India’s Balance of PaymentsConcepts, Compilation and Recent Scenario 1950-51 to 2003-04 EPW Research Foundation* February 2005* An original note on the subject was published in the Economic and Political Weekly (EPW) of November13-20, 1993. The same has been thoroughly revised and updated by Ms. Shilpa Jain for publication onthe website www.epwrf.res.in Mrs. Rema K. Nair undertook page-making.
ContentsSection No. Title Page No. List of Exhibits and Appendices i I Key Concepts 1 Current and Capital Accounts Merchandise on FOB/ CIF basis Invisibles Capital Account II Sources of BOP Data 5 Difference between RBI Balance of payments data and customs data Apparent gaps in BOP data III An Overview of India’s Balance of Payments 10 Notes 12 List of Text Tables Text Table 1: India’s Foreign Trade: A Comparison of DGCI & S and RBI Data 6 2: Foreign Exchange Reserves: 1950-51 to 2003-04 14 3: Financing of Current Account Deficits: 1950-51 to 2003-04 15 4: Balance of Payments-Selected Indicators: 1950-51 to 2001-02 17
List of Exhibits and Appendices Title Page No. Exhibits Exhibit A: Estimation of Invisible Accounts - A Comparison of RBI Classification with the IMF Classification (IMF BOP MANUAL) 7 B: Estimation of Invisible Accounts - A Comparison of RBI Classification with the IMF Classification (IMF BOP Yearbook) 8 AppendicesAppendix 1: Balance of Payments: 1950-51 to 1989-90 (Rs. Crore / Dollar Million) 19 1990-91 to 2003-04 (Rs. Crore) 23 1990-91 to 2003-04 (US Dollar Million) 26 2: Break-up of Invisibles on Current Account 29 (A) Travel Account 35 (B) Transportation Account : (i) 1956-57 to 1989-90 (Rs. Crore) 36 (ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 38 (C) Insurance Account : (i) 1956-57 to 1996-97 (Rs. Crore) 40 (ii) 1997-98 to 2001-02 (Rs. Crore/ Dollar Million) 41 (D) Investment Income Account : (i) 1956-57 to 1996-97 (Rs. Crore) 42 (ii) 1997-98 to 2001-02 (Rs. Crore/ Dollar Million) 45 (E) Government not included elsewhere Account : (i) 1956-57 to 1989-90 (Rs. Crore) 46 (ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 47 (F) Miscellaneous Account : (i) 1956-57 to 1989-90 (Rs. Crore) 48 (ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 50 (G) Official Transfer Payments Account : (i) 1956-57 to 1989-90 (Rs. Crore) 52 (ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 54 (H) Private Transfer Payments Account : (i) 1956-57 to 1989-90 (Rs. Crore) 55 (ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 57 3: Foreign Inevestment (A),(B) Private Foreign Investment 58 (C) Foreign Investment Inflows 59 4: NRI Deposits A Inflows under FCNR and NR(E)RA Accounts 60 NRI Deposits Outstanding 61 5: External Transactions as per CSO’s 62 National Account Statistics
India’s Balance of Payments Concepts, Compilation and Recent Scenario: 1950-51 to 2003-04 I Key ConceptsA balance of payments statement is essentially a double entry system of record for a given period of an economy’s two-way international transactions in the form of goods and services, receipts and payments of incomes, transfers without quid pro quo and financial claims and liabilities. Witha view to standardising the concepts and definitions, classificatory schemes and conventions applied inthe compilation of balance of payment statistics by various countries, the International Monetary Fund (IMF)has prescribed a Balance of Payment Manual.1 India, as in the case of other member countries of the IMF,has adopted the same as a conceptual and methodological basis for compiling her balance of payment account.However, there exist some departures from the IMF framework due to the constraints of data availabilityand to take account of the country’s institutional structure.2 Principally, the balance of payment (BOP) account records transactions between a resident economic entityand the rest of the world. Though the resident status of an individual is conceived in terms of the permanenceof interest within a given territory, the rule of thumb adopted for recognition of such permanence is a stayof one year or more. Tourist and commercial travellers, employees of foreign governments and internationalbodies on a mission of less than one year and seasonal workers from foreign countries, are all consideredas residents of the economy in which they normally live. Major exceptions to this are the official diplomaticand consular representatives, members of armed forces and other government personnel of a foreign countrystationed in a given country who are treated (together with their dependents) as non-residents for the countryof their posting or as residents of the country they represent.Current and Capital Accounts In BOP accounting, transactions relating to goods, services and income, and current transfers constitutethe current account, while those relating to claims and liabilities of a financial nature and capital transfersand acquisition or disposals of non-produced, non-financial assets which go to finance the deficit on currentaccount, or to absorb its surplus, form the capital account. The sum of these current and capital accounttransactions together constitutes the basic balance on BOP and theoretically it should be finally roundedup. The double-entry accounting should be closed with the help of: a) purchase and repurchase from theIMF essentially as a multilateral agency for the countries’ BOP support, b) allocation of the IMF’s SpecialDrawing Rights (SDRs) intended to supplement the relatively inadequate international reserves and alsoto serve as a principle reserve asset of the international monetary system, and finally, c) the build-up ordrawdown of the country’s own reserve assets. Incidentally, the objective of SDRs serving as a principalreserve asset was scuttled in the midst of the controversy regarding the justification or otherwise for additionalreserve assets. The above is the theoretical position; in reality, due to myriad discrepancies arising from differencesin timing, coverage, valuation and possible inaccurate estimation (which also includes clandestine capitalflight through various devices), the credit side of the double entry accounting does not exactly match thesum of all debit entries. Therefore, the balancing act is performed by an item called “errors and omissions”-a negative sign in it implying an overstatement of receipts and an understatement of payments, generallya combination of both, and the positive sign signifying the reverse. It is very often found that in yearsof large depreciation of the rupee, the ‘errors and omissions’ remain negative.
