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Balance of Payment is thesystematic record of all theinternational economic ormonetary transactions of acountry during a given period oftime usually one year.International transactionsinclude exchanges of goods,services or assets.
› The Current Account› The Capital Account› Official Reserves Account› Errors and Omissions
Goods account (Include all import and export of visible) Service Account (Include all import and export of invisible) Unilateral Transfers Account (Gifts,Grants,etc).
› Long term Capital Account (Pvt. Direct Investment & Portfolio Investment & Govt. Loans to foreign government.› Short Term Capital Account (Bank accounts & Other short term Payments)
Official reserves assets include gold reserves, foreign currencies, SDRs, reserve positions in the IMF.
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".
Balance of PaymentsRed = deficit (more imports than exports)Blue = surplus (more exports than imports)Grey = no data
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
During the first plan period, the balance of payments was affected by the Korean War boom, American recession of 1953 and favorable monsoon at home which helped to boost agricultural and industrial production. balance of payment during the first plan was only Rs. 42 crores.
An important feature of the second plan period was the heavy deficit in the balance of trade which aggregated to Rs. 2339 crores. The foreign exchange reserves sharply declined and the country was left with no choice but to think of ways and means to restrict imports and expand exports
The balance of current account was unfavorable during the third plan . The serious adverse balance of payments which started with the second plan continued relentlessly during the third and annual plans. Heavy amount had to be paid by India in the form of interest payments on loans
One of the objectives of the fourth plan was self-reliance – i.e., import substitution of certain critical commodities on the one side and export promotion so as to match the rising import bill, on the other Accordingly the government managed to restrict imports and succeeded in expanding exports.
During the whole of the Fifth Plan India experienced a surplus balance of payments due to a sharp increase in the exports surplus on account of invisibles. From 1979-80 onwards, India started experiencing very adverse balance of payments. India had to meet this colossal deficit in the current account through withdrawals and borrowings from IMF .
The Sixth plan characterize the balance of payments position acute. The annual average current account deficit was of the order of rs.2600 crores during the Sixth Plan. During the Sixth Plan, the trade deficit was 3.3 per cent of GDP and current account deficit was 1.4 per cent of GDP.
Exports performance substantially improved in the Seventh Plan with average volume growth exceeding 7 per cent. The share of net invisible earnings in financing trade deficit declines from 63 per cent during the Sixth Plan to 29.5 per cent during the Seventh Plan. The average current account deficit as a per cenr of GDP increased to 2.4 per cent in the Seventh Plan.
BOP BOT Include all international Part of BOP transactions Only Visible Both Visible and invisible items items. Smaller than Wider than BOT BOP Always in balance No need to be balance
Period FeaturesI. Up to 1975-76 I. DeteriorationII.1976-77 to 1979-80 II. Transition & ImprovementIII.1980-81 to 1989-90 III. Emergence &IV.1990-90 to 1995-96 Persistence of structural ImbalanceV. 1996-97 to 2010-11 IV. Stabilization & Strengthening V. Resilience in addition to growth
Difficulty in India’s BOP Slow growth of exports in relation to import 92% CAD was financed by external assistance at concessional terms CAD was 1.8 % of GDP
Golden years of BOP’s CA surplus of 0.6% of GDP Foreign exchange reserve surplus Period of Indira Gandhi
Severe BOP difficulties Loan from IMF, 5Billion SDR in 1981 but took 3.9Billion Deficit in external trade Widening trade deficit due to import requirement Decline in invisibles Reduction in concessional assistance & market rate Disintegration of USSR &Gulf War CAD 2.2% of GDP
BOP crisis reached its climax in 1990- 91 it is 3% of GDP
Preference to non-debt creating capital flows Liberalise the current account & gradual liberalisation of Capital account Fiscal&Monetary disciple Devaluation of Rupee by 20%-1991 Exchange rate change (LERMS-92,UER-93& FULL CONVERIBILITY OF CURRENCY IN THE CURRENT CCOUNT) Import restrictions on capital account & raw materials, Structural reforms aims at attracting FDI & Portfolio investments Reduction in tariff, As A result improvement in both CA & CAd
Again Trade deficit Due to;Impact of liberalization, Increasing manufacturing activity, surplus in invisible, pvt enterprises• Capital account surplus to solve the BOP problemo Due to foreign exchange reserves, through FDIo Overall surplus
Growing import intensity Net surplus on invisibles Mounting burden of external debt servicing Rising oil import Commercial borrowing Nature of FDI Management of capital account Inflow of concessional aid