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Balance of payment

DEFINITION PURPOSE OF BOP BALANCE OF PAYMENT ACCOUNTS TYPES OF ACCOUNTS STRUCTURE OF BOP ACCOUNT BALANCE OF TRADE EQUILIBRIUM DISEQUILIBRIUM CORRECTIVE MEASURES BOP ADJUSTMENTS INDIAS PAST & CURRENT BOP SCENARIO

Agenda

Definition
A Balance of Payment (BOP) account is a systematic record of all economic transactions (involving foreign payments) between residents of a country and the rest of the world carried out in specific period of time.

Purpose Of BOP
Provides data for economic analysis Reveals changes in the composition & magnitude of foreign trade Provides indications of future repercussions of countrys past trade performances Reveals the weak and strong points of a countrys foreign trade relations

TERMINOLOGIES
Favorable Balance Of Payments Value of total receipts > total payments Adverse Balance Of Payments Value of total receipts < total payments Balanced Balance Of Payments Value of total receipts = total payments Unrequited receipts
Receipts for which nothing has to be paid in return.

Unrequited payments
Payments for which nothing is received in return.

Balance of Trade
Definition: Difference between value of exports and imports of visible items only
BOT BOP

Records only transactions of Records transactions relating visible goods to both visible & invisible goods and services Does not record transactions of capital nature transaction of Records capital nature A part of current account of BOP Includes BOT, Balance of services, Balance Of Unrequited Transfers and Balance Of Capital Transactions.

BALANCE OF PAYMENT ACCOUNTS


CURRENT ACCOUNT
Visible items

CAPITAL ACCOUNTS
Short-term capital movement

Invisible items

Long-term capital movement

Unrequited transfers

Change in stock of gold & Reserves of Foreign Exchange

CURRENT ACCOUNT
All transactions relating to goods, services and unrequited transfers constitute current account Flow of items pertaining to specific period of time Visible items include goods Invisible items include services

Structure of current account


Transactions Credit Debit Net Balance

1. Merchandise
2. Foreign Travel 3. Transportation 4. Insurance (Premium) 5. Investment Income 6.Government (purchase of goods & services)

Export
Earning Earning Receipt Dividend Receipt Receipt

Import
Payment Payment Payment Dividend Payment Payment

CURRENT A/C Balance

Surplus (+) Deficit (-)

CAPITAL ACCOUNT
All transactions indicating changes in stock magnitudes concerning capital receipts and payments constitute capital account Relates to - Borrowing - Capital repayment - Sale of assets - Change in stock of gold - Change in reserve of foreign currency

Short term capital movement includes:


Purchase of short term securities Speculative purchase of foreign currency Cash balances held by foreigners Net balance of current account

Long term capital movement includes:


Investments in shares, bonds, physical assets etc. Amortization of capital

DIFFERENCE BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT


CURRENT ACCOUNT CAPITAL ACCOUNT

Indicates flow aspect of countrys national transactions Relates to goods , services and unrequited transfers

Indicates changes in stock magnitudes Relates to all transactions constituting debts and transfer of ownership

STRUCTURE OF BALANCE OF PAYMENTS ACCOUNT


CREDITS DEBITS

Current A/c: Exports of goods(Visible items) Exports of services (Invisibles) Unrequited receipts(gifts , remittance, insurances, etc. form foreigners) Capital A/c: Capital receipts (Borrowings from abroad , capital repayments by , or sale of assets to foreigners, increase in stock of gold and reserves of foreign currency etc.)

Current A/c: Imports of goods(Visible items) Imports of services(Invisibles) Unrequited payments( gifts, remittance, indemnities etc. to foreigners) Capital A/c: Capital payments (lending to , capital repayments to , or purchase of assets from foreigners, reduction in stock of gold and reserves of foreign currency etc.)

Total Receipts

Total Payments

An Example
Let us consider the following hypothetical situation: Export of goods Rs. 550 Crore Import of goods Rs. 650 Crore Export of services Rs. 150 Crore Import of services Rs. 70 Crore Unrequited receipts Rs. 100 Crore Unrequited payments Rs. 80 Crore Capital receipts Rs. 200 Crore Capital payments Rs. 200 Crore.

Balance Of Payment Account


Credits Current A/c: 1) Export of goods 550 2) Export of services 150 3) Unrequited receipts 100 Debits Current A/c: 1) Import of goods 650 2) Import of services 70 3) Unrequited payments 80

Capital A/c: 1) Capital receipts Total receipts

Capital A/c:

200

1) Capital payments

200

1000

Total payments

1000

EQUILIBRIUM IN BOP ACCOUNTS


Total receipts equals total payments arising out of transfer of Goods and services Other transactions These transactions are classified as: Autonomous transactions Induced transactions or Accommodating capital flows

In the current account autonomous transactions are the export and import of goods and services When export is not equal to import, short run capital movements such as international borrowing and lending take place, which are called induced or accommodating transactions

In the capital account the export and import of long term capital are autonomous transactions The short term capital movements viz. gold movements and accommodating capital movements on account of autonomous transactions are induced transactions.

Example of Autonomous and Accommodating transactions


Credits Current A/c
Autonomous transactions

Debits Current A/c


Autonomous transactions

1. Export of goods 550 2. Export of services 150 3. Unrequited receipts Gifts 75 Capital A/c 25
Accommodating transactions

1. Import of goods 800 2. Import of services 50 3. Unrequited payments Gifts 20 Capital A/c 60
Accommodating transactions

1. Borrowings

1. Lending

Disequilibrium
Total receipts and total payments inequality shows disequilibrium of balance of payments account Total receipt and payment arising from autonomous transactions determine the deficit or surplus in the balance of payments

If payments>receipts, BOP shows Deficit If payments<receipts, BOP shows Surplus

CAUSES OF DISEQUILIBRIUM
Increase in imports
Slow progress in exports Burden of interest payments International developments Deficit in capital account

Corrective Measures
Devaluation Export promotion Import restrictions Import substitution Government intervention Supply of credit Special treatment to NRIs Announcement of trade policies Foreign aid Improvements in production efficiency

BOP Adjustments
INDIRECT MEASURES Income measures
Fiscal Policy Monetary Policy

Price measures DIRECT MEASURE Exchange control

Variations in Indias deficit position


1991-1995:- Equal growth of exports & imports 1995-1999:- Growth of imports& stagnation of exports(widening of trade deficits) 1999-2000:- Exports recovered while imports surged(continued rise in trade deficits) 2000-2001:- Rise in exports &stagnation of imports(normal level of trade deficit)

Indias current BOP position


Remained comfortable during 2007-08

Increase in net inflows by FIIs


Increase in FDI inflows Increase in net surplus