Balance of Payments

BALANCE OF PAYMENTS

• It is a double entry system of record of all economic transactions between the residents of the country and the rest of the world carried out in a specific period of time.

• It takes into account the export and import of both visible and invisible items.

BOP statement includes

• All the receipts on account of goods exported• Services rendered• Capital received by residents• Payments of residents• Capital transferred to foreign

Balance of trade• It deals with exports and imports of

visible items only.• It takes into account only merchandise

exports & imports only.

Components of Balance of Payments

• Current account• Capital account

Current Account

– It includes visible exports and imports, and invisible items like receipts and payments for various services.

– It contains credit and debit items.– Credit includes merchandise exports and invisible

exports.– Debit includes merchandise imports and invisible

imports.

BOP position of India on current account• Its position is satisfactory at first five year plan. During

the period inflow of foreign capital was 127 cr. Deficit of current account was only 42.3 cr.

• The second and third five year plans recorded negative balance of payments.

• The fourth and fifth five year plans recorded positive balance of payments with 100 cr. and 3082 cr. respectively.

• From 1985-86 to 1989-90 Balance of Payments are negative.

• During 2001-02 to 2004-05 India have surplus of BOP, but 2005-06 onwards it suffered with the deficit. Again India experienced positive BOP in 2008-09.

Reasons for Deficit Balance• Government liberalized imports in 1985 this leads to

the increase in imports significantly.• the Gulf war in 1990’s• the rapid industrialization (import of capital goods,

technology, etc.)• the slow growth of invisibles• the devaluation/depreciation of rupee against

importing countries• 1990-91 crisis• less exports

Capital Account

• It is divided into – private capital– banking capital and – official capital

Private capital• Long term (> 1 year)

» Foreign investments» Long term loans» Foreign currency deposits» Estimated portion of the unclaimed receipts allocated to the CA

• Short term (< 1 year)

Bank capital

• External financial assets• Liabilities of commercial and

cooperative banks authorized to deal in foreign currency

Official capital– RBI’s holdings in terms of foreign currency & Special

Drawing Rights– Capital outflow from home country to a foreign country

is treated as debit.– The inflow of capital from a foreign country to home

country is credit.– Credit includes foreign long-term investment in the

home country and short term investment in the home country

– Debit includes long term investments in foreign country and short term investments in foreign country.

Unilateral payment/transfers account

– These are ‘giving the gifts’– These include Government grants, private

remittances, disaster relief, etc.• Ex. India gave grant to an African country it is debit side

of India’s BOP a/c and credit side of the African country.

Official Settlements Account

• The official sales of foreign currencies and other reserves to foreign countries or official purchases of foreign currencies or other reserves from foreign countries.