Balance of Payments

Balance Of PaymentsPresented By:

Pooja MohanAjinkya Keni

Girish patil

Balance Of Payment The balance of payment is defined as “a

systematic record of all economic transactions between the residents of a country and residents of a foreign countries”

It is presented in the form of double-entry bookkeeping.

Importance f BOP

Structure of BOPBOP

Portfolio Investment

s

Trade

Capital AccountCurrent Account

Transfer / factor

Payments

FDI/FIIs

Forex Reserves

Reserves

Gold Reserves

Invisibles NRE/NRI A/cs IMF Loans

BOP Accounts

Current Account

Capital AccountCapital Account:-

That part of balance of payments that reflects net change in national ownership of assets.

Capital Account = Foreign direct investment +Portfolio investment +Other investment

INDIA'S OVERALL BALANCE OF PAYMENTS(US $ million)

Item/Year 2010-11 2011-12 2012-13Credit Debit Net Credit Debit Net Credit Debit Net

1 2 3 4 5 6 7 8 9 10A. Current Account                  

1. Merchandise 256159 383481 -127322 309774 499533 -189759 306581 502237 -195656

2. Invisibles (a+b+c) 190488 111218 79269 219229 107625 111604 224044 116551 107493a) Services 124636 80555 44081 142325 78227 64098 145678 80763 64915

i) Travel 15793 11026 4768 18462 13762 4699 17999 11823 6176ii)Transportation 14246 13880 366 18241 16382 1859 17334 14806 2528

iii) Insurance 1945 1400 545 2632 1497 1134 2227 1409 818

iv) G.n.i.e. 535 820 -285 478 780 -302 574 813 -239v) Miscellaneous 92117 53430 38687 102513 45806 56707 107544 51912 55632

of which : Software services 53100 2194 50905 62212 1256 60957 65867 2363 63504

Business services 24050 27694 -3644 25910 26788 -878 28447 30349 -1902

Financial services 6508 7483 -975 5967 7984 -2018 4949 4633 316

Communication services 1562 1152 410 1600 1557 43 1686 741 945

b) Transfers 56265 3125 53140 66761 3267 63494 68090 4057 64034i) Official 647 631 16 632 607 25 463 772 -309

ii) Private 55618 2494 53125 66129 2660 63469 67627 3285 64342

c) Income 9587 27538 -17952 10144 26131 -15988 10276 31731 -21455

i) Investment income 8471 25546 -17075 7676 24141 -16465 7202 29572 -22370

ii) Compensation of employees 1116 1992 -876 2468 1991 477 3074 2159 914

Total Current account (1+2) 446647 494700 -48053 529003 607158 -78155 530625 618788 -8816

The BOP provides an extremely useful data for the economic analysis of the country’s 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.

USES OF BOP:-

DISEQUILIBRIUM

Total receipts and total payments inequality shows disequilibrium of balance of payments account

B = R – PWhere, 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

trade cycles. Cyclical fluctuations in demand are caused by changes in Income, employment, output & price.

Structural disequilibrium: It is caused because of fluctuation in the demand based on changes in tastes, fashions, habits, income, economic progress etc.

Short – run disequilibrium: When a country borrows or lends internationally, it will have short run disequilibrium, as these are usually for short period.

Long run disequilibrium: It occurs because of accumulation of deficits or surpluses over a long period.

Causes for India’s 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.

• 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.

Causes for India’s BOP deficit

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