A VERY DETAILED AND ELABORATED PPT ON THE BOP OF INDIA WHERE THE COMPONENTS ARE MENTIONED, THEN A BRIEF OF THE CRISIS OF 1991 IS MENTIONED AND THEN THE DEVELOPMENTS FROM THE ECONOMIC SURVEY OF 2013-14 ARE ALSO FOCUSED UPON.

1. DEDICATED AT HIS
DIVENE LOTUS FEET

2. BALANCE OF
PAYMENTS

3. Balance of payments?
 A systematic record of all the economic transactions of
goods and services that take place between the
domestic country and the ROW. It represents a
classified record of all the receipts on the A/C of goods
and services traded and the capital received and
invested by the domestic country.

4. Why BOP?
 Judge economic and financial status of a country in
the short-run.
Deficit signifies a tendency to take a stiff measures for
diminishing imports, exchange control and
restrictions on repatriation of dividends or the
interests.

5. Components Of Balance of Payments
Current A/C Capital A/C
Errors and
Omissions
Overall
BOP
Monetary
Movements

6. Current A/C
BOP on Current A/C refers to the inclusion of two
balances:
Merchandise balance
 Invisible balance
In other words, the net balance of the visible and
invisible trade defines the balance on the Current
account.

7. Capital A/C
The Capital A/C records all transactions that involve a
resident of the country changing his assets or liabilities
with the resident of another country. Transactions in the
Capital A/C show the change in the stock, i.e., assets or
the liabilities.

8. Brief History
In 1991 India faced a critical economic and currency crisis.
REASONS:
I. High Fiscal Deficit
II. Current A/C Deficits
 The consumption driven growth strategy in the
year 1979 pushed up the Fiscal Deficit.
 Direct taxes were continuously reduced.

9. Two immediate external shocks contributed to the large
Current A/C deficit of 3.1% during 1990-91.
 GULF CRISIS in August 1990, where the
petroleum import costs in 1990-91 increased by
half to $5.7 bn,
 The GLOBAL RECESSION, where the world
growth reduced from 4.5% in 1988 to 2.25 in 1991.
MEASURES:
 Economic Liberalization: to remove the
inefficiencies in the economic system
 Privatization: transfer of the activities or
organization from the public to private sector.

10.  Globalization: growing economic
interdependence among the countries in the
world with regards to the capital, information,
goods & services, etc.

11. Developments in BOP
 India’s BOP position improved dramatically in 2013-14.
CAD declined sharply:
YEAR U.S.$ (in
billions)
Proportion
in GDP
2012-13 82.2 4.7
2013-14 32.4 1.7

12.  The stress in India’s BOP, which was observed during 2011-12
as a fallout of the euro zone crisis and inelastic domestic
demand for certain key imports, continued through 2012-13 and
the first quarter of 2013-14.
 Capital flows (net) to India, however, remained
high and were sufficient to finance the elevated CAD in
2012-13, leading to a small accretion to reserves of US$ 3.8
billion.

13. The rise in imports owed to India’s dependence on crude
petroleum oil imports and elevated levels of gold imports since
the onset of the global financial crisis.
 Capital flows (net) moderated sharply from US$ 65.3
billion in 2011-12 and US$ 92.0 billion in 2012-13 to
US$ 47.9 billion in 2013-14.
 This moderation in levels essentially reflects a sharp
slowdown in portfolio investment and net outflow in
short-term credit and other capital.
Those countries with large CADs saw larger volumes of
outflows and their currencies depreciated sharply.

14. Global Economic Environment
Global economic recovery appears to have strengthened in
recent months and is expected to further improve. The
recent uptick in global growth is mainly concentrated in
advanced economies and some emerging market and
developing economies.
 Stronger external demand from the advanced economies
would lift growth in EMEs.

15. The World Economic Outlook
WEO projects growth in the world economy to
strengthen from 3% in 2013 to 3.6% in 2014 and 3.9%
in 2015.
EXPECTED GROWTH:
ECONOMIES Growth in 2014 (in %)
Advanced Significantly to 2.2
Emerging Projected at 4.9
Developing ,,

16.  The financial situation in developed countries is posing
challenges in many EMEs. Bond markets are now more
sensitive to changes in accommodative monetary policies in
advanced economies because foreign investors have crowded
into local markets and can withdraw at the slightest hint of
adverse circumstances.
 The Indian economy witnessed substantial improvement on
the external sector front. India’s BOP situation witnessed a
turnaround during 2013-14 as
Exports increased modestly
Depreciating Rupee
Imports declined

17. ECONOMIC SURVEY
2013-14

18.  The government swiftly moved to correct the situation
through restrictions in non-essential imports like gold,
(customs duty hike in gold and silver to a peak of 10 per
cent), and measures to augment capital flows through
quasi-sovereign bonds and liberalization of external
commercial borrowings.
 The RBI also put in place a special swap window for
Foreign Currency Non-Resident deposit Banks [FCNR
(B)] and banks’ overseas borrowings through which
US$ 34 billion was mobilized.

19. Current A/C developments
2012-13
After registering strong growth in both imports and
exports in 2011-12, merchandise trade (on BOP basis)
evidenced a slowdown in 2012-13.
2011-12 2012-13
Exports
(U.S. bn $)
309.8 306.6
Imports
(U.S. bn $)
499.6 502.2
Trade Deficit
(U.S. bn $)
-189.8 -195.6

20.  The decline in exports owed largely to weak global demand
arising from the slowdown in advanced economies
following the euro zone crisis, which could only be partly
compensated by diversification of trade.
 Net imports of PoL shot up to US$ 99.0 billion in 2011-12
initially on account of a spurt in crude oil prices (Indian
basket) and remained elevated at US$ 103.1 billion and US$
102.4 billion in the next two years.
 Gold and silver imports rose to a peak of U.S. $ 61.6 bn in
2011-12 and moderated only somewhat in 2012-13. Hence the
and record high trade deficit in 2012-13.

21.  With relatively static levels of net inflow under services and
transfers, it was the net outflow in income (mainly investment
income), which explained the diminution in level of overall net
invisibles balance.
 Software services continue to dominate the non-factor
services account and in 2012-13 grew by 4.2 per cent on
net basis to yield US$ 63.5 billion with other services
broadly exhibiting no major shifts.
 Investment income (net) outgo constituted 25.4 per
cent of the CAD in 2012-13.

22. Current A/C developments in
2013-14
In terms of the major indicators, the broad trend witnessed
since 2011-12 continued through to the first quarter of 