Project Report

On

BALANCE OF PAYMENT

Sumeet Singh
M
BA (Gen)
Roll .No.= 89
Sec =
B

Contents

Sr.No. Subject Covered Page No.

1 Introduction 3

Components of
2 4-6
Balance of Payments
Balance of Payments
3 7 -9
Disequilibrium
It e m s Wh i ch F al l
4 Un de r C AP IT AL AC C OU NT an d
10 - 11

CU R R E NT AC C OU NT

Detailed Outline of the

5 12 - 13
BOP Statement & Sub
Accounts

2
Introduction

The balance of payments of a country is a systematic record of

all economic transactions between the residents of a country
and the rest of the world. It presents a classified record of all
receipts on account of goods exported, services rendered and
capital received by residents and payments made by theme on
account of goods imported and services received from the
capital transferred to non-residents or foreigners.

-
Reserve Bank of India

The above definition can be summed up as following: - Balance

of Payments is the summary of all the transactions between the
residents of one country and rest of the world for a given period
of time, usually one year

The balance of payments of a country is a systematic record of

all economic transaction between residents of that country and
the rest of the world during a given period of time. To spot
whether it is becoming more difficult for debtor countries to
repay foreign creditors, one needs a set of accounts that shows
the accumulation of debts, the repayment of interest and
principal, and the country’s ability to earn foreign exchange for
future repayment.

3
Components of Balance of Payments:

Balance of Payments is generally grouped under the following

heads

1. Current Account
2. Capital Account
3. Unilateral Payments Account
4. Official Settlement Account.

Current Account
“The Current Account includes all transactions which give rise to
or use up national income.”

The Current Account consists of two major items, namely:

i) Merchandise exports and imports
ii) Invisible exports and imports.

 Merchandise exports, i.e., the sale of goods abroad, are

credit entries because all transactions giving rise to
monetary claims on foreigners represent credits.

 Merchandise imports, i.e., purchase of goods from abroad,

are debit entries because all transactions giving rise to
foreign money claims on the home country represent
debits.

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  Invisible exports, i.e., sales of services, are credit entries
and

 Invisible imports, i.e. purchases of services, are debit

entries.

Important invisible exports include the sale abroad of such

services as transport, insurance, etc., foreign tourist expenditure
abroad and income paid on loans and investments (by
foreigners) in the home country form the important invisible
entries on the debit side.

Capital Account
The Capital Account consists of shortterms and long-term capital
transactions. A capital outflow represents a debit and a capital
inflow represents a credit. For instance, if an American firm
invests Rs.100 million in India, this transaction will be
represented as a debit in the US balance of payments and a
credit in the balance of payments of India. The payment of
interest on loans and dividend payments are recorded in the
Current Account, since they are really payments for the services
of capital. As has already been mentioned above, the interest
paid on loans given by foreigners of dividend on foreign
investments in the home country are debits for the home
country, while, on the other hand, the interest received on loans
given abroad and dividends on investments abroad are credits.

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Unilateral Transfers Account
Unilateral transfers is another terms for gifts. These unilateral
transfers include private remittances, government grants,
disaster relief, etc. Unilateral payments received from abroad
are credits and those made abroad are debits. Official
Settlements Accounts Official reserves represent the holdings by
the government or official agencies of the means of payment
that are generally accepted for the settlement of international
claims.

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Balance of Payments Disequilibrium:
The balance of payments of a country is said to be in equilibrium
when the demand for foreign exchange is exactly equivalent to
the supply of it. The balance of payments is in disequilibrium
when there is either a surplus or a deficit in the balance of
payments. When there is a deficit in the balance of payments,
the demand for foreign exchange exceeds the demand for it. A
number of factors may cause disequilibrium in the balance of
payments.

Factors That Cause Disequilibrium :

1. Economic factors
2. Political factors
3. Sociological factors.

1) Economic Factors :
A number of economic factors may cause disequilibrium in the
balance of payments. These are:

 Development Disequilibrium
Large-scale development expenditures usually increase the
common in developing countries, because the above factors,
and large-scale capital goods imports needed for carrying out

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the various development programmes, give rise to a deficit in
the balance of payments.

