Includes all the basics of balance of payments and the position of India in 2015 along with other countries

1. BALANCE OF
PAYMENTS

2. BALANCE OF PAYMENT
 The BOP can be defined as a statement of all economic transactions between the
residents of a nation and the rest of the world during a period of time, usually
one year .
 Economic transactions include all the transactions that involve the transfer of title
or ownership of goods ,services ,money and assets between the residents of a
country and the rest of the world .
 Residents means the nationals of the reporting country .
 Receipts are recorded on the credit side and payments on the debit side.

3. PURPOSE
 It yields necessary information on the strength and weakness of the country’s
international Economic status.
 Whether composition and direction of international trade and capital movements
have improved or caused deterioration in the economic condition of the country .
 BOP statements give warning signals for future policy formulation .
 To provide useful information to financial decision makers.

5. CURRENT ACCOUNT
•The current account records transactions relating to export and import of
goods, services, unilateral transfers and international incomes.
The main components of the current account are:
• Trade in goods (visible balance)
• Trade in services (invisible balance) e.g. insurance and services
• Investment incomes e.g. dividends, interest and migrants remittances from abroad
• Net transfers – e.g. International aid, NRI transfers

6. CURRENT ACCOUNT
BALANCE
The current account balance is the difference between a country's savings
and its investment.
 If the current account balance is positive, it measures the portion of a
country's saving invested abroad;
 If negative, the portion of domestic investment financed by foreigners'
savings.
 It can also be defined by the sum of the value of imports of goods and
services plus net returns on investments abroad, minus the value of
exports of goods and services, where all these elements are measured in
the domestic currency.

7. BALANCE OF TRADE
The difference between a country's imports and its exports.
Balance of trade is the largest component of a country's balance of
payments.
Debit items include imports, foreign aid, domestic spending
abroad and domestic investments abroad.
Credit items include exports, foreign spending in the domestic
economy and foreign investments in the domestic economy.
When exports are greater than imports than the BOT is favourable
and if imports are greater than exports then it is unfavourable

8. BOP
1. It is a broad term.
2. It includes all transactions related to
visible, invisible and capital transfers.
3. It is always balances itself.
4. BOP = Current Account + Capital
Account + or - Balancing item ( Errors
and omissions)
5. Following are main factors
which affect BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT
BOT
1. It is a narrow term.
2. It includes only visible items.
3. It can be favourable or unfavourable.
4. BOT = Net Earning on
Export - Net payment for imports.
5. Following are main factors
which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home
DIFFERENCE

9. INDIA’S CURRENT ACCOUNT
• The current account deficit in India narrowed to 6200 USD Million in the second
quarter of 2015 from a 7800 USD Million gap a year earlier.
• Imports have been falling more than exports due to lower oil prices, thus leading to a
smaller trade deficit.
• The current account deficit for the three months to June of 2015 corresponds to 1.2
percent of the country's GDP.

11. CAPITAL ACCOUNT
• Capital account transaction is defined as a transaction which:-
• It includes those transactions which are undertaken by a resident of India such that
his/her assets or liabilities outside India are altered.
• It includes those transactions which are undertaken by a non-resident such that
his/her assets or liabilities in India are altered.
• Different types of Capital Account Transactions:
• Private transactions: It includes all types of investment: direct, portfolio and short-
term.
• Government transactions: It consists of loans to and from foreign official agencies.

12. LIST OF CAPITAL ACCOUNT
TRANSACTIONS
 Transfer or issue of any security or foreign security by any branch, office or agency in India of a
person resident outside India;
 Any borrowing or lending in rupees in whatever form or by whatever name called between a person
resident in India and a person resident outside India;
 Deposits between persons resident in India and persons resident outside India; Export, import or
holding of currency or currency notes;
 Acquisition and Transfer of immovable property outside India, other than a lease not exceeding five
years, by a person resident in India;
Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred-
(i) By a person resident in India and owed to a person resident outside India; or
(ii) By a person

13. BALANCE OF PAYMENT
ALWAYS BALANCES
 Double entry system.
 Debit side shows the use of
total foreign exchange
acquired in a particular period.
 Credit side shows the sources
from which the foreign
exchange is acquired during a
particular period.

15. IMPORTANCE OF BALANCE OF
PAYMENT
 Reflects Various Aspects of Country’s International Economic Position
 Government Decision Making tool – Fiscal and Monetary policy.
 For Developing States – it reflects the Economic Development on financial
Assistance by Developed Countries.
 Economic Barometer- determining
1. Short term International Economic Prospect
2. Degree of International Solvency
3. Determine Exchange Rate of Country’s Currency.