Balance of Payments 2Merchandise on FOB / CIF basis The transactions relating to goods, services and income, constituting the current account on the BOP,are functionally classified in two broad categories: merchandise and invisibles. As per the IMF Manual,imports and exports of goods (merchandise) should be presented under free-on-board (f.o.b. basis), thatis, without including freight and insurance costs. Such freight and insurance paid to foreign shipping andair carriers should be treated as an outgo (debit) under the invisible sub-items, transportation and insuranceservices, while that earned by domestic carriers has to be treated as receipts (credit) under the same sub-items. However, the BOP data put out by the Indian authorities (Reserve Bank of India as well as theGovernment of India) make a major departure from the IMF manual in that while they present exportson an FOB basis they set out imports on CIF (cost, insurance and freight) basis on the ground of the natureof data availability, that is, while exports declarations are uniformally on f.o.b. basis, import invoices donot distinguish between the cost of merchandise and freight and insurance. Incidentally, it is found thatmany other countries conduct periodical sample studies of import invoices, which facilitate such a distinctionand estimate the proportion of freight, insurance and other distributive services in the total CIF value ofimports and thus apply the results for deriving the f.o.b. values of total imports also. Besides, the IMFin its Year Book on Balance of Payment Statistics, presenting uniform BoP data for its member countries,publishes India’s BOP with merchandise imports also on a f.o.b. basis.3 The IMF apparently has a methodof using global adjustment to the import data for converting c.i.f. into f.o.b. Interestingly, the RBI did conductsuch surveys in the past for converting into f.o.b. basis those export invoices which were on c.i.f. or c.i.basis. Apparently a 1948 survey, which indicated that freight and insurance elements constituted of aboutfour per cent of the c.i.f. values of exports, is broadly considered valid for quite some years as per subsequentsurveys.4 Though, since October 1983 the relevant forms specify the f.o.b. value of exports the above surveyresults are required to be used to estimate the freight and insurance components (i.e., under invisbles) nowon the given basis of fob value. Foreign trade data relate to merchandise trade through all the recognized seaport, airports, land customsstations and inland container depots of India. Data on exports, which include re-exports, relate to fob valuesand imports relate to c.i.f. values. Exports are based on the general system of recording, according to whichre-exports relate to Indian merchandise previously imported into India. The item Non-Monetary Gold Movement has been deleted from invisibles in conformity with IMF Manualon BOP (4th edition) from May 1993 onwards; these entries have been included under merchandise. Similarly,in accordance with the provisions of IMF Manual on BOP (5th edition), gold purchased from the governmentof India by RBI has been excluded from the BOP statistics. Data from the earlier period have been amendedby making suitable adjustments in ‘other capital receipts’ and ‘foreign exchange reserves’. Imports relateto foreign merchandise whether intended for home consumption, bonding or re-exploration. Trade balanceis defined as the difference between total exports and total imports (both merchandise).Invisibles As distinguished from the ‘visibles’ (merchandise) transactions, the invisibles account comprises costsof services, income and transfer payments (ie, payments and remittances unrequited or without quid proquo or without any repayment obligations). The IMF manual classifies non-merchandise current accounttransactions into as many as thirteen items and also obtains from the reporting country authorities andpublishes (supplemented by its own estimates) in its BOP yearbook fairly disaggregated information ona number of countries. Exhibits I(A) and I(B) provide listings of current account transactions as per theIMF Manual and as per the BOP yearbook, respectively; these also carry alongside the Indian system ofclassifications. It is true that many other countries do not possess such detailed data and hence they clubcertain items together and publish data on fewer heads. In the regular dissemination of BOP data, the Indianauthorities now provide the ‘invisibles’ account data under seven broad heads. Within the above broad heads, however, the Reserve Bank of India has now begun to provide many moredetails, which may be seen in disaggregated data presented in Appendix Tables 2(A) to 2(H). With a view
3 Balance of Paymentsto disseminating more disaggregated data on India’s trade and services, the RBI has published such statisticsseparately for the period 1956-57 to 1998-99 in its monthly bulletins of March and April 1992 and in itscomprehensive publication Balance of Payments: 1948-49 to 1988-89 (July 1993); this practice has beencontinued thereafter on an annual basis. Apart from some broad details presented in Appendix Table 2A,attempts have been made to cull out more disaggregated data on invisibles from the above studies whichare presented in eight separate sets in Appendix Tables 2(A) to 2(H). As may be observed from thesedisaggregated data, India has now begun to provide many more details; earlier income consisted only ofinvestment income whereas now one more sub-category ‘compensation of employees’ is added, in accordancewith the IMF’s Balance of Payments Manual (5th edition), 1993, under the head ‘income’ with effect from1997-98. Earlier, the Indian practice was to record ‘compensation of employees’ under the head ‘services-miscellaneous’. Since 1990-91, the value of defense related imports are recorded under imports (merchandisedebit) with credits financing such imports shown under “loans (external commercial borrowings) to India”in the capital account. Based on the recommendations