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Balance of Payments
BALANCE OF PAYMENTS
• It is a double entry system of record of all
economic transactions between the residents
of the country and the rest of the world
carried out in a specific period of time.
• It takes into account the export and import of
both 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 of
visible items only.
• It takes into account only merchandise
exports & imports only.
Components of Balance of Payments
• Current account
• Capital account
Current Account
– It includes visible exports and imports, and
invisible items like receipts and payments for
various services.
– It contains credit and debit items.
– Credit includes merchandise exports and invisible
exports.
– Debit includes merchandise imports and invisible
imports.
BOP position of India on current account
• Its position is satisfactory at first five year plan. During
the period inflow of foreign capital was 127 cr. Deficit
of current account was only 42.3 cr.
• The second and third five year plans recorded negative
balance of payments.
• The fourth and fifth five year plans recorded positive
balance of payments with 100 cr. and 3082 cr.
respectively.
• From 1985-86 to 1989-90 Balance of Payments are
negative.
• During 2001-02 to 2004-05 India have surplus of BOP,
but 2005-06 onwards it suffered with the deficit. Again
India experienced positive BOP in 2008-09.
Reasons for Deficit Balance
• Government liberalized imports in 1985 this leads to
the 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 against
importing 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 and
cooperative banks authorized to deal
in foreign currency
Official capital
– RBI’s holdings in terms of foreign currency & Special
Drawing Rights
– Capital outflow from home country to a foreign
country is treated as debit.
– The inflow of capital from a foreign country to home
country is credit.
– Credit includes foreign long-term investment in the
home country and short term investment in the home
country
– Debit includes long term investments in foreign
country and short term investments in foreign
country.
Unilateral payment/transfers account
– These are ‘giving the gifts’
– These include Government grants, private
remittances, disaster relief, etc.
• Ex. India gave grant to an African country it is debit side
of India’s BOP a/c and credit side of the African country.
Official Settlements Account
• The official sales of foreign currencies and other
reserves to foreign countries or official purchases of
foreign currencies or other reserves from foreign
countries.
Balance of payments

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Balance of payments

  • 2. BALANCE OF PAYMENTS • It is a double entry system of record of all economic transactions between the residents of the country and the rest of the world carried out in a specific period of time. • It takes into account the export and import of both visible and invisible items.
  • 3. BOP statement includes • All the receipts on account of goods exported • Services rendered • Capital received by residents • Payments of residents • Capital transferred to foreign
  • 4. Balance of trade • It deals with exports and imports of visible items only. • It takes into account only merchandise exports & imports only.
  • 5. Components of Balance of Payments • Current account • Capital account
  • 6. Current Account – It includes visible exports and imports, and invisible items like receipts and payments for various services. – It contains credit and debit items. – Credit includes merchandise exports and invisible exports. – Debit includes merchandise imports and invisible imports.
  • 7. BOP position of India on current account • Its position is satisfactory at first five year plan. During the period inflow of foreign capital was 127 cr. Deficit of current account was only 42.3 cr. • The second and third five year plans recorded negative balance of payments. • The fourth and fifth five year plans recorded positive balance of payments with 100 cr. and 3082 cr. respectively. • From 1985-86 to 1989-90 Balance of Payments are negative. • During 2001-02 to 2004-05 India have surplus of BOP, but 2005-06 onwards it suffered with the deficit. Again India experienced positive BOP in 2008-09.
  • 8. Reasons for Deficit Balance • Government liberalized imports in 1985 this leads to the 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 against importing countries • 1990-91 crisis • less exports
  • 9. Capital Account • It is divided into – private capital – banking capital and – official capital
  • 10. 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)
  • 11. Bank capital • External financial assets • Liabilities of commercial and cooperative banks authorized to deal in foreign currency
  • 12. Official capital – RBI’s holdings in terms of foreign currency & Special Drawing Rights – Capital outflow from home country to a foreign country is treated as debit. – The inflow of capital from a foreign country to home country is credit. – Credit includes foreign long-term investment in the home country and short term investment in the home country – Debit includes long term investments in foreign country and short term investments in foreign country.
  • 13. Unilateral payment/transfers account – These are ‘giving the gifts’ – These include Government grants, private remittances, disaster relief, etc. • Ex. India gave grant to an African country it is debit side of India’s BOP a/c and credit side of the African country.
  • 14. Official Settlements Account • The official sales of foreign currencies and other reserves to foreign countries or official purchases of foreign currencies or other reserves from foreign countries.