It is a record of transactions done by resident country with the rest of world. Resident country: India Sources of fund for nation: exports or receipts of loans and investments, are recorded as positive or surplus items. Uses of funds: imports or to invest in foreign countries, are recorded as negative or deficit items.
BOPCurrent Account Capital Account Reserves Gold Trade FDI/FIIs Reserves Transfer / Portfolio factor Forex Investments Payments Reserves NRE/NRI Invisibles A/cs IMF Loans
Current Account:- That part of balance of payments recording a nation’s export and import of goods and services and transfer pay. Balance of trade, Net factor income, Net transfer payment.
Capital Account:- That part of balance of payments that reflects net change in national ownership of assets.Capital Account = Foreign direct investment +Portfolio investment +Other investment
No. 41 : India’s Overall Balance of Payments US$ mn Item 2006-07 2007-08 2008-09 2009-10A. CURRENT ACCOUNT I. MERCHANDISE -61,782 -91,467 -119,520 -118,374 II. INVISIBLES 52,217 75,731 91,605 79,991 Total Current Account (I+II) -9,565 -15,737 -27,915 -38,383B. CAPITAL ACCOUNT 1. Foreign Investment (a+b) 14,753 43,326 5,785 51,167 2. Loans (a+b+c) 24,490 40,653 8,318 13,259 3. Banking Capital (a+b) 1,913 11,759 -3,246 2,084 4. Rupee Debt Service -162 -122 -100 -97 5. Other Capital 4,209 10,969 -3,990 -13,016 Total Capital Account (1 to 5) 45,203 106,585 6,768 53,397C. Errors & Omissions 968 1,316 1,067 -1,573D. Overall Balance (Total Current Account, 36,606 92,164 -20,080 13,441 Capital Account and Errors & Omissions)E. Foreign Exchange Reserves (Increase - / -36,606 -92,164 20,080 -13,441 Decrease +) of which SDR Allocation – -5,160 P: Preliminary PR: Partially Revised
USES OF BOP:- The BOP provides an extremely useful data for the economic analysis of the country’s weakness and strength as a partner in international trade. BOP also reveals the changes in the composition and magnitude of foreign trade. BOP also provides indications, future repercussions of countries past trade performances.
Total receipts and total payments inequality shows disequilibrium of balance of payments account B=R–PWhere, B stands for balance of payments, R denotes receipts from foreigners, P stands for payments made to foreigners A country whose balance of payments is positive is called as surplus country (R>P) A country whose balance of payments is negative is called as deficit country (P>R)
Cyclical disequilibrium: It occurs on account of trade cycles. Cyclical fluctuations in demand are caused by changes in Income, employment, output & price. Structural disequilibrium: It is caused because of fluctuation in the demand based on changes in tastes, fashions, habits, income, economic progress etc. Short – run disequilibrium: When a country borrows or lends internationally, it will have short run disequilibrium, as these are usually for short period. Long run disequilibrium: It occurs because of accumulation of deficits or surpluses over a long period.
Causes for India’s BOP deficit• Huge development & investment programs : Due to huge development and investment programs , Import goes on increasing , requirement of capital for rapid industrialization, while exports may not be boosted up to that extent. Thus, there will be structural changes in the balance of payments and structural equilibrium will result.
• Population growth: High population growth in poor countries has adverse impact on their balance of payments. Increase in the population increases the needs of these countries for imports and decreases the capacity of export.• Huge external borrowing: A country will have adverse balance of payments when it borrows heavily from another country• Inflation: Rapid economic development, increase in the income & price will adversely affect BOP position of a developing country like India.