Balance of Payments <br />   Nations continually carry out economic, commercial and financial  transactions  between resid...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />2<br />  BOP statistics are published  monthly by RBI in India.<br />...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />3<br />   On the other hand, Balance of Trade considers  the value of...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />4<br />  * Balance Of Payment on Current Account<br />    -- It inclu...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />5<br />  ii) Banking capital covers the external financial assets and...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />6<br />* Unilateral Transfers Account <br />It comprises of uni-direc...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />7<br />Equilibrium in Balance of Payment of Nations<br />  -- When de...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />8<br />* Economic Factors  may cause<br />     1)  Development Disequ...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />9<br />2.  Cyclical Disequilibrium<br />     Due to fluctuations in b...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />10<br />  4.  Structural Disequilibrium<br />--  Sometimes notable sh...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />11<br />  * Political Factors <br />     --  Political uncertainties,...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />12<br />Correction of BOP  Disequilibrium <br />   When BOP becomes s...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />13<br />2. Deliberate Measures <br />Govt. also adopts certain measur...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />14<br />  * Devaluation<br />     In case of deficit BOP, purchasing ...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />15<br />  * Export Promotion Measures<br />     Govt. of India endeav...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />16<br />Structure of India’s BOP Statement <br />				           Credi...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />17<br />India’s BOP Account  (contd.)<br />					Credit   Debit  Net  ...
3/21/2010<br />Presentation by Prof. H.Ganguly.<br />18<br />  			           India’s BOP Account  (Contd.) <br />					   C...
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Balance of payments

  1. 1. Balance of Payments <br /> Nations continually carry out economic, commercial and financial transactions between residents of one nation and rest of world in the form of :<br />-- exchange of goods for goods<br />-- goods for services<br />-- services for services<br />-- goods and services for money etc.<br /> Summary of these transactions for a period carries great economic significance for the nation.<br /> The systematic record of all economic transactions between residents of a country and rest of world in a given period is called the Balance of Payment.<br />3/21/2010<br />1<br />Presentation by Prof. H.Ganguly.<br />
  2. 2. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />2<br /> BOP statistics are published monthly by RBI in India.<br /> These are analysed by bankers, businessmen, economists <br /> foreign exchange traders etc. to know international <br /> economic performance of the country.<br /> BOP is a double entry system statement of followings : <br /> -- all receipts for goods exported <br /> -- all services rendered <br /> -- capital received by residents* of the nation<br /> -- and payments made by residents* for goods imported and<br /> services received in addition to capital transferred to <br /> non-residents and foreigners. <br /> * Residents mean individuals , businesses and govt. agencies.<br /> -- Military personnel, diplomats, tourists and workers who <br /> emigrate temporarily are considered residents of the <br /> country of their citizenship. <br />
  3. 3. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />3<br /> On the other hand, Balance of Trade considers the value of exports and imports of visible items i.e. merchandise only.<br />-- It does not take into account trade of invisible items.<br />-- Thus ‘Balance of Trade’ is a sub-set of ‘Balance of Payment’. <br />Components of Balance of Payment <br /> * B.O.P. on Current account<br /> * B.O.P. on Capital account<br /> * Unilateral Payment accounts<br /> * Official Settlement accounts<br />
  4. 4. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />4<br /> * Balance Of Payment on Current Account<br /> -- It includes value of exports and imports of visible items <br /> and receipts and payments on invisibles i.e. services like <br /> banking, insurance, travel, tourism, transportation etc. <br /> -- Balance of Payment on current account is added to <br /> determine nations’ Gross Domestic Product (GDP).<br />* Balance of Payment on Capital Account<br /> -- It comprises of <br />i) Private capital (both long and short-term) : <br /> Long- term with maturity period of more than one year <br /> and short-term with maturity of one year or less.<br /> -- Long-term private capital includes Foreign <br /> Investments ( both Direct and Portfolio), long term <br /> loans, foreign currency deposits and unclassified <br /> capital account receipts of foreign currency, SDRs etc. <br />
