Balance Of Payment

BALANCE OF PAYMENT (DRAFT-I)

Submitted Panda

to:-

Prof.

P.C

Submitted by:Debasish Dey(107) Laxmi Deep

(108)

Isha Mohanty(109) Debabrata Dash(115) Chinmaya Dash(117) Subheswari Das(118) Ravi Gupta(126)

BALANCE OF PAYMENT 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. Balance of Payments is a systematic and summary record of a country’s economic and financial transactions with the rest of the world over a period of time. (a) Transactions in good and services and income between an economy and the rest of the world, (b)Changes of ownership and other changes in that country’s monetary gold,

SDRs, and claims on and liabilities to the rest of the world, and (c) Unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting.

Nature of Balance of Payments Accounting

The transactions that fall under Balance of Payments are recorded in the standard double-entry book-keeping form,under which each international transaction undertaken by the country results in a credit entry and a debit entry of equal size,as the international transactions are recorded in the doubleentry book-keeping form, the balance of payments must always balance, i.e., the total amount of debits must equal the total amount of credits. Sometimes, the balancing item, error and omissions, must be added to balance the balance of payments.

Components of Balance of Payments

Balance of Payments is generally grouped under the following heads

i) Current Account ii) Capital Account iii) Unilateral Payments Account iv) 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, and 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. On the other hand, 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. Merchandise imports and exports form the most important international transaction of most of the countries. 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.

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.

Balance of Payments Items

Credits Debits. Current Account Current Account 1. Merchandise Exports 1.Merchandise Imports (Sale of Goods) (Purchaseof Goods)

2. Invisible Exports 2.Invisible Imports (Sale of Services) (Purchase of Services) (a) Transport Services (a) Transport Services sold purchased from abroad (b) Insurance services (b) Insurance Services sold abroad purchased from abroad (c) Foreign tourist (c) Tourist Expenditure expenditure in country abroad (d) Other services sold (d) Other services purchased abroad from abroad (e) Incomes received on (e)Income paid on loans and loans and Investment investments abroad. in home country. Capital Account Capital Account 3. Foreign long-term 3. Long-term investments abroad. investments in the home

(a) Direct investments in (a) Direct investments country. abroad the home (b) Foreign investments (b)Investments in securities in domestic foreign securities. (c) Other investments (c) Other investments abroad of foreigners abroad. 4. Foreign short-term 4.Shortterminvestments in home country. abroad Unilateral Transfers Unilateral Transfers Account Account 5. Private remittances 5. Private remittances abroad received from abroad 6. Pension Payments 6. Pension payments abroad. received from abroad. 7. Government grants 7. Government grants abroad Received from abroad Official Settlements Official Settlements

Accounts 8. Official sales of purchases of foreign currencies or other reserve services abroad assets abroad Total Credits

Account 8.

Official

foreign currencies or other Total Debits

Balance of Payments Disequilibirum

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. These various causes may be broadly categorized into: (i) Economic factors ; (ii) Political factors; and (iii) Sociological factors.

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 purchasing power, aggregate demand and prices, resulting in substantially large imports. The development disequilibrium is common in developing countries, because the above factors, and large-scale capital goods imports needed for carrying out 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. But production in the other countries will be activated as a result of the increased exports to the boom country. Secular Disequilibrium Sometimes, the balance of payments diequilibrium persists for a long time because of certain secular trends in the economy. For instance, in a developed country, the disposable income isgenerally 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 Structual 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.

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.

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$) End of Foreign Gold SDRs Reserv Total currenc e y tranch

1 2Jul

e in IMF ASSETS IN US MILLION % Rs cr. 3 5 8 10 11

114,71 8 9jul 115,40 5, 16jul 115,73 7 23jul 114,21 5 30jul 112,96 7 6aug 113,91 8 13aug 113,90 0

4,057 2

1,301

4,057 2

1,314

4,057 2

1,310

4,057 2

1,301

4,057 2

1,293

4,123 2

1,293

4,123 1

1,298

in In US million$ 12=(5+3+8 =10) 5,51,8 1,20,077 82 5,527, 1,20,778 68 5,59,0 1,21,106 71 5,52,5 1,19,575 80 5,49,4 1,18,319 02 5,54,0 1,19,336 83 5,52,0 1,19,322 66