of a high-level committee in their Reports of PolicyGroup and Task Force on External Debt Statistics of India, 1992, interest payments on defense debt owedto the general currency area (GCA) are recorded under investment income (debit) and principal repaymentsunder debit to “Loans (external commercial borrowings) to India”. The IMF classifies transfers as ‘current transfers’ and ‘capital transfers’. Transfers basically representreceipts and payments without quid pro quo. Current transfers include those of general government (eg,current international cooperation between different governments, payments of current taxes on income andwealth, etc.) and other transfers (eg, workers remittances, premiums-less service charges), and claims onnon-life insurance. Definitionally, capital transfers should include: (i) Transfer of ownership of fixed asset or (ii) The forgiveness of a liability by a creditor when no counter-part is received in return, or (iii) A transfer of cash when linked to, or conditional on, the acquisition or disposal of a fixed asset (eg investment grant) by one or both parties to the transaction. Finally, capital transfer should result in a commensurate change in the stocks of assets of one or bothparties to the transaction. Due to non-availability of data, the RBI is unable to provide such segregationinto current and capital transfers; instead it has segregated transfers into private and official. The term‘transfers’ is used in India’s Balance of Payments in the same sense as unrequited transfers. Unrequitedtransactions are transations such as gifts, grants, taxes, etc. where one transactor provides something ofeconomic value to another but doesnot receive a quid pro quo on which economic value can be assignedin return. The economic value that is lacking on one side has to be balanced by an entry which is referredto as unrequited transfers. Government not included elsewhere represents remittances towards maintenances of foreign embassies,diplomatic missions and international/ regional institutions. Miscellaneous services encompass communication services, software services, construction services,royalties, copyrights and licence fees, news agency services and others. Because of the emergence of softwareservices as a highly focused and dynamic area of export activity in the 1990s, it is shown as a separatesub-item under ‘Miscellaneous’ since 2000-01. Investment incometransactions are in the form of interest, dividend, profit and others for servicing ofcapital transactions. Investment income receipts comprise interest received on loans to non-residents,dividend/profit received by Indians on foreign investments, reinvested earnings of Indian FDI companiesabroad, interest received on debentures, floating rate notes (FRNs), commercial papers (CPs), fixed depositsand funds held abroad by ADs out of foreign currency loans/export proceeds, payments of taxes by non-residents/refunds of taxes by foreign governments and interest/discount earnings on RBI holding of foreignassets. Investment income payments comprise payment of interest on non-received deposits, payment ofinterest on loans from non- residents, payment of dividend/profit to non-resident shareholders, reinvestedearnings of the FDI companies, payments of interest on debentures, FRNs, CPs, fixed deposits, governmentsecurities, charges on SDRs and others. Undistributed income or retained earnings of an enterprise held by non-residents are conceived of as apayment of income to the foreign investor and simultaneous reinvestment of that income by the foreign
Balance of Payments 4investor in the same resident direct investment enterprise. Such income is recorded as a component of foreigninvestment income payment in the current account matched by the flow of foreign investment in the capitalaccount. Even so, while the Indian classification of current transactions is found to be fairly comprehensive, someloss of information in it relating to the following items is noticed: (i) As explained earlier, data on insurance and freight on imports, which would constitute part of the items transportation and insurance, are in fact included under merchandise. (ii) Under the Indian classification, transactions relating to the life insurance business of the Life Insurance Corporation of India or those relating to the general insurance business of the Indian general insurance companies abroad for domestic hazards in those countries are clubbed under the item insurance which also covers the insurance of merchandise trade. The IMF classification places this under a separate item called ‘other goods, services and income’. Expenditures of diplomatic missions in India or those of Indian missions abroad are not presented separatelyin the Indian data, whereas the IMF publishes such data under the head ‘other foreign official, NIE’ evenfor India separately.Capital Account Though the IMF manual distinguishes a large number of items under the capital account, India, as inthe case of many other countries, has dovetailed the accounting classification to fit into its own institutionalstructure and analytical needs. Until the end of the 1980s, key sectors distinguished under the capital accountwere: (i) private capital, (ii) banking capital, and (iii) official capital. Private capital was sub-divided into (i) long-term and (ii) short-term, with loans of original maturity ofone year or less constituting the relevant dividing line. Long-term private capital, as published in the regularBOP data, covered foreign investments (both direct and portfolio), long-term loans, foreign currency deposits(FCNR and NRE) and an estimated portion of the unclassified receipts allocated to capital account. Bankingcapital essentially covered movements in the external financial assets and liabilities of commercial andco-operative banks authorised to deal in foreign exchange. Official capital transactions, other than thosewith the IMF and movements in RBI’s holdings of foreign currency assets and monetary gold (SDRs areheld by the government), were