Balance of Payments/ India’s Balance sheet

What Is BOP ?• The balance of payments accounts are those that

record all transactions between the residents of a country and residents of all foreign nations.

• The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.

• It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

• Balance of payments is one of the major indicators of a country's status in international trade

BOP consists of

– The Current Account

– The Capital Account

– Official Reserves Account

– Errors and Omissions

Current Account

• Includes all imports and exports of goods and services.

• Includes unilateral transfers of foreign aid.

• If the debits exceed the credits, then a country is running a trade deficit.

• If the credits exceed the debits, then a country is running a trade surplus.

Current Account 1. Export & Import of Merchandise & Services

2. Income Account(The income account accounts mostly for investment income from dividends and interest on credit and payments on foreign taxes.)

3. Transfer payment(Grants received / given, Pvt.Transfer)

Capital Account

1. Foreign Investment(FDI, FII)

2. Banking Capital (NRI Deposits)

3. Short term credit

4. External Commercial Borrowings(ECB)

Capital Account

• If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a capital account surplus.

• On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a capital account deficit.

Official international reserves• The official international reserve account records

the change in stock of official international reserve assets (also known as foreign exchange reserves) at the country's monetary authority .

• Official reserves assets include gold reserves, foreign currencies, SDRs, reserve positions in the IMF.

• {Special Drawing Rights (SDRs) are potential claims on the freely usable currencies of IMF members.}

Net errors and omissions

• This is the last component of the balance of payments and principally exists to correct any possible errors made in accounting for the three other accounts

• They are often referred to as "balancing items".

Development in India’s Balance of Payment during the First Quarter

(April –June) of 2010-11

Merchandise• India’s merchandise exports recorded a growth of 37.2

percent year-on-year in Q1 of 2010-11 as against a decline of 31.8 per cent in Q1 of 2009-10.

• Merchandise imports registered a growth of 35.7 per cent during Q1 of 2010-11 as against a decline of 21.7 per cent during Q1 of 2009-10.

• The increase in imports during the current year partly reflected the impact of higher international crude oil prices.

• Notwithstanding higher growth in exports relative to imports, the trade deficit, on a BoP basis, was higher at US$ 34.2 billion in Q1 of 2010-11 as compared with US$ 25.6 billion during Q1 of 2009-10.

Invisibles• Invisibles receipts recorded a growth of 13.6 per cent, on year-on-

year basis, during Q1 of 2010-11 mainly led by services exports.• Services exports registered a growth of 22.5 per cent led by travel

and transportation as well as miscellaneous services such as software, business and financial services.

• Business services receipts increased during Q1 of 2010-11 mainly due to trade-related services and business and management consultancy services.

• Invisibles payments recorded a growth of 35.5 per cent (as against a decline of 5.7 per cent a year ago) mainly due to higher payments under investment income and also on account of higher payments under travel, transportation, business and financial services.

• The lower size of invisibles surplus coupled with a higher trade deficit resulted in an increase in current account deficit during Q1 of 2010-11 to US$ 13.7 billion

Capital Account

• Both gross capital inflows to India and outflows from India increased during Q1 of 2010-11 as compared to last year. Gross capital inflows to India were higher at US$ 95.3 billion (US$ 77.1 billion a year ago) mainly led by portfolio investments and short-term trade credit. On the other hand, gross capital outflows were higher at US$ 76.9 billion (US$ 73.1 billion a year ago) driven by portfolio investments, FDI and NRI deposits

• Sector-wise, the deceleration in FDI to India (i.e., inward FDI) was mainly on account of lower FDI inflows under construction, real estate, business and financial services.

• Gross FDI by India (i.e., outward FDI) was marginally higher at US$ 3.1 billion (US$ 2.8 billion in Q1 of 2009- 10) mainly due to other FDI capital (i.e., inter-company loans).

• Net portfolio investments were also significantly lower at US$ 4.6 billion during the quarter (US$ 8.3 billion during Q1 of 2009-10), mainly due to deceleration in net FII flows largely on account of risk aversion by global investors following the sovereign debt crisis in the euro-zone countries

• Net ECBs were significantly higher at US$ 2.7 billion during the quarter (as against a decline of US$ 0.4 billion in Q1 of 2009-10) mainly due to higher disbursements of commercial loans to India coupled with lower repayments.

• With net capital flows being higher than the current account deficit, the overall balance was in surplus.

• Accordingly, there was an increase in foreign exchange reserves on BoP basis (i.e., excluding valuation) of US$ 3.7 billion during Q1 of 2010-11. In nominal terms (i.e., including valuation changes) foreign exchange reserves declined by US$ 3.3 billion during the quarter reflecting appreciation of US dollar against major international currencies during the quarter

Factors Impacting BoP

• Trade Agreement

• Trade Policy

• Currency Exchange Rate

• Tax , Tariff and Trade Barriers

Impact Of Stimulus Package

• Trade Interest

• Interest subversion

• Exemption of Tax

Measures for making BoP Favorable

• Diversification of Trade

• Development of New Industries

• Concentrate on selected sectors

• Concentrating on Frugal engineering skills

• Incentives related to Trade