session 12-Balance of Payments

8/7/2019 session 12-Balance of Payments

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Balance of PaymentsBalance of Payments

Dr. Utpal Chattopadhyay

Asst. Professor, NITIE.


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ConceptsConcepts Balance of payments (BoP) is a systematic record of all

economic transactions between the residents of a country and

the rest of the world. Like all double-entry book keeping accounts it always balances,

i.e. sum of credit entries equals sum of debit entries. There are two types of accounts in BoP, viz. Current Account It records transfers of goods and services i.e., merchandise

trade and net invisibles which includes services like travel,transportation, insurance etc. and transfer payments.

Capital Account It shows transfers of claims to money or titles to investment

between a country and the rest of the world. In includesforeign investment inflows minus the foreign investment

outflows, loans including external assistance and externalcommercial borrowings (inflow-outflow) and other forms ofcapital.

A current account deficit is financed through net inflow of capital on the capital account and the changes in the Govtsforeign exchange reserve position.


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Indias BoP : April-June 2008 (US$ million) Source: RBI Credit Debit Net

A.CURRENT ACCOUNT

I. MERCHANDISE 43703 75277 -31574

II.INVISIBLES (a+b+c) 37730 16880 20850

a) Services 21969 11508 10461

b) Transfers 12188 666 11522

c) Income 3573 4706 -1133

Total Current Account (I+II) 81433 92157 -10724

B. CAPITAL ACCOUNT

1. Foreign Investment 53161 47252 5909

2.Loans 13643 9560 4083

3. Banking Capital 19025 16290 2735

4. Rupee Debt Service - 30 -30

5. Other Capital 2585 2067 518

Total Capital Account (1to5) 88414 75199 13215

C. Errors & Omissions - 256 -256

D. Overall Balance 169847 167612 2235

(Total Capital Account, Current Account and Errors & Omissions(A+B+C))

E. Monetary Movements (i+ii) - 2235 -2235

i) I.M.F. - - -ii) Foreign Exchange Reserves - 2235 -2235


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Trends in Indias BoPTrends in Indias BoP During 1950s & 1960s

Prior to 1956-57, when India faced BoP crisis, the countrymostly had current account surplus.

The BoP crisis of 1956-57 precipitated the imposition ofexchange controls which then became endemic to the import-substitution regime.

The BoP position deteriorated once again in 1966-67,

following Indo-Pak war in 1965 (USA suspended its aid). The Indian Rupee was devaluated (by 36.5%) in June 1966. Tariffs and export subsidies were simultaneously rationalized. BoP improved after 1966-67 largely due to decline in imports

(exports performed indifferently despite devaluation). During 1970s (A Decade of Comfort)

During this period Indias BoP remained comfortable, mainlydue to buoyant exports, spurt in private transfer receipts andinflow of aid.

At the close of the decade the foreign exchange reservesstood at US$ 7361 million sufficient for seven months imports.


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Trends in Indias BoPTrends in Indias BoP Upto 1981-82 ( A Period of Difficulties)

During the eighties, issues relating to the balance of payments came to occupy the centre stage in terms of Indias macro-economic management.

Between 1978-79 and 1981-82 , imports almost doubled(the increase in POL imports accounted for a little over halfthe increase in the overall imports).

Export performance was depressed by the severe

international recession of 1980-83. (exports in vol. grew bya little over 3% p.a.).

Net invisible receipts continued to provide support to BoP(tourism, private transfers played important role).

However, growing merchandise trade deficits resulted in acurrent account deficits to the tune of US$ 3166 million in

1981-82 (1.8% of GDP). Adjustments efforts consisted essentially of an Extended

Fund Facility negotiated with the IMF, although there wasalso intensified efforts to improve domestic crude oilproduction.


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Trends in Indias BoPTrends in Indias BoP During 1982-83 to 1984-85 (Easing of Pressure) A reprieve came during the period, mainly due to a decline in volume

growth of imports . Net oil imports declined substantially as domestic production spurted

by 1984-85. Exports, however, grew only at a moderate rate of 3.2% p.a.,

invisibles account deteriorated and private transfers stagnated. Current account deficits fell to US$ 2416 million in 1984-85. Commercial borrowings, non-resident deposits and external

assistance accounted for the majority of the financing requirements. During 1985-90 (The Build-up to the Crisis) Current account deficits remained at a high level in spite of robust

growth in exports (share of manufactured exports went up to 75% in1989-90).

The volume of POL trade almost doubled between 1985 and 1990.

The non-POL rose sharply partly due to large imports of food grains.Imports of capital goods also increased significantly. The current account deficit was high at 2.4% of GDP. The period also marked a deterioration in fiscal imbalances (GFD

rose to 8.2% of GDP). External debts doubled.


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Trends in Indias BoPTrends in Indias BoP BoP during 1990-92 (The Crisis) The 1985 Export-Import Policy led to a wave of

indiscriminate liberalization of imports. Import liberalization measures resulted in the emergence of

the huge deficits in the balance of trade (export promotionhas not been commensurate with the increase of imports).

In 1991, India found itself in its worst balance of payments

crisis since 1947. Foreign currency reserves were depleted rapidly. Matters were made worse by an accompanying double-digit

inflation in 1990-91. The oil price increase resulting from Iraqs invasion of

Kuwait in August 1990 reinforced the crisis-like situation in

India. A net outflow of NRI deposits commenced in Oct. 1990 and

continued during 1991. The crisis forced to opt for economic reforms programme. A

series of changes were introduced in the industrial policyand trade policy with a view to improve efficiency,

productivity and international competitiveness of Indiaseconomy.