classified into (i) loans, (ii) amortisation, and (iii) miscellaneous receiptsand payments. In the data base created here, statistical series on BOP for the period 1950-51 to 1989-90are in this format (See Appendix Table 1A). Independent data published by the RBI give disaggregationof FDI by approval categories and that of portfolio investments by types of flow. In FDI, there are threesources of approvals: government [Secretariat of Industrial Approvals (SIA) and Foreign InvestmentPromotion Board (FIPB)]; RBI; and NRI investments (See Appendix Table 3B). Likewise, RBI puts outdata on NRI deposits under different categories of deposits (Appendix Tables 4A and 4B). For the subsequent period, from 1990-91 onwards, the classification adopted is as follows: (i) Foreign investment, which is bifurcated into Foreign Direct Investment (FDI) and portfolio investment. The FDI in India could be in the form of inflow of investment (credit) and outflow in the form of disinvestments (debit) or abroad in the reverse manner. The portfolio investment5, on the other had, comes in the form of Foreign Institutional Investors (FIIs), offshore funds and Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). The data on acquisition of shares (acquisition of shares of Indian companies by non-residents under section 5 of FEMA, 1999) has been included as part of foreign direct investment since January 1996. (ii) Loans, which are further classified into external assistance, medium and long-term commercial borrowings and short-term borrowings, with loans of original maturity of one-year or less constituting the relevant dividing line. The principal repayment of the defense debt to the General Currency Area (GCA) is shown under the debit to loans (external commercial borrowing to India) for the general currency area since 1990-91. (iii) Banking capital comprises external assets and liabilities of commercial and government banks authorized to deal in foreign exchange, and movement in balance of foreign central banks and
5 Balance of Payments international institutions like, World Bank, IDA, ADB and IFC maintained with RBI. An important component of banking capital is non-resident (NRI) deposits. (iv) Rupee debt service contains interest payment on, and principal re-payment of, debt for the erstwhile rupee payments area (RPA). (This is done based on the recommendation of high-level committee on balance of payments.) (v) Other capital is a residual item and broadly includes delayed exports receipts, funds raised and held abroad by Indian corporate, India’s subscriptions to international institutions and quota payments to IMF. Delayed export receipts essentially arises from the leads and lags between the physical shipment of goods recorded by the customs and receipt of funds through banking channel. It also includes rupee value of gold acquisition by the RBI (monetization of gold). (vi) Movement in Reserves comprises changes in the foreign currency assets held by the RBI and SDR balances held by the government of India. These are recorded after excluding changes on account of valuation. Valuation changes arise because foreign currency assets are expressed in US dollar terms and they include the effect of appreciation/depreciation of non-US currencies (such as Euro, Sterling, Yen and others) held in reserves. Furthermore, this item does not include reserve position with IMF. As per the earlier classification, institutional character of the Indian creditor/debtor formed the dividingline for capital account transaction, whereas now it is the functional nature of the capital transaction thatdominates the classification. FDI to and by India up to 1999-2000 comprised mainly equity capital. In line with international bestpractices, the coverage of FDI has been expanded since 2000-01 to include, besides equity capital, reinvestedearnings (retained earnings of FDI companies) and ‘other direct capital’ (inter-capital debt transactionsbetween related entities). Data on equity capital include equity of unincorporated bodies. Reinvested earningsfor the latest year (2003-04) are estimated as average of the previous two years as these data are availablewith time-lag of a year. In view of the above revision, FDI data are not comparable with similar data forthe previous years (Appendix Table 3C). In terms of standard practise of BOP compilation, the above revisionof FDI data would not affect India’s overall position as the accretion to the foreign exchange reserves wouldnot undergo any change. The composition of BOP, however, would undergo changes. These changes relateto investment income, external commercial borrowings and ‘errors and omissions’. In case of reinvestedearnings, there is a contra-entry (payments) of equal magnitude under investment income in the currentaccount. ‘Other Capital’ reported as part of FDI inflow has been carved out from the figure reported underexternal commercial borrowings by the same amount. ‘Other Capital’ by Indian companies abroad and equitycapital of unincorporated entities have been adjusted against ‘errors and omissions’ for 2000-01 and 2001-02. II Sources of BOP Data The compilation of BOP data are considerably facilitated by two important prescriptions under foreignexchange regulations, which are a universal feature in the governance of transactions in foreign exchange,and which therefore have continued in India even after external sector liberalisation and replacement ofthe Foreign Exchange Regulation Act (FERA), 1973 by the Foreign Exchange Management Act (FEMA),1999. The prescriptions are: (i) all foreign exchange transactions are required to be channelled throughthe banking system; and (ii) the authorised dealers (ADs) are required to submit various returns to theRBI on those transactions (RBI 1987). The compilation is thus done on the basis of such statistical returns submitted by ADs to the RBI. Themost important return is the well-known R returns, which covers export receipts, import payments, andalso non-merchandise transactions (current and capital) beyond a cut-off limit; this cut-off limit prescribedfor the supplementary statement of receipts in respect of purposes other than exports, was varied from timeto time; it was Rs 1 lakh and above for some time up to January 2001 but was raised to $ 10,000 andabove thereafter. These R return schedules, including the supplementary statement of receipts, for non-merchandise transactions are now obtained from about 2,000 AD branches in electronic form. All of the