STATEMENT 2: INDIA'S OVERALL BALANCE OF PAYMENTS (Rs crore)

Item 1 A.CURRENT ACCOUNT I. MERCHANDISE II.INVISIBLES (a+b+c) a) Services i) Travel ii) Transportation iii) Insurance iv) G.n.i.e. v) Miscellaneous of which Software Services Business Services Financial Services Communication Services b) Transfers i) Official ii) Private c) Income i) Investment Income ii) Compensation of Employees Total Current Account (I+II) B. CAPITAL ACCOUNT 1. Foreign Investment (a+b) a) Foreign Direct Investment (i+ii) i. In India Equity Reinvested Earnings Other Capital ii. Abroad Equity Reinvested Earnings Other Capital

April-June 2007 P Credit Debit

Net

April-June 2006 PR Credit Debit Net

2

3

4

5

6

7

144,155 129,609 82,721 8,610 9,105 1,719 396 62,891

233,139 59,992 44,991 7,756 11,100 759 462 24,914

-88,984 69,617 37,730 854 -1,995 960 -66 37,977

134,930 112,054 77,328 7,766 7,885 1,087 259 60,331

211,985 55,764 41,109 6,766 9,312 582 368 24,081

-77,055 56,290 36,219 1,000 -1,427 505 -109 36,250

34,806 18,469 3,641 2,115 36,121 631 35,490 10,767 10,206 561 273,764

2,297 14,886 3,538 825 1,785 684 1,101 13,216 12,210 1,006 293,131

32,509 3,583 103 1,290 34,336 -53 34,389 -2,449 -2,004 -445 -19,367

32,007 20,757 2,828 2,019 27,246 314 26,932 7,480 7,184 296 246,984

1,992 14,432 1,441 491 1,364 409 955 13,291 12,400 891 267,749

30,015 6,325 1,387 1,528 25,882 -95 25,977 -5,811 -5,216 -595 -20,765

169,531 26,530 24,345 20,737 2,919 689 2,185 2,185 0 0

136,879 24,630 87 87 0 0 24,543 22,807 1,117 619

32,652 1,900 24,258 20,650 2,919 689 -22,358 -20,622 -1,117 -619

152,041 11,886 11,586 8,376 3,174 36 300 300 0 0

147,898 5,447 36 36 0 0 5,411 3,533 837 1,041

4,143 6,439 11,550 8,340 3,174 36 -5,111 -3,233 -837 -1,041

b) Portfolio Investment 143,001 In India 142,758 Abroad 243 2.Loans (a+b+c) 65,480 a) External Assistance 3,109 i) By India 21 ii) To India 3,088 b) Commercial Borrowings (MT<) 34,282 i) By India 1,464 ii) To India 32,818 c) Short Term to India 28,089 3. Banking Capital (a+b) 30,113 a) Commercial Banks 30,113 i) Assets 9,001 ii) Liabilities 21,112 of which: Non-Resident Deposits 19,755 b) Others 0 4. Rupee Debt Service 0 5. Other Capital 13,764 Total Capital Account (1to5) 278,888 C. Errors & Omissions 2,622 D. Overall Balance 555,274 (Total Capital Account, Current Account and Errors & Omissions (A+B+C)) E. Monetary Movements (i+ii) 0 i) I.M.F. 0 ii) Foreign Exchange Reserves 0 ( Increase - / Decrease +) P: Preliminary PR: Partially Revised

112,249 112,224 25 31,034 2,046 54 1,992 5,220 1,196 4,024 23,768 38,856 38,831 10,313 28,518 21,599 25 177 9,014 215,960 0 509,091

30,752 30,534 218 34,446 1,063 -33 1,096 29,062 268 28,794 4,321 -8,743 -8,718 -1,312 -7,406 -1,844 -25 -177 4,750 62,928 2,622 46,183

140,155 140,055 100 48,831 2,619 18 2,601 22,995 414 22,581 23,217 44,729 44,402 23,904 20,498 18,980 327 0 8,121 253,722 1,736 502,442

46,183 0 46,183

-46,183 0 0 0 -46,183 0

142,451 142,446 5 28,710 2,396 41 2,355 4,993 1,014 3,979 21,321 22,040 22,040 8,535 13,505 13,382 0 305 6,734 205,687 0 473,436