  5. 5. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />5<br /> ii) Banking capital covers the external financial assets and <br /> liabilities of commercial and co-operative banks who <br /> deal in foreign exchange.<br />Official capital are RBI’s holding of foreign currency, <br /> SDRs etc. on behalf of Govt. of India in the form of loan,<br /> miscellaneous receipts, payments etc.<br /> -- Capital outflow from home country to foreign <br />countries is treated as debit and inflow of capital from <br /> foreign countries to home country is treated as credit.<br /> Inflow on Curr. a/c bal. Import cover of<br />cap. accountas %age of GDPFor. Exch.(months)<br />93-94 $ 9.882 b. (-) 0.4 % 8.6 months <br />97-98 7.867 (-) 1.4 % 6.9<br />02-03 10.640 n.a. n.a.<br />05-06 24.238 (-) 1.1% 11.6<br />
  6. 6. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />6<br />* Unilateral Transfers Account <br />It comprises of uni-directional transactions like ‘giving of <br /> gifts’. Disaster relief, foreign aids, govt. grants, pension <br /> paid to and received by Indian citizens for services <br /> rendered abroad. <br />* Official Settlements Account<br />It represents official sales of foreign currencies and other <br /> reserves to foreign countries or official purchase of foreign <br /> currencies or other reserves from foreign countries.<br /> -- Credits here are money received from official sale of <br /> foreign currencies and reserves. Similarly, debits comprise <br /> of official purchases of foreign currencies and other assets. <br />Balance on Current Account consist of exports and<br /> imports of goods and services plus net unilateral transfers. <br />
  7. 7. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />7<br />Equilibrium in Balance of Payment of Nations<br /> -- When demand for and supply of foreign currency in a <br /> nation in a given period are equal – it is viewed as <br /> equilibrium position in BOP. <br /> -- But in case of most of nations, it is not so i.e. they either <br /> enjoy a surplus BOP or deficit. It represents disequilibrium <br /> in Balance of Nations. <br /> Disequilibrium in BOP are caused by :<br /> * Economic factors<br /> * Political factors and <br /> * Sociological factors.<br />
  8. 8. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />8<br />* Economic Factors may cause<br /> 1) Development Disequilibrium<br /> 2) Cyclical Disequilibrium<br /> 3) Secular disequilibrium and<br /> 4) Structural Disequilibrium<br /> 1. Development Disequilibrium<br /> -- Developing countries mostly take up activities like <br /> establishment of industries, infrastructure etc. which <br /> require greater imports of capital goods, machinery etc.<br /> In addition it also shoots up imports of consumer goods on <br /> account of increase in per capita income and aggregate <br /> demands.<br /> -- Thus increased developmental activities result in <br /> greater outflow of foreign currency leading to deficit in <br /> BOP.<br />
  9. 9. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />9<br />2. Cyclical Disequilibrium<br /> Due to fluctuations in business cycle in a country , value <br /> of imports of consumer goods and then consumer goods <br /> go up or down periodically, both of which lead to <br /> disequilibrium in BOP. <br /> 3. Secular Disequilibrium<br /> It mostly happens in developed countries where disposable <br /> income of people are very high. It raises in turn the cost of <br /> production and price of goods and services. <br /> -- Consequently, developed countries prefer to outsource <br /> goods and services from other countries where quality of <br /> goods is high and cost of production is low. <br /> -- It may lead to secular disequilibrium in BOP of nation. <br />
  10. 10. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />10<br /> 4. Structural Disequilibrium<br />-- Sometimes notable shift comes in nature of economy of <br /> countries e.g. from agricultural to manufacturing or <br /> services. <br />-- These may call for structural changes in developing<br /> alternative items, sources of supply, changes in transport <br /> channels and also costs.<br />-- These structural changes may enhance imports of capital <br /> goods and consumer goods resulting in deficits in BOP. <br />India’s BOP Disequilibrium due to Structural Changes <br />Between 1999-2000 & 2000-2001, structural changes in<br /> India’s economy increased POL imports from $ 5.64 b. to <br /> $ 9.77 b. ; electronic goods from $ 1.47 b. to $ 2.05 b. etc. <br />