Balance of Payments 6R returns data cover forex transactions including their purpose-wise classification up to and above the cut-off limit referred to above, and for the transactions below the limit, only total amount is given. Therefore,to capture such purpose-wise classification in respect of the balance of forex transactions below the cut-off limit of $10,000 now (about Rs 50,000), a sample survey of unclassified receipts is undertaken on aquarterly basis. Thirdly, data on a number of what are called non-R return items, that is, items dealt withdirectly by the government such as defence-related purchases and other official transactions, are supple-mented from government sources and major diplomatic missions abroad (Washington, London and Tokyo).Finally, there are three more other sources which supplement the above BOP data: (i) a foreign currency gross provisional return (FCGPR) on capital account transactions including all investment flows; (ii) a BAL statement on balances in NRE deposit accounts; and (iii) information, through fortnightly section 42(2) returns of banks, on their Nostro balances (normally in credit) and Vostro balances (normally in debt). In addition, there is yet another class of surveys on India’s ‘foreign liabilities and assets’, which hasfinally culminated into a more comprehensive survey on international investment position (IIP). Earlierthis survey of foreign assets and liabilities was periodically undertaken to fill the gap in the capitaltransactions of the private sector; this survey was also used to obtain data on direct investment flows ona non-cash basis such as shares allotted to non-residents against import of plant and equipment or againsttechnical know-how fees, and direct investors’ portion of reinvested earnings. Now, the Indian governmenthas accepted Special Data Dissemination Standards (SDDS)6 prescribed by IMF in the aftermath of thefinancial crisis of 1997-98, according to which, the IIP, amongst others, ‘has become the focus of attentionon account of its comprehensive coverage and the feasibility of assessing the impact of policies on thecomposition of capital flows’ (RBI’s Annual Report, 2002-03, p.112). Under the SDDS, India was committedto compile the IIP for the period ending March 2002. Accordingly, annual IIP of India for the years March1997 to March 2002 have been placed on RBI’s website.Apparent gaps in balance of payments data: - (i) As pointed out earlier, there is the need to present import data in fob terms and thus give the valuesof freight and insurance under invisibles more accurately. (ii) IMF publications classify data on invisibles under 15 heads, whereas Indian BOP is generally reported under 7 heads. Now that the RBI has begun collecting substantially more disaggregated data, BOP classification may be expanded (Exhibit IA). (iii) RBI was conducting sporadic studies on currency-wise pattern of exports and imports and invisibles. It is hoped that these will be continued and that an analysis of the available data may be undertaken more regularly such as once in two years. (iv) Detailed dissemination of FDI inflows by sectors and by projects is needed. The advisory group on data dissemination had in fact highlighted this requirement. Currently, the Secretariat of Industrial Approvals (GoI) publishes in their SIA Newsletter (monthly) census list of FDI approvals with brief details on individual proposals and some consolidated data on actual inflows. RBI may attempt publishing similar data on the progress achieved in actual inflow of FDI and technical collaborations, along with ‘individual profiles’ for major cases of inflows and projects under implementation.Difference between RBI balance of payments data and customs data. As repeatedly reported by the RBI, a phenomenon in the external trade statistics of India has been thesignificant divergence between the merchandise transactions, particularly on imports, as revealed by thecustoms data compiled by the Directorate General of Commercial Intelligence and Statistics (DGCI and S)and the BOP data published by the RBI on payment basis (see Table 1 below). Apart from valuation andtiming differences as between the customs data based on the shipment of goods and the booking of, say,
7 EXHIBIT A: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Manual) I . IMF Classification of Invisibles II. Indian Classification of InvisiblesCategory No. Nomenclature Brief Description Nomenclature Brief DescriptionServices:- 1 Transportation Includes sea transport and air tranport and Transportation Category 1under Services as per IMF specification. other transport for passenger and freight traffic. Balance of Payments 2 Travel Covers travel for business or personal purpose. Travel Category 2 under Services as per IMF specification. 3 Construction services Cover work performed on construction projects and installations by employees of an enterprise in Insurance Categry 5 under Services as per IMF specification. locations outside the economic territory of the enterprise. G.n.i.e. Categry 11 under Services as per IMF specification. 4 Communication services Include telecommunications in turn including transmission of sound, images, other Miscellaneous Includes cateory 3,4,6,7,8,9,10 under Services as per information by various modes and their IMF specification. maintenance and postal and courier services. Income Categry 1 and 2 under Income as per IMF specification. 5 Insurance services Cover the provision of insurance to non-residents by resident enterprises covering freight and direct Official transfers Categry 1 under Transfers as per IMF specification. insurance (life, accident, health etc. insurance). 