16. THE RESERVE ACCOUNT
Three accounts: IMF, SDR & Reserve and Monetary Gold are
collectively called as The Reserve Account.
The IMF account contains purchases (credits) and re-purchase
(debits) from International Monetary Fund. Special Drawing
Rights (SDRs) are a reserve asset created by IMF and allocated
from time to time to member countries. It can be used to settle
international payments between monetary authorities of two
different countries.

17. OVERALL BOP
•Total of a country’s current and capital account is reflected in overall Balance
of payments. It includes errors and omissions and official reserve
transactions.
•The errors may be due to statistical discrepancies & omission may be due to
certain transactions may not be recorded.
For e.g.: A remittance by an Indian working abroad to India may not yet
recorded, or a payment of dividend abroad by an MNC operating in India may
not yet recorded or so on.
•The errors and omissions amount equals to the amount necessary to balance
both the sides

18. CAUSES OF DISEQUILIBRIUM
1. Natural causes – e.g. floods, earthquake etc.
2. Economic causes – e.g. Cyclical Fluctuations, Inflation
3. Political causes – e.g. international relation, political instability, etc.
4. Social factors – e.g. change in taste and preferences etc.

19. HOW TO CORRECT THE
BALANCE OF PAYMENT?
1. Monetary Measures
Deflation: It means falling prices. It is brought through monetary measures like bank
rate policy, open market operations, etc. or through fiscal measures like higher
taxation, reduction in public expenditure, etc. It would make our items cheaper in
foreign market resulting a rise in our exports. However, it can be successful when the
exchange rate remains fixed.
Exchange Depreciation: It means decline in the rate of exchange of domestic
currency in terms of foreign currency. This device implies that a country has adopted
a flexible exchange rate policy. It will stimulate exports and reduce imports because
exports will become cheaper and imports costlier. Hence, a favorable balance of
payments would emerge to pay off the deficit.
Devaluation - Devaluation refers to deliberate attempt made by monetary authorities
to bring down the value of home currency against foreign currency. Generally
devaluation is resorted to where there is serious adverse balance of payment problem.

20. 2. Non-Monetary Measures
Export Promotion: This includes substitutes, tax concessions to exporters, marketing
facilities, credit and incentives to exporters, etc. The government may also help to
promote export through exhibition, trade fairs; conducting marketing research & by
providing the required administrative and diplomatic help to tap the potential markets.
Quotas: Under the quota system, the government may fix and permit the maximum
quantity or value of a commodity to be imported during a given period. By restricting
imports through the quota system, the deficit is reduced and the balance of payments
position is improved.
Tariffs: Tariffs are duties (taxes) imposed on imports. When tariffs are imposed, the
prices of imports would increase to the extent of tariff. The increased prices will
reduced the demand for imported goods and at the same time induce domestic
producers to produce more of import substitutes. Non-essential imports can be
drastically reduced by imposing a very high rate of tariff.
HOW TO CORRECT THE
BALANCE OF PAYMENT?

21. TRENDS IN INDIA’S BALANCE
OF PAYMENTS
A country, like India, which is on the path of development generally, experiences a
deficit balance of payments situation.
This is because such a country requires imported machines, technology and capital
equipments in order to successfully launch and carry out the programme of
industrialization

22. BOP POSITION OF INDIA
BoP during April-March 2015:
• On a cumulative basis, the overall BoP during 2014-15 showed improvement
over the preceding year. Lower CAD, on the back of contraction in trade
deficit and marginal improvement in the net invisible earnings, along with a
sizable increase in net financial flows enabled a large build-up of reserves.
• India’s trade deficit narrowed to US$ 144.2 billion in 2014-15 from US$
147.6 billion in 2013-14. With modest increase in invisibles supported by
some improvement in net services receipts, the CAD tracked the trade deficit
and shrank to US$ 27.5 billion in 2014-15 (1.3 per cent of GDP) from US$
32.4 billion (1.7 per cent of GDP) a year ago.

23. • Net inflows under the capital and financial account (excluding change
in foreign exchange reserves) rose to US$ 89.5 billion during 2014-15
from US$ 48.7 billion in the previous year.
• There was an accretion to India’s foreign exchange reserves to the tune
of US$ 61.4 billion in 2014-15 as compared with US$ 15.5 billion in
2013-14.
• At the end of March 2015, the level of foreign exchange reserves stood
at US$ 341.6 billion.
BOP POSITION OF INDIA

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