Balance of Payments

By: Dr.
Neelam Tandon
What Is BOP ?
The balance of payments accounts are those that record all
transactions between the residents of a country and residents
of all foreign nations.
The BOP is determined by the country's exports and
imports of goods, services, and financial capital, as well as
financial transfers.
It reflects all payments and liabilities to foreigners (debits)
and all payments and obligations received from foreigners
(credits).
Balance of payments is one of the major indicators of a
country's status in international trade
BOP consists of
The Current Account
The Capital Account
Official Reserves Account
Errors and Omissions

Current Account
Includes all imports and exports of goods and services.
Includes unilateral transfers of foreign aid.
If the debits exceed the credits, then a country is running a
trade deficit.
If the credits exceed the debits, then a country is running a
trade surplus.
Current Account
1. Export & Import of Merchandise & Services
2. Income Account
(The income account accounts mostly for investment
income from dividends and interest on credit and
payments on foreign taxes.)
3. Transfer payment
(Grants received / given, Pvt.Transfer)
Capital Account
1. Foreign Investment(FDI, FII)
2. Banking Capital (NRI Deposits)
3. Short term credit
4. External Commercial Borrowings(ECB)
Capital Account
If foreign ownership of domestic financial assets has
increased more quickly than domestic ownership of
foreign assets in a given year, then the domestic
country has a capital account surplus.
On the other hand, if domestic ownership of foreign
financial assets has increased more quickly than
foreign ownership of domestic assets, then the
domestic country has a capital account deficit.
Official International Reserves
The official international reserve account records the
change in stock of official international reserve
assets (also known as foreign exchange reserves) at
the country's monetary authority .
Official reserves assets include gold reserves, foreign
currencies, SDRs reserve positions in the IMF.
{Special Drawing Rights (SDRs) are potential claims
on the freely usable currencies of IMF members.}
Net errors and omissions
This is the last component of the balance of payments
and principally exists to correct any possible errors
made in accounting for the three other accounts
They are often referred to as "balancing items".

Development in India’s Balance of
Payment during the First Quarter
(April –June) of 2010-11
Merchandise
India’s merchandise exports recorded a growth of 37.2
percent year-on-year in Q1 of 2010-11 as against a decline of
31.8 per cent in Q1 of 2009-10.
Merchandise imports registered a growth of 35.7 per cent
during Q1 of 2010-11 as against a decline of 21.7 per cent
during Q1 of 2009-10.
Cont---
The increase in imports during the current year partly
reflected the impact of higher international crude oil
prices.
Notwithstanding higher growth in exports relative to
imports, the trade deficit, on a BOP basis, was higher
at US$ 34.2 billion in Q1 of 2010-11 as compared with
US$ 25.6 billion during Q1 of 2009-10
Invisibles
Invisibles receipts recorded a growth of 13.6 per cent, on year-on-
year basis, during Q1 of 2010-11 mainly led by services exports.
Services exports registered a growth of 22.5 per cent led by travel
and transportation as well as miscellaneous services such as
software, business and financial services.
Business services receipts increased during Q1 of 2010-11 mainly
due to trade-related services and business and management
consultancy services.
Cont---
Invisibles payments recorded a growth of 35.5 per
cent (as against a decline of 5.7 per cent a year ago)
mainly due to higher payments under investment
income and also on account of higher payments under
travel, transportation, business and financial services.
The lower size of invisibles surplus coupled with a
higher trade deficit resulted in an increase in current
account deficit during Q1 of 2010-11 to US$ 13.7
billion
Capital Account
Both gross capital inflows to India and outflows from
India increased during Q1 of 2010-11 as compared to last
year. Gross capital inflows to India were higher at US$
95.3 billion (US$ 77.1 billion a year ago) mainly led by
portfolio investments and short-term trade credit. On the
other hand, gross capital outflows were higher at US$
76.9 billion (US$ 73.1 billion a year ago) driven by
portfolio investments, FDI and NRI deposits
Capital Account
Sector-wise, the deceleration in FDI to India (i.e., inward
FDI) was mainly on account of lower FDI inflows under
construction, real estate, business and financial services.
Gross FDI by India (i.e., outward FDI) was marginally
higher at US$ 3.1 billion (US$ 2.8 billion in Q1 of 2009-
10).
Capital Account
Net portfolio investments were also significantly lower at US$
4.6 billion during the quarter (US$ 8.3 billion during Q1 of

2009-10), mainly due to deceleration in net FII flows largely
on account of risk aversion by global investors.
Capital Account
Net ECBs were significantly higher at US$ 2.7 billion
during the quarter (as against a decline of US$ 0.4
billion in Q1 of 2009-10) mainly due to higher
disbursements of commercial loans to India coupled
with lower repayments.
With net capital flows being higher than the current
account deficit, the overall balance was in surplus.
Capital Account
Accordingly, there was an increase in foreign exchange
reserves on BoP basis (i.e., excluding valuation) of US$ 3.7
billion during Q1 of 2010-11. In nominal terms (i.e., including
valuation changes) foreign exchange reserves declined by US$
3.3 billion during the quarter reflecting appreciation of US
dollar against major international currencies during the quarter
Factors Impacting BOP
Trade Agreement
Trade Policy
Currency Exchange Rate
Tax , Tariff and Trade Barriers
Impact Of Stimulus Package
Trade Interest
Interest subversion
Exemption of Tax
Measures for making BOP
Favorable
Diversification of Trade
Development of New Industries
Concentrate on selected sectors
Concentrating on engineering skills
Incentives related to Trade
THANKS

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By: Dr.

The Capital Account

Official Reserves Account

Errors and Omissions

They are often referred to as "balancing items".

4.6 billion during the quarter (US$ 8.3 billion during Q1 of

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