6 Financial services Include intermediary service fees associated with Private transfers Categry 2 under Transfers as per IMF specification. the line of credit, leasing etc. It also covers commisssions related to transactions in securities. 7 Computer and information Include computer data and news-related services service transaction covering data bases, data processing, hardware consultancy. 8 Royalties and licence fees Cover receipts/payments due to sale of trademarks, copyrights, patents, franchises due to the use of produced originals such as films, manuscripts. 9 Other business services Services; operational leasing services; and miscella- neous business, professional, technical services. 10 Personal, cultural and Include services associated with the production of recreational services motion pictures on films or video-tape, radio and television programmes 11 Government services n.i.e. Covers services associated with government sectors or international or regional organisations and not classified elsewhere.Income:- 1 Compensation of Covers wages, salaries, other benefits in employees cash or in kind of border, seasonal and non-resident workers in embassies 2 Investment income Consists of direct and portfolio income, and other incomeTransfers:- 1 Official transfers Includes current international cooperation between governments, payments of current taxes on income and wealth 2 Private transfers Includes workers remittances, claims on nomn-life insurance etc.Note: The recording of transportation and insurance transactions on a gross basis and their reclassification from merchandise to invisibles form part of the ongoing efforts to refine and disaggregate the balance of payments statistics.Source: IMF, Balance of Pyments Statistics, Yearbook, Volume 35, Part I, 1984
EXHIBIT B: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Yearbook) I . IMF Classification of Invisibles I . IMF Classification of Invisibles Item Nos. Nomenclature Brief Description Item Nos. Nomenclature Brief Description(Credit and Debit) (Credit and Debit) 3 and 4 Shipment Freight and insurance charges on exports and 23 and 24 Other resident A miscellaneous category (like sale of embassy inports official, Nie buildings, for instance) 5 and 6 Passenger services Passenger fares 25 and 26 Other resident All foreign embassy receipts and payments for official, Nie diplomatic missions abroad including expenditures 7 and 8 Port services Bunkers, supplies of jet fuel, and repair services incurred by UN agencies and the agencies like at ports and airports the World Bank, IMF and ADB. 9 and 10 Travel Tourists and other temporary visitors’s foreign 27 and 28 Labour income, Nie. Personal income earned/ remitted in respect of exchange expenditure workers who stay outside the country of their residence for less than one year I.e. for temporary employment. 11 and 12 Re-invested earnings Share of undistributed earnings of companies with on direct investment foreign shareholdings. This includes earnings of 29 and 30 Property income, Nie Receipts/payments for patents and royalties. abroad branches of foreign companies unremitted (including banking companies) 13 and 14 Other direct this section covers distributed earnings of 31 and 32 other goods, services This will cover: investment income foreign controlled companies or profits remitted and incomes, Nie. (i) value added from re-exports (distributed earnings) in the case of branches or interest payments (ii) local expenses of offshore companies made to principals. (iii) motion picture film rental and management fees (iv) net transactions from life insurance corporations i.e all non-merchandise insurance and non-trade 15 and 16 Other investment this should include interest income receivable on services obtained from abroad. income of resident foreign currency assets held abroad and also inte- official, including rest paid on foreign debt held by government and 33 and 34 Migrants‘ transfer Remittance received /paid from/for temporary interofficial government owned public utilities and agencies. migrants abroad other than those seeking employment or initial arrivals 17 and 18 Other investment Foreign official interest income paid to a non- 35 and 36 Worker’s remittances Remittance of workers I.e. those who are for income of foreign official organisation (credit) and a private regular employment but either than those in official excluding organisation paying interest to a foreign official business. Also personal remittance by persons interofficial organisation (debit) employed under technical assistance. 19 and 20 Other investment Covers: 37 and 38 Other private Personal remittances of a special nature such as income (private to (i) Dividends on portfolio investment transfers pensions and social security receipts/payments private) income in equities and all gilts (ii) Interest earned/paid on bank deposits (iii) Debentures and other debt securities 39 and 40 Interofficial transfers On the receipts side, contra-entries for all grants (iv) This item also covers interest paid on foreign for technical assistance; also cancellation of debt by public enterprises and also corporations debt is included in this item. Debits include whose debt is guaranteed by local governments actual grant figures. 21 and 22 Inter-official, n.i.e. This should cover value of services obtained/ 41 and 42 Other transfers of This includes some transfers to resident govern- rendered under aid programmes which are financed resident official ments like taxes from non-residents (like foreign by grants and which has a contra entry under company registration fees) or on the debt side item no 39 below. official transfers to private entities abroad like pension payments. 43 and 44 Other transfers of This covers claims received from foreign social foreign official security institution, pensions and scholarships, etc. on the debit side, paymnts by private individuals and organisations to foreign governments (foreign social security institutions) and consular and visa-fee payments. (Contd) Balance of Payments 8