 Capital Disequilibrium
Cyclical fluctuations in general business activity are one of the
prominent reasons for the balance of payments disequilibrium.
As Lawrance W. Towle points out, depression always brings
about a drastic shrinkage in world trade, while prosperity
stimulates it. A country enjoying a boom all by itselt ordinarily
experiences more
rapid growth in its imports than its exports, while the opposite is
true of other countries.

 Secular Disequilibrium
Sometimes, the balance of payments disequilibrium persists for
a long time because of certain secular trends in the economy.
For instance, in a developed country, the disposable income is
generally very high and therefore, the aggregate demand, too, is
very high. At the same time, production costs are very high
because of the higher wages. This naturally results in higher
prices. These two factors – high aggregate demand and higher
domestic prices may result in the imports being much higher
than the exports. This could be one of the reasons for the
persistent balance of payments deficits of the USA.

 Structural Disequilibrium

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Structural changes in the economy may also cause balance of
payments disequilibrium. Such structural changes include the
development of alternative sources of supply, the development
of better substitutes, the exhaustion of productive resources, the
changes in transport routes and costs, etc.
2) Political Factors
Certain political factors may also produce a balance of payments
disequilibrium. For instance, a country plagued with political
instability may experience large capital outflows, inadequacy of
domestic investment and production, etc. These factors may,
sometimes, cause disequilibrium in the balance of payments.
Further, factors like war, changes in world trade routes, etc.,
may also produce balance of payments difficulties.

3) Social Factors
Certain social factors influence the balance of payments. For
instance, changes in tastes, preferences, fashions, etc. may
affect imports and exports and thereby affect the balance of
payments. Foreign exchange reserves in India(in million us$)

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 It e m s Wh i ch F al l U n de r

C AP IT AL AC C OU NT an d CU R R E NT AC C OU NT

Credits Debits

1. Merchandise Exports (Sale 1. Merchandise Imports

of Goods) (purchase of Goods)
2. Invisible Exports (Sale of 2. Invisible Imports
Services) (Purchase of Services)
a. Transport services a. Transport services
sold abroad purchased from abroad
b. Insurance services b. Insurance services
sold abroad purchased
c. Foreign tourist c. Tourist expenditure
expenditure in country abroad
d. Other services sold d. Other services
abroad purchased from abroad
e. Incomes received on e. Income paid on loans
loans and investments and investments in the
abroad. home country.
3. Unilateral Transfers 3. Unilateral Transfers
a. Private remittances a. Private remittances
received from abroad abroad
b. Pension payments b. Pension payments abroad
received from abroad
c. Government grants c. Gover
received from abroad nment grants abroad.
Capital Account Capital Account
Foreign long-term investments Long-term investments abroad
in the home country (less (less redemptions and

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redemptions and repayments) repayments)
a. Direct investments in a. Direct Investments
the home country abroad
b. Foreign investments b. Investments in
in domestic securities foreign securities
c. Other investments of c. Other investments
foreigners in the home abroad
country
d. Foreign d. Government loans to
Governments’ loans to the foreign countries
home country.
4. Foreign short-term 4. Short-term
investments in the home investments abroad.
country.

Detailed Outline of the BOP Statement &

Sub Accounts

Balance of Payments is the summary of all the transactions

between the residents of one country and rest of the world for a

11
given period of time, usually one year. A BOP statement
(revised) includes the following sub accounts, as shown in the
table below.

Items Credits Debits Net

A. Current Account
1. Merchandise
a. Private
b. Government
2. Invisibles
a. Travel
b. Transportation
c. Insurance
d. Investment Income
e. Government (not included
elsewhere)
f. Miscellaneous
3. Transfer Payments
a. Official
b. Private
Total Current Account (1+2+3)

B. Capital Account
2. Private
a. Long Term
b. Short Term
3. Banking
4. Official
a. Loans
b. Amortisation
c. Miscellaneous
Total Capital Account (1+2+3)

C. IMF
D. SDR Allocation
E. Capital Account, IMF & SDR
Allocation (B+C+D)
F. Total Current Account, Capital
Account, IMF & SDR Allocation (A+E)

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 G. Errors & Omissions
H. Reserves and Monetary Gold

