unit (e.g.: $ 3 per barrel of oil).
• Ad-valorem: as a proportion of the value of
the imported goods.
• Objectives of the govt.?
• Who suffers and who gains ?
Other forms of protectionism:
• Import Quota:
• 1. Tariff quota: Import of a commodity
upto a specified vol. Is permitted to
enter a country at a specially low rate of
duty (or free duty). In case the import
goes above a specified vol. The
increased import duty is levied.
• 2. Unilateral quota
• 3. Bilateral quota
• 4. Mixing quota: Utilisation of certain
proportion of RM.
• 5. Import Licensing: To avoid various
difficulties in allotting quotas. This
method makes an even distribution of
quotas between different suppliers is
ensured without in any way disrupting
the market.
 WTO / GATT
• General Agreement on Tariff and Trade
was signed in 1947.
• Objective: to reduce trade barriers such
as tariff in order to bring about free
trade, so that the world could benefit
from more efficient specialisation.
 WTO encourages:

• 1. Liberalized trade

• 2. Non discrimination

• 3. No unfair encouragement of exports.