9 Balance of PaymentsEXHIBIT B: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Yearbook) (Concluded) II. RBI Classification Nomenclature Corresponding Item Nos in above IMF Classification 1 Travel Item numbers 9 and 10 (including the relevant share from unclassified receipts 2 Transportation Item numbers 3 and 4 (freight component only) and also 5 and 6 (passenger fares) and item numbers 7 and 8 (port services) 3 Insurance Item numbers 3 and 4 (insurance component only).This item also includes surplus funds received by Indian Insurance companies from abroad (Item numbers 31 and 32) 4. Income : Investment Income Item numbers 11 and 12, 13, 14 ,15 and 16, 17and 18 and 19 and 20 Compensation to employees Item numbers 27 and 28 5 Government N.i.e. Item numbers 23 and 24 and 25 and 26 6. Miscellaneous Item no 29 and 30 7 Transfer Payments (I) Official Item numbers 21 and 22, 23 and 24, 39 and 40, 41 and 42 and 43 and 44 (ii) Private Item numbers 33 and 34, 35 and 36, 37 and 38.Note: The recording of transportation and insurance transactions on a gross basis and their reclassification from merchandise to invisibles from part of the ongoing efforts to refine and disaggre-gate the balance of payments statistics.Source: IMF, Balance of Payments Statistics, Yearbook, Volume 35, Part I, 1984
Balance of Payments 10imports on payments basis, a major cause for the difference in merchandise imports is that customs (DGCIand S) data do not cover import of defence stores including defence equipment, while the RBI data coverthe same as and when these imports are paid for. Besides, RBI data have a lead in payments in regardto imports under external assistance and commercial borrowings as the RBI records them when the paymentsare made to suppliers while the DGCI and S data cover them when the goods arrive in the country in accordancewith the recommendations of the report of the technical group on reconciling balance of payments andDGCI and S data sources on merchandise trade. Data on gold and silver brought in by the Indians returningfrom transfer receipts since 1992-93 abroad have been included under import payments with contra entryunder private transfer receipts. As the data in text Table 1 shows, the differences between the two sources have got widened, particularlyin the latter half of the last decade when defence purchases seems to have got expanded; it is quiet likelythat leads and lags between shipments and payment receipts may have also got widened. Table 1: India’s Foreign Trade : A Comparison of DGCI & S and RBI Data (Rupees, Crore) Exports Imports Trade Balance DGCI and S RBI Difference DGCI and S RBI Difference DGCI and S RBI Difference (2-3) (5-6) (8-9)(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)1980-81 6711 6666 45 12549 12876 -327 -5838 -6210 3721981-82 7806 7766 40 13608 14260 -652 -5802 -6494 6921982-83 8803 9137 -334 14293 15856 -1563 -5490 -6719 12291983-84 9771 10169 -398 15831 17093 -1262 -6060 -6924 8641984-85 11744 11959 -215 17134 18680 -1546 -5390 -6721 13311985-86 10895 11578 -683 19658 21164 -1506 -8763 -9586 8231986-87 12452 13315 -863 20096 22669 -2573 -7644 -9354 17101987-88 15674 16396 -722 22244 25693 -3449 -6570 -9297 27271988-89 20232 20647 -415 28235 34202 -5967 -8003 -13555 55521989-90 27658 28229 -571 35328 40642 -5314 -7670 -12413 47431990-91 32558 33153 -595 43193 50086 -6893 -10635 -16933 62981993-94 69751 71146 -1395 73101 83869 -10768 -3350 -12723 93731994-95 82674 84329 -1655 89971 112749 -22778 -7297 -28420 211231995-96 106353 108481 -2128 122678 146542 -23864 -16325 -38061 217361996-97 118817 121194 -2377 138920 173753 -34833 -20103 -52559 324561997-98 130101 132703 -2602 154176 190508 -36332 -24075 -57805 337301998-99 139753 144436 -4683 178332 199914 -21582 -38579 -55478 168991999-00 159561 165993 -6432 215236 240112 -24876 -55675 -74119 184442000-01 203571 205287 -1716 230873 270663 -39790 -27302 -65376 380742001-02 209018 214351 -5333 245200 274778 -29578 -36182 -60427 242452002-03 255137 254022 1115 297206 316450 -19244 -42069 -62428 203592003-04 291582 288769 2813 353976 365641 -11665 -62394 -76872 14478 Sources : Various issues of RBI Bulletin III An Overview of India’s Balance of Payments Appendix Tables 1(A) to 5 present a detailed account of all the major components of India’s balanceof payments for about 54 years since 1950-51. A few special tables amongst them give further detailsof some important sub-categories of invisibles and capital transactions. A text Table 2, depicts a profileof end-year foreign exchange reserves including annual transactions with the IMF. A separate table presents‘rest of the world account’ transactions as tabulated by the Central Statistical Organisation (CSO) in itsNational Accounts Statistics (Appendix Table 6). A few analytical tables such as the one on financing ofcurrent account deficit (Table 3) and another on selected indicators of BOP (Table 4) are also presentedas text tables. They make an attempt to provide a perspective of macro analysis that is possible of BOPstatistics. Apart from exports and imports of goods and services, the table on ‘rest of the world account’provides data on (a) compensation of employees from, and to, the rest of the world; and (b) property andentrepreneurial income similarly from, and to, the rest of the world. The objective of this note is to presentthese data for use by research scholars and others and not to provide any detailed analysis. However,