Major Items of India's balance of Payments (April-March, 2008-

09)
(In $ million)
April-March April-March
(2008-09) (P) (2007-08) (PR)
Exports 175,184 166,163
Imports 294,587 257,789
Trade Balance -119,403 -91,626
Invisibles, net 89,586 74,592
Current Account Balance -29,817 -17,034
Capital Account* 9,737 109,198
Change in Reserves# 20,080 -92,164
(+ indicates increase;-
indicates decrease)
Including errors & omissions; # On BoP basis excluding
valuation; P: Preliminary, PR: Partially revised. R: revised
SOURCE: Reserve Bank of India Report

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Inflows & Outflows from NRI Deposits and Local Withdrawals
(In $ million)
Inflows Outflows LocalWithdrawal
s
2006-07 (R) 19914 15593 13208
2007-08 (PR) 29401 29222 18919
2008-09 (P) 37,089 32,799 20,617
P: Preliminary, PR: Partially revised. R: revised SOURCE: RBI
report

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15
KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

April-March
2008-09 2007-08 2006-07
Merchandize Trade
Exports ($ on BoP 5.4 28.9 22.6
basis) Growth Rate
(percent)
Imports ($ on BoP 14.3 35.2 21.4
basis) Growth Rate
(percent)
Crude Oil Prices, Per 82.4 79.5 62.4
Barrel (Indian
Basket)
Trade Balance ($ -119.4 -91.6 -61.8
billion)
Invisibles
Net Invisibles ($ 89.6 74.6 52.2
Billion)
Net Invisibles 75.0 81.4 84.5
Surplus/Trade
Deficit (Percent)
Invisible 48.1 47.2 47.1
Receipts/Current
Receipts (Percent)
Services 30.0 28.6 30.3
Recipts/Current
Receipts (Percent)
Private 13.7 13.8 12.7
Transfers/Current
Receipts (Percent)
Current Account
Current Receipts ($ 337.7 314.8 243.4
Billion)
Current Payments ($ 367.6 331.8 253.0
Billion)
Current Account --29.8 -17.0 -9.6
Balance ($ Billion)
Capital Account 16
Gross Capital 302.5 433.0 233.3
 Gross Capital Inflows and Outflows (In $ Million)
HEADS Gross Inflows Gross Out flows
April-March April-March
200 200 2006-07 200 200 200
8-09 7-08 R 8-09 7-08 6-07
P PR P PR R
Foreign 36,25 36838 23590 18,76 21437 15897
Direct 8 2
Investment
Portfolio 128,6 23592 109620 142,6 20636 10256
Investment 51 4 85 8 0
External 5,042 4241 3767 2,404 2127 1992
Assistance
External 15,38 30376 20883 7,224 7743 4780
Commercia 2
l
Borrowings
NRI 37,08 29401 19914 32,79 29222 15593
Deposits 9 9
Banking 27,90 26412 17295 35,59 14834 19703
capital 9 6
excluding
NR
Deposits

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Short-term 39,73 48,91 29,992 45,52 31,72 23,38
trade 4 1 9 8 0
Credits
Rupee 0 0 0 101 121 162
Debt
Service
Other 12,39 20904 8230 8,210 11434 4021
Capital 1
TOTAL 302,4 43300 233291 293,3 32501 18808
56 7 10 4 8
R: Revised; P: Preliminary; PR: Partially Revised
SOURCE: Reserve Bank of India Report on Balance of Payment,
December 2008

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Business Services (In $ Million)
Item Receipts Payments
April-March April-March
2008 200 2006-07 R 2008 200 2006-
-09 P 7-08 -09 P 7-08 07 R
PR PR
Trade Related 2,00 223 1325 1,64 228 1801
8 3 2 5
Business & 4,84 443 4476 3,51 365 3484
Management 7 3 2 3
Consultancy
Architectural, 1,75 314 3457 3,10 317 3025
Engineering & 9 4 6 3
other
Technical
Maintenance 2,98 286 2638 3,28 3,49 4,032
of Offices 0 1 3 6
Others 4,65 410 2648 3,72 4,10 3,522
7 0 6 8
TOTAL 16,2 167 14544 15,2 167 15866
51 71 69 15
SOURCE: Reserve Bank of India Report on Balance of Payment,

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