-2,296 -2,391 95 20,121 223 -23 246 18,002 -600 18,602 1,896 22,689 22,362 15,369 6,993 5,598 327 -305 1,387 48,035 1,736 29,006

29,006 0 29,006

-29,006 0 -29,006

RBI has released the latest Balance of Payments for the 4th quarter (i.e. Jan-Mar) 2006-07 and alongside has released preliminary findings for the entire financial year 2006-07. Here is a quick summary:

Current Account:

Exports of goods increased by 21 % during 2006-07 compared to 23 % in 2005-06. Exports grew mainly on account of tea, spices, engineering and petro goods. Imports growth at 22 per cent in 2006-07 (32 per cent in 2005-06). Imports grew mainly on account of non-oil imports and not oil-imports as it has generally been the case. Non-oil imports increased by 25% in 2006-07 (21.8% in 2005-06). The major non-oil import items were capital goods, metalliferrous ores, metal scrap and gold and silver. Crude oil imports during 2006-07 recorded some moderation in growth at 30.4 % (47.3 % in 2005-06). The slowdown in oil imports was largely because of a moderation in crude oil prices. The average price of the Indian basket of international crude (a mix of Dubai and Brent varieties) stood at $ 62.4 per barrel during 2006-07 as compared with US $ 55.4 per barrel during 2005-06. This implies that the prices increased by 13% in 2006-07 much lower than 42% increase seen in 2005-06. In volume terms, the oil import demand rose to 13% in 2006-07 from 8 % in 2005-06, tracking the growth in industrial sector. The service exports increased by 37% in 06-07 compared to 68% in 05-06. Software exports increased by 29% on 0607 compared to 35% in 05-06.

Capital account: FDI has a larger share in foreign investments than FII, a trend last seen in 2002-03. Outward FDI and FII have also grown sharply at 273% and 85%, showing Indians appetite for investing abroad is increasing. External Commercial Borrowings have grown at a shocking rate of 491% this year and are now at about USD

16 billion. That is why RBI revised the rates corporate can pay for ECB. The total capital flows have increased by 92% and despite the increasing current account deficit, we have a huge BoP surplus at USD 36.6 billion, an increase of 143%.

THE CURRENT DEFICIT The current account for Q1 2008-09 was noted at a deficit of $10.7 bn. This is the highest quarterly current account deficit (CAD) since the quarterly figures have been available (Q1 1990). The 1991 crisis was a result of the inability to finance the CAD. So, is the current CAD a cause of concern? Current account shows the external trade position of an economy. It comprises two sub-accounts — export/import of goods and export/import of invisibles. Invisibles include services, remittances and investment income. The goods imports have always been more than exports, resulting in trade deficit. Recently, goods imports have surged mainly due to high oil prices. The widening trade deficit so far has been negated by a surge in revenue from services inflows (software). If the service inflows are less than trade deficit we get CAD, which in turn is financed by capital inflows (FDI, FII, etc) from abroad (vice-versa for current account surplus). In Q1 2008-09, the trade deficit was $31.6 bn and the net service inflows was positive $20.9 bn, implying a CAD of 10.7 bn. Capital inflows were $12.9 bn leading to an overall

surplus of $2.2 bn. The concern is not having a deficit, but financing it. In India, a widening CAD has so far been financed by buoyant capital flows. But things are expected to change looking at the current global crisis. First, pressure on oil prices is likely to continue as emerging economies expand further. Second, software exports are likely to decline tracking collapses of several foreign financial firms. The Indian software industry derives majority of its revenues from foreign financial sector and latter is clearly contracting. Third, with a global slowdown the capital inflows are also expected to decline Fourth, the goods exports are also expected to decline, as demand in other economies contracts. In all, CAD levels are expected to decline but the deficit is likely to continue. The silver lining is the ample forex reserves held by the RBI. Those would help India finance its oil bills and manage the global slowdown. A combined effect of rapid economic growth, import liberalisation and rising oil prices in 2007-08 has been a balance of trade deficit expanding to $80 bn. This year it may expand further to $100 bn. Although services and invisibles have been helping in moderating the current account deficit, it is beginning to look worrisome as services export growth is also tapering off. Current account deficit helps India absorb foreign savings.