11 Balance of Paymentsopportunity is taken to make a few obser- Graph 1 Export and Import as Percentage of GDPvations on what these mass of data reveal 30essentially as a lead for their users. First, there has occurred a quantum leap in 25the proportion of India’s exports in GDP. Forover three decades, merchandise exports hadconstituted around 4 to 5 per cent of GDP but 20this has jumped to about 8 to 9 per cent in Percentagethe 1990s (Table 4 in the text) and over 10 15per percent in the latest two years. Further,it is revealed that inclusive of exports of 10services, the rise in the ratio of goods andservices to GDP has been much sharper, from 5about a range of 8-9 per cent to 18-19 per cent.Significantly, the rise in export earnings has 0 1961-62 1963-64 1965-66 1967-68 1969-70 1971-72 1973-74 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04been accompanied by similar sizeable increasein imports as percentage of GDP. Although Years Exports as % to GDP Imports as % to GDPthe physical trade to GDP ratio has not shown Graph 2 any significant expansion in the second half Total Merchandise as % to GDP of the 1990’s, the ratio has significantly im- 30 proved in this millenium. On the other hand, 25 exports of services as percentage of GDP has witnessed a more rapid and continuous rise. 20 It has grown from about 2.5-3.5 per cent for Percentages about two decades until the early 1990’s to 5 15 per cent in 1995-96 and to 8.8 per cent in 2003- 10 04, the most commendable feature being that the growth in exports of both goods and ser- 5 vices have come about despite around 8 per cent appreciation of the rupee against the dollar 0 in these two years; of course, in REER terms, 1961-62 1963-64 1965-66 1967-68 1969-70 1971-72 1973-74 1975-76 1977-78 1979-80 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 there has not been any change in the value of the rupee. Years Total Merchandise as % to GDP Secondly, the current account deficit – a crucial macro economic indicator – has faced Graph 3a chequered trend. As percentage of GDP, Financing CAD 80000it was around 2 per cent during the high 70000investment phases of the second and third 60000five-year plan periods (1956-57 to 1965-66)and also during the decade of the 1980s. 50000Interestingly, the 1990s in particular have 40000 Rs Croreshown the lowest relative current account 30000deficit so much so that by 2001-02, there 20000has arisen a current account surplus, which 10000has continued has continued till the first 0 1960-61 1962-63 1964-65 1966-67 1968-69 1970-71 1972-73 1974-75 1976-77 1978-79 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03quarter of 2004-05. Earlier, such a surplus -10000was experienced in the mid-1970s when the -20000national economy had similarly experienced Yearsan investment famine. External assistance Commercial Borrowings Foreign Investments NRI Deposits
Balance of Payments 12 Thirdly, again, in the financing of current Graph 4deficit (text Table 3 and Graph 3), there has Import Coveroccurred a significant change in the relative 60000 12.0importance of various sources of financein this respect. While the role of external 50000 10.0assistance has declined in the 1990s, theimportance of private investment flows, 40000 8.0NRI deposits and commercial borrowings,has increased. Separate information pro- 30000 6.0vided on the first two items of investmentflows [Appendix Tables 3A, 3B and 3C] 20000 4.0and NRI deposits (Appendix Tables 4A 10000 2.0and 4B) speak of their importance in ab-solute numbers. 0 0.0 Finally, above all, it is the phenomenal 2001-02expansion in foreign currency assets in the1990s that stands out. As indicated in the Yearstext Table 2, the country’s foreign exchange Forex Reserves Import Coverreserves had generally remained low afterthe sterling balances were brought down in the early phase of planning. The years when the reserves formedmore than three months’ import requirements, as in the 1970s and the early 1980s, were periods of considerablerecessionary conditions in Indian industry; in the early 1980s the reserves were also supported by the IMF drawals. The same phenomena of recession as well as IMF and other exceptional drawings were prevalent in theearly 1990s; thereafter the foreign exchange reserves began to rise. But, the increases in reserves that haveoccurred after 1995-96 or thereabout are of a different genre. Not only have there been no IMF borrowings(in fact all repurchase obligations have been cleared), the recessionary conditions have not been as severeas in, for instance, in the 1970s. In fact, inflows have been quite sizeable as a result of reduced merchandisedeficits, rapid increases in private inward remittances, and higher capital flows - all of which could notprobably have been absorbed even if the tempo of investment was stepped up. Notes [Acknowledment: An original note on the subject was published in the Economic and Political Weekly (EPW) of November13-20, 1993. The same has been thoroughly revised and updated by Ms. Shilpa Jain for publication on the websitewww.epwrf.res.in Mrs. Rema K. Nair undertook page-making.] 1 International Monetary Fund, Balance of Payments Manual, Fourth Edition, 1971. 2 The Reserve Bank of India has compiled and published its own manual setting out the concepts and methodology, the main constitutents of BoP and source of data used. See Reserve Bank of India (1987), Balance of Payments Compilation Manual, October, 1987. 3 See International Monetary Fund, Balance of Payments Statistics (various yearbook volumes) 4 See RBI,op cit, pp 21-22. 5 Portfolio investment mainly includes FIIs’ investment, funds raised through GDRs/ADRs by Indian companies and through offshore funds. Data on investment abroad, hitherto reported, have been split into equity capital and portfolio investment since 2000-01. 6 A detailed note on the SDDS has been published by the EPW Research Foundation (2003) ; it is: “ International Reserve, Foreign Currency Liquidity and External Debt: Data template”, Economic and Political Weekly, September 30, 2003. Symbols and Abbreviations 1. The following symbols have been used throughout the article. .. = data not available -, 0 = nil or negligible . = Denotes data not available separately and has been clubbed elsewhere. 2. f.o.b. = free on board c.i.f- cost, insurance and freight. 3. NR(E)RA = Non-Resident (External) Rupee Account 4. FCNR (B) = Foreign Currency Non-Resident (Banks) 5. FCNR (A) = Foreign Currency Non-Resident (Accounts)