  11. 11. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />11<br /> * Political Factors <br /> -- Political uncertainties, instability, internal disturbances, <br /> external wars etc. create threatening situation for local <br /> industry and investments. In such cases domestic <br /> production declines leading to increase in imports and <br /> outflow of capital <br /> -- It results in deficit in BOP as it happened in Sri Lanka, <br /> Pakistan etc. <br />* Social Factors <br /> -- Changes in culture, taste, preference, fashion etc. bring <br /> about changes in nature of import of consumer items first, <br /> followed by capital goods leading to deficit in BOP. <br />
  12. 12. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />12<br />Correction of BOP Disequilibrium <br /> When BOP becomes surplus, nations enjoy the same as it <br /> offers a number of desirable situation like increased <br /> purchasing power and influence in global market. <br /> -- In cases of disequilibrium due to deficit, countries adopt <br /> measures to eliminate the same completely, if not possible <br /> at least reduce it. <br />1. Automatic Correction of BOP Disequilibrium <br /> -- Deficit in BOP indicates that demand for foreign <br /> exchange is higher than its supply in the nation.<br /> -- It leads to devaluation of local currency in relation to the <br /> foreign currency. Thereby imports become costlier and <br /> exports cheaper. So imports get reduced and exports are <br /> increased. Thereby outflow of FE is reduced and income is <br /> increased leading to automatic restoration of equilibrium. <br />
  13. 13. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />13<br />2. Deliberate Measures <br />Govt. also adopts certain measures to control deficit BOP <br /> called ‘Deliberate Measures’ as indicated. <br /> A. Monetary Measures <br /> * Reduction in Money Supply : <br /> -- RBI takes to control credit so that money supply in <br /> the country is reduced which leads to decline in income, <br /> purchasing power, aggregate demand and consumption.<br /> -- Thus imports decline and hence outflow of foreign <br /> currency. In turn exports grow and inflow of foreign <br /> currency to set right BOP disequilibrium.<br /> * Interest Rate Adjustment :<br /> Inflow of FE in deficit BOP nation falls, so liquidity <br /> falls. So on short term basis ‘Interest rate’ is raised – <br /> leading to investments and loans coming from foreign <br /> nations improving BOP scenario. <br />
  14. 14. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />14<br /> * Devaluation<br /> In case of deficit BOP, purchasing power of local currency <br /> reduces, the Govt. delebarately devalues currency. Thus<br /> imports become costlier and exports cheaper. Hence <br /> increased exports and reduced imports balance the <br /> disequilibrium of BOP. <br /> * Exchange Control<br /> Exporters are to surrender the foreign exchange earned to <br /> RBI through authorised dealers and importers are to draw <br /> foreign exchange from authorised dealers.<br /> -- Through suitable policies from time to time, Govt. of <br /> India and RBI control imports to reduce deficit of BOP. <br /> B. Trade Measures<br /> These measures try to restore equilibrium through <br /> increasing exports and/or reducing imports. <br />
  15. 15. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />15<br /> * Export Promotion Measures<br /> Govt. of India endeavour to boost exports by reducing <br /> export duties, providing incentives, encouraging EOUs, <br /> forming EPZs, FTZs etc. <br /> * Import Control Measures <br /> Import control measures include ways and means of <br /> restricting imports through duties, quotas, licences etc.<br /> C. Miscellaneous Measures <br /> Govt. of India tries to remove BOP disequilibrium by <br /> assortment of means like <br /> a) Attracting Foreign Investments both FDI and FPI<br /> b) Attracting NRI deposits<br /> c) Promoting tourism<br /> d) Negotiating Foreign currency loans etc.<br />
  16. 16. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />16<br />Structure of India’s BOP Statement <br /> Credit Debit Net<br />A. Current Account<br /> I. Merchandise<br />i) Private<br /> ii) Govt.<br /> II. Invisibles<br /> 1. Non-monetary gold <br /> 2. Travel<br /> 3. Transportation<br /> 4. Insurance<br /> 5. Investment Income<br /> 6. Govt. not included anywhere<br /> 7. Miscellaneous <br /> 8. Transfers Receipts / Payments<br />i) Official<br /> ii) Private<br /> Total Current Account ( I + II )<br />
  17. 17. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />17<br />India’s BOP Account (contd.)<br /> Credit Debit Net <br />B. Capital Account<br /> 1. Private<br />i) Long-term<br /> ii) Short-term<br /> 2. Banking <br /> 3. Official<br />i) Loans<br /> ii) Amortisation<br /> iii) Miscellaneous <br /> Total Capital account (1 + 2 + 3 )<br />I.M.F.<br />S.D.R. Allocation <br />Capital Account, I.M.F. & S.D.R. Allocation<br />
  18. 18. 3/21/2010<br />Presentation by Prof. H.Ganguly.<br />18<br /> India’s BOP Account (Contd.) <br /> Credit Debit Net<br />Total Current Account, <br />Capital Account,I.M.F. <br />& S.D.R. Allocation<br />G. Errors & Omissions<br />H. Reserves and Monetary Gold <br />
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