BALANCE OF PAYMENTS• It is a double entry system of record of alleconomic transactions between the residentsof the country and the rest of the worldcarried out in a specific period of time.• It takes into account the export and import ofboth visible and invisible items.
BOP statement includes• All the receipts on account of goods exported• Services rendered• Capital received by residents• Payments of residents• Capital transferred to foreign
Balance of trade• It deals with exports and imports ofvisible items only.• It takes into account only merchandiseexports & imports only.
Components of Balance of Payments• Current account• Capital account
Current Account– It includes visible exports and imports, andinvisible items like receipts and payments forvarious services.– It contains credit and debit items.– Credit includes merchandise exports and invisibleexports.– Debit includes merchandise imports and invisibleimports.
BOP position of India on current account• Its position is satisfactory at first five year plan. Duringthe period inflow of foreign capital was 127 cr. Deficitof current account was only 42.3 cr.• The second and third five year plans recorded negativebalance of payments.• The fourth and fifth five year plans recorded positivebalance of payments with 100 cr. and 3082 cr.respectively.• From 1985-86 to 1989-90 Balance of Payments arenegative.• During 2001-02 to 2004-05 India have surplus of BOP,but 2005-06 onwards it suffered with the deficit. AgainIndia experienced positive BOP in 2008-09.
Reasons for Deficit Balance• Government liberalized imports in 1985 this leads tothe increase in imports significantly.• the Gulf war in 1990’s• the rapid industrialization (import of capital goods,technology, etc.)• the slow growth of invisibles• the devaluation/depreciation of rupee againstimporting countries• 1990-91 crisis• less exports
Capital Account• It is divided into– private capital– banking capital and– official capital
Private capital• Long term (> 1 year)» Foreign investments» Long term loans» Foreign currency deposits» Estimated portion of the unclaimed receipts allocated to the CA• Short term (< 1 year)
Bank capital• External financial assets• Liabilities of commercial andcooperative banks authorized to dealin foreign currency
Official capital– RBI’s holdings in terms of foreign currency & SpecialDrawing Rights– Capital outflow from home country to a foreigncountry is treated as debit.– The inflow of capital from a foreign country to homecountry is credit.– Credit includes foreign long-term investment in thehome country and short term investment in the homecountry– Debit includes long term investments in foreigncountry and short term investments in foreigncountry.
Unilateral payment/transfers account– These are ‘giving the gifts’– These include Government grants, privateremittances, disaster relief, etc.• Ex. India gave grant to an African country it is debit sideof India’s BOP a/c and credit side of the African country.
Official Settlements Account• The official sales of foreign currencies and otherreserves to foreign countries or official purchases offoreign currencies or other reserves from foreigncountries.