Balance of Payments (BoP) is an accounting system
that records the economic transactions between the
residents and Government of a particular country with
the rest of the world.
Economic transactions includes imports and exports of
goods and services, capital inflows and outflows, gifts
and other transfer payments and changes in a
country’s international reserves.
BoP is important to investors, MNCs , business
managers, consumers and Govt. officials as it affects
the value of currency and also influences macro
economic variables like GNP, interest rates, exchange
rate, price level etc..,
HOW IS BOP PREPARED?
The Reserve Bank of India (RBI) is responsible for
compiling the balance of payments for India.
In accordance with the Foreign Exchange Management
Act (FEMA) of 1999, all foreign exchange transactions
must be channeled through the banking system which
must submit various periodical returns and supporting
Transactions that are not routed through banking
channels, information is obtained directly from the
relevant government agencies, concerned agencies,
and departments within the RBI.
The information is also supplemented by data
collected through various surveys conducted by the
RBI. Data are prepared on a quarterly basis and are
published in the Reserve Bank of India Bulletin.
Balance of payment (BoP) comprises of current account,
capital account, errors and omissions and changes in
foreign exchange reserves.
The Current Account
This account is typically divided into 3 categories namely
merchandise trade balance, services balance and
balance on unilateral transfers.
The Capital Account
This account is sub categorized into direct investment,
portfolio investment and other capital flows.
Official Reserves Account
These are Government owned assets. It represents
purchases and sales by RBI. It is necessary to account
for deficit or surplus in BoP.
The current account registered an improvement in the
first quarter (April-June) of FY13 over Q1 FY12, with
current account deficit (CAD) declining to US$ 16.4
billion, from US$ 17.4 billion. This reduction in deficit has
been supported by a sharper decline in imports as
compared with exports.
However, as a proportion of GDP, CAD rose to 3.9% in
Q1 FY13 when compared with 3.8% in Q1 FY12. This
may be attributed to the fall in GDP growth and the
depreciation of the rupee depreciation by about 17%
against the dollar during this quarter.
Goods exports recorded a decline of 2.6% while imports
registered a sharper decline of 3.6%
Trade deficit amounted to US$ 42.5 billion, i.e. 10.0% of
GDP (as against 9.8% in Q1 FY12)
Net exports of services declined 13.0% during Q1 FY13
over Q1 FY12 on account of lower growth in receipts in
transportation, travel, construction, insurance & pension
services and other business services sectors.
Net inflows under capital witnessed a decline, primarily
on account of moderation in foreign direct investment
(FDI) inflows and loans by banks and non-banks
Net secondary income (private transfers/remittances)
receipts remained buoyant at US$ 16.8 billion, benefitted
by the depreciating rupee;
INDIA’S POSITION OF BOP
With only enough cash in the RBI to pay for seven
months of imports and weak fund inflows, the balance of
payments position is undermining its ability to defend a
India has $280 billion of foreign exchange reserves, by
far the lowest of the BRICs, the four major emerging
By the end of this fiscal year, India needs to repay $172
billion of liabilities such as foreign borrowings, trade
credit, and private debts which is almost 45% of its
overall external borrowings and equivalent to 59% of its
CHALLENGES & MEASURES
room to increase exports in the short run is limited,
as they are dependent upon the recovery and growth of
partner countries, especially in industrial economies.
The main focus has to be on curbing imports, mainly by
making oil prices more market determined, and curbing
imports of gold.
At the same time, further measures to ease the inflow of
remittances and steps to diversify software exports
could help reduce financing needs.
Greater emphasis on FDI & FII, including opening up
sectors further can help increase the quantum of safe
Finally, external commercial borrowing needs to be