Presentation on Balance Of Payment (BOP)

1. BALANCE OF PAYMENTS
A SUMMARY OF ALL PAYMENTS AND RECEIPTS BY INDIVIDUALS, BUSINESSES
AND THE GOVERNMENT

2. WHAT IS BALANCE OF PAYMENTS?
 The Balance of Payments is a statement that contains the
transactions made by residents of a particular country with the rest
of the world for a specific time period.
 It is also known as the balance of international payments and if
often abbreviated as BOP.
 It summarizes all payments and receipts by firms, individuals, and
the government.
 The transactions can be both factor payments and transfer
payments.

3. THE GENERAL RULE IN BOP ACCOUNTING
 a) If a transaction earns foreign currency for the nation, it is a credit and is
recorded as a plus item.
 b) If a transaction involves spending of foreign currency it is a debit and is
recorded as a negative item.

4. DOUBLE-ENTRY ACCOUNTING IN THE BOP
 All transactions are either debit or credit transactions
 Credit transactions result in receipt of payment from
foreigners
o Merchandise exports (valued f.o.b.)
o Transportation and travel receipts
o Income received from investments abroad
o Gifts received from foreign residents
o Aid received from foreign governments

5.  Debit transactions involve to payments to foreigners
o Merchandise imports
o Transportation and travel expenditures
o Income paid on investments of foreigners
o Gifts to foreign residents
o Aid given by home government
o Overseas investments by home country residents
 Each credit transaction has a balancing debit transaction, and
vice versa, so the overall balance of payments is always in
balance.

6. COMPONENTS OF BOP
 There are two accounts in the BOP statement:
 Current Account
 Capital Account.

8. CURRENT ACCOUNT
 Current account records all transactions involving goods, services, investment
income and current transfer payment.
 The four major components of current account are as follows:
o Invisible trade – This is the net of exports and imports of services (invisible
items). Transactions mainly constitute of shipping, IT, banking and
insurance services.
o Unilateral transfers to and from abroad – These refer to payments that are
not factor payments. These are ‘one-way’ transactions. For examples, gifts
or donations sent to the resident of a country by a non-resident relative.

9. o Income receipts and payments – These include factor payments and
receipts. These are generally rent on the property, interest on capital and
profits on investments.
o Visible trade – This is the net of export and imports of goods (visible items).
The balance of this visible trade is known as the trade balance. There is a
trade deficit when imports are higher than exports and a trade surplus
when exports are higher than imports

10. CAPITAL ACCOUNT
 The capital account is used to finance the deficit in the current
account or absorb the surplus in the current account. The three
major components of capital account:
o Loans to and borrowings from abroad – These consist of all loans and
borrowings given to or received from abroad. It includes both private sector
loans as well as the public sector loans.
o Investments to/from abroad – These are investments made by nonresidents
in shares in the home country or investment in real estate in any other
country.
o Changes in foreign exchange reserves – Foreign exchange reserves are
maintained by the central bank to control the exchange rate and ultimately
balance the BOP if it is not.

11.  Current account deficit is financed by a surplus in the capital account and vice
versa. This can be done by borrowing more money from abroad or lending
more money to non-residents.
 All purchases or sales of assets, including:
 Direct investment
 Securities (debt)
 Bank claims and liabilities
 Official reserves transactions

12. SIGNIFICANCE OF BOP
 The balance of payments data is important to a lot of users. Investment
managers, government policymakers, the central bank, businessmen, etc. all
make use of the BOP data to make important decisions.
 The BOP data is affected by vital macroeconomic variables such as exchange
rate, price levels, interest rates, employment, and GDP.
 Monetary and fiscal policies are formed in a way to achieve very specific
objectives, which generally exert a significant impact on the balance of
payments.
 Policies can be formed with the objectives to induce or curb foreign inflows or
outflows.

13.  Businesses use BOP to analyze the market potential of a country, especially in
the short term.
 A country with a large trade deficit is not as likely to import as much as a
country with a trade surplus.
 If there is a large trade deficit, the government may adopt a policy of trade
restrictions such as quote or tariffs.

14. REASONS FOR SATISFACTORY BALANCE OF PAYMENTS
 High earnings from invisibles
 Rise in external commercial borrowings
 Non- resident deposits
 Role of foreign investment

15. TRENDS IN INDIA’S BALANCE OF PAYMENTS
 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 equipment's in order to successfully launch and carry out the
programme of industrialization

16. FIRST PLAN
 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.

17. SECOND PLAN
 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.

18. THIRD PLAN
 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

19. FOURTH PLAN
 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.

20. FIFTH PLAN
 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 .

21. SIXTH PLAN
 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.

22. SEVENTH PLAN
 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.

23. Items 2004-05 (P) 2003-04 2002-03 2001-02 2000-01 1990-91
Trade Balance -38,130 -15,454 -10,690 -11574 -12460 -9437
Invisibles, net 31,699 26,015 17,035 17,035 9,794 -243
Current Account
Balance
-6,431 10,561 6,345 6,345 2,666 -9,680
Capital Account 32,175 20,542 10,840 10,840 8,840 7,056
Overall Balance 26159 31,421 16,985 16,985 5,868 -2,492
Foreign Exchange
Reserve
Increase
(+)/Decrease (-)
-26,159 -31,421 -16,985 -16,985 -5,842 1,278
Source: Reserve Bank of India Annual report (2004-05)
INDIA'S BALANCE OF PAYMENTS(2001-05)
US $ MILLION

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