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Trends in Indias BoPTrends in Indias BoP

BoP during 1993-94 & Beyond

Initial response of the economy, especially exports, was verygood (exports grew by about 20% between 1993-94 and1995-96).

But the boom was short lived as Indias export performance

started declining since 1996. Deficit on trade account touched alarming level of US$ 1.6

billion in 1997-98.

A current account surplus for the third consecutive year,coupled with an expanding capital account reversed theprevious trend and by 2003-04 India had a foreign exchange

reserve of about US$ 31.4 billion. The year 2004-05 marked a significant departure with the

current account, after three consecutive years of surplus,turned into a deficit.


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Trends in Indias BoPTrends in Indias BoP

The current account has followed an inverted U shapedpattern during the period 2001-02 to 2006-07, rising to asurplus of over 2% of GDP in 2003-04. Thereafter it hasreturned close to its post-1990s reform average, withcurrent account deficit of 1.2% (of GDP) in 2005-06 and

1.1% in 2006-07. Capital flows have been on a clear uptrend during the six

years 2001-02 to 2006-07.

With capital inflows exceeding financing requirements,foreign exchange reserve was on the rise.

With continuous reforms in policies, FDI inflows hasaccelerated in the recent years. On a gross basis, FDIinflows into India has increased from US$ 6.2 billion in2001-02 to US$ 23.0 billion in 2006-07.


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FDIFDIInflowsInflows


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FDIFDIOutflowsOutflows


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Indias Export & Import PerformanceIndias Export & Import Performance

0

50000

100000

150000

200000

250000

1990-91 2000-01 2003-04 2004-05 2005-06 2006-07

Exports Imports

Source: Economic Survey2007-08

Year E x p o rts Im p o rts

1 9 9 0 -9 1 1 84 7 7 2 7 9 1 5

2 0 0 0 -0 1 4 5 4 5 2 5 7 9 1 2

2 0 0 3 -0 4 6 6 2 85 80 0 0 3

2 0 0 4 - 0 5 85 2 0 6 11 89 0 8

2 0 0 5 -0 6 1 0 5 1 5 2 1 5 7 0 5 6

2 0 0 6 -0 7 1 2 80 83 1 9 1 2 5 4

Indias Foreign Trade( In US $ million)


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Balance of TradeBalance of Trade

Ever since the beginning of planning era in 1951,India has continued to suffer from an unfavorablebalance of trade.

The only exceptions to this trend have been theyears 1972-73 and 1976-77 when India had

positive trade balance.

The gap between imports and exports though wasnarrow at the beginning had widened over the

years.

This has happened because exports from Indiahave not been able to keep pace with high growth

rate of imports.


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Growth in Exports & ImportsGrowth in Exports & Imports

7.7

23.4

27.3

42.7

33.8

24.525.9

20.3 21.1

30.8

22.6 21.6

19.4

8.3

0

5

10

15

20

25

30

35

40

45

1990-91 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Exports Imports

Annual per cent change in value (in US$ terms)


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Large increase in Imports In terms of value Indias imports have increased sharply

since 1950-51 (e.g., import has jumped from 1,273 US$million in 1950-51 to 1,85,747 US$ million in 2006-07).

Some of the factors that have contributed to this massiveimport growth are:

Large increase in developmental imports: Under the plannedeconomic development programme there has beencontinuous expansion in imports of capital goods, machineryand raw materials.

Large increase in import of petroleum: Petroleum, oils and

lubricants (POL) accounts for a major part of Indias imports.Petroleum being the major source of energy and also a rawmaterial to some industries there has been massive increasein its demand in the country. The domestic production alwaysfell short of demand and the gap was filled by imports.

Import of Fertilizers.

Causes of Unfavorable Trade BalanceCauses of Unfavorable Trade Balance


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Commodity Composition ofCommodity Composition ofImportsImports

Commodity

Year (Figures in per cent)

2000-01 2005-06 2006-07 2007-08

Food & allied pdts. 3.30 2.50 2.90 2.20

POL 31.30 29.50 30.60 31.00

Fertilizer 1.30 1.30 1.60 1.90

Capital Goods 10.50 15.80 15.40 13.20

Chemicals 5.90 5.70 5.20 5.20

Electronic Goods 7.00 8.90 8.60 8.90

Others 40.70 36.30 35.70 37.60

Total 100.00 100.00 100.00 100.00

Source: Economic Survey 2007-08


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Causes of Unfavorable Trade BalanceCauses of Unfavorable Trade Balance

Modest growth of exports The following external and internal factors can be

held responsible for this.

External factors:

Low world demand Low income and price elasticity of goods exported

Import restrictions by foreign countries (tariff,NTBs)

Disintegration of the Soviet Union Internal factors:

Increasing domestic demand

Low quality and high cost of production.


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Measures to Correct Deficits in BalanceMeasures to Correct Deficits in Balanceof Tradeof Trade

The GOI has been adopting and implementing a number ofmeasures for restricting imports and promoting exports.

Restriction on Import:

Licensing of Imports (not a very import measure now a days)

Tariff Restrictions

QRs ( on the way out under WTO system)

Export Promotion:

Such measures include both monetary and non-monetarymeasures. Some of the important measures are:

Devaluation of Rupee Cash assistance to exporters to compensate them for

indirect taxes levied on the imported inputs.

Income tax concessions (e.g. profits from exports areexempted from IT).


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Measures to Correct Deficits inMeasures to Correct Deficits inBalance of TradeBalance of Trade

Concessional bank credit to exporters

Import license to exporters

Relaxation of controls on exports and

simplification of procedures Establishment of

Export processing Zones (EPZs)

Special Economic Zones (SEZs)

Export Promotion Councils Specialized financial institution like Export Import

(Exim) Bank.

session 12-Balance of Payments

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