As long as current account deficit is bridged through capital inflows such as foreign direct investments (FDI), it should be fine as it leads to addition of capital stock. However, we have to be cautious while bridging this deficit with short-term capital flows or borrowing huge amounts in international ,as they can bring instability or push us into a debt trap.

PROPOSED SOLUTION:In the medium and long run we need to strengthen and expand the base of Indian exports so that we have a more sustainable balance of payments situation. India should consolidate her presence in traditional export industries such as textiles, clothing, leather goods, gems and jewellery, Agricultural and horticultural products. With our labour cost advantage eroding over time, the competitiveness will have to be sustained by internalising the full value chain While consolidating Indian advances in generic pharmaceuticals, small cars, two wheelers, and metals, we need to develop new industries leveraging our large and expanding market to containing imports and for new avenues for exports. A domestic mobile handset production base has been built but what about a large personal computer manufacturing base especially in view of our skills base and software capabilities? A Nano type innovation could help in developing a major industry.

We should also seek to develop new scale-intensive, exportoriented industries such as aerospace, ship building and multiply power and telecom equipment producers. The time has come for giving a new thrust to industrialisation to generate exports and substitute imports for a more sustainable BoP while generating output and jobs for millions

Our view is: Current Account deficit has widened by only 5% in 06-07 compared to 70% in 05-06 and is at about 1% of GDP. As the Rupee has been appreciating (it is now in the 41 Rs= 1$ compared to 43.5-44 range till March 31, 2007) the trade balance should worsen (as imports get cheaper and exports expensive). It is already happening as per the latest press release, imports have been rising and exports slowing. So it would all depend on how much RBI intervenes in Forex markets. If it doesn’t given the high capital flows, the currency would appreciate. But then India has a current account deficit and the currency should depreciate!! If RBI lets the exchange rate to markets it would be interesting to see the rupee level ahead. Another problem is with high investments needed in infrastructure we would need extra foreign capital, as currently investments are more than available savings (as per latest CSO estimates, Savings is 35% of GDP and Investments 37% of GDP) . That means more investments and which means more current account deficit. So, it is a bit of a mixed story and let’s see how things move ahead.

EFFEECTS OF RECENT ECONOMIC CRISIS ON BALANCE OF PAYMENT India’s balance of payment fell by close t o$10 billion during the week ended 10thOctober 20, 2008,a record fall mainly due to heavy dollar sales by the central bank to stem the fall in the value of the local currency. According to data released by the Reserve Bank Of India, the total foreign exchange reserve, including gold and SDR, dipped to $ 274 billion during the week ended October 10 from $291.9 at the end of September. This is the third straight week that the Forex stockpile has fallen with the slide in the past two weeks being specially severe. The past fortnight also marked the period when foreign portfolio investors sold stocks in droves, forcing the central bank to sell dollars to pour up the rupee. India- the fourth largest holder of foreign exchange reserves in Asia after China ,Japan and Taiwan-has seen reserves sliding since the start of the fiscal. Starting from end march the Forex stockpile has shrunk by

close to $35 billion, forcing policymakers to recently unveil measures to boost inflows like a higher investment limit for FIIs in corporate debt and also allowing banks to offer higher rates on deposits for non-resident Indians. The scenario now is in stark contrast to the same period a year ago, when reserves rose by $57 billion. India is not alone on this count. Other emerging Asian economies, too, have been scarred. STATEMENT 2 : INDIA'S OVERALL BALANCE OF PAYMENTS (Rs.crore) April-June 2008 P April-June 2007 PR Credit Debit Net Credit Debit Net 2 3 4 5 6 7

Item 1 A.CURRENT ACCOUNT I. MERCHANDISE II.INVISIBLES (a+b+c) a) Services i) Travel ii) Transportation iii) Insurance iv) G.n.i.e. v) Miscellaneous of which Software Services Business Services Financial Services Communication Services b) Transfers i) Official ii) Private c) Income i) Investment Income ii) Compensation of Employees Total Current Account (I+II)

182,049 313,573 -131,524 147,421 232,781 157,169 70,316 86,853 119,993 60,615 91,515 47,938 43,577 77,620 41,627 10,431 8,994 1,437 8,610 7,756 10,143 13,813 -3,670 7,855 10,276 1,408 933 475 1,522 759 542 462 80 396 462 68,991 23,736 45,255 59,237 22,374

-85,360 59,378 35,993 854 -2,421 763 -66 36,863

44,389 3,570 40,819 36,435 3,282 16,962 13,430 3,532 16,411 13,170 3,103 2,612 491 2,598 2,528 2,474 941 1,533 2,115 825 50,770 2,774 47,966 32,786 1,785 629 504 125 631 684 50,141 2,270 47,841 32,155 1,101 14,884 19,604 -4,720 9,587 17,203 14,238 18,229 -3,991 9,298 16,387 646 1,375 -729 289 816 339,218 383,889 -44,671 267,414 293,396

33,153 3,241 70 1,290 31,001 -53 31,054 -7,616 -7,089 -527 -25,982

B. CAPITAL ACCOUNT 1. Foreign Investment (a+b) a) Foreign Direct Investment (i+ii) i. In India Equity Reinvested Earnings Other Capital ii. Abroad Equity Reinvested Earnings Other Capital b) Portfolio Investment In India Abroad 2.Loans (a+b+c) a) External Assistance i) By India ii) To India b) Commercial Borrowings (MT<) i) By India ii) To India c) Short Term to India i) Suppliers' Short Term to India Credit >180days & Buyers Credit ii) Suppliers' Credit up to 180 days 3. Banking Capital (a+b) a) Commercial Banks i) Assets ii) Liabilities of which: Non-Resident Deposits b) Others 4. Rupee Debt Service 5. Other Capital Total Capital Account (1to5) C. Errors & Omissions D. Overall Balance (Total Capital Account, Current Account and Errors & Omissions (A+B+C)) E. Monetary Movements (i+ii) i) I.M.F. ii) Foreign Exchange Reserves ( Increase - / Decrease +) P: Preliminary. PR: Partially Revised.

221,448 196,833 24,615 174,986 133,275 51,642 9,498 42,144 31,985 21,026 50,646 92 50,554 28,864 87 42,656 92 42,564 21,310 87 7,169 7,169 7,096 821 821 458 996 9,406 -8,410 3,121 20,939 996 6,398 -5,402 3,121 18,065 1,129 -1,129 1,117 1,879 -1,879 1,757 169,806 187,335 -17,529 143,001 112,249 169,727 187,131 -17,404 142,758 112,224 79 204 -125 243 25 56,832 39,823 17,009 68,339 31,084 3,787 2,324 1,463 3,019 2,025 25 33 -8 25 29 3,762 2,291 1,471 2,994 1,996 11,589 5,095 6,494 34,113 5,291 1,687 804 883 1,464 1,196 9,902 4,291 5,611 32,649 4,095 41,456 32,404 9,052 31,207 23,768 38,557 32,404 2,899 79,250 67,857 79,250 67,395 35,545 31,692 43,705 35,703 37,744 34,358 462 125 10,768 8,610 368,298 313,248 1,069 707,516 698,206

-

9,310 9,310

6,153 28,382 23,768 2,899 2,825 11,393 35,260 39,049 11,855 35,260 39,024 3,853 10,486 11,797 8,002 24,774 27,227 3,386 21,619 23,462 -462 25 -125 177 2,158 4,070 7,546 55,050 282,655 211,131 -1,069 641 9,310 550,710 504,527

-9,310 -9,310

-

46,183 46,183

41,711 10,959 28,777 21,223 7,096 458 -17,818 -14,944 -1,117 -1,757 30,752 30,534 218 37,255 994 -4 998 28,822 268 28,554 7,439 4,614 2,825 -3,789 -3,764 -1,311 -2,453 -1,843 -25 -177 -3,476 71,524 641 46,183

-46,183 -46,183

oleObject1

Source:A) Primary datas from Prof. P.C Panda B) Web & Media www.rbi.org www.investopedia.com www.wikipedia.org www.boj.or.jp/en/ www.indiastat.com/india/ShowData.asp?secid=53&ptid=8&level=2 83k

-

www.rocw.raifoundation.org/management/mba/internationaltrade/lect ure-notes/lecture-14.pdf -www. informationbible.com/BalanceOfPayment.html The Economic Times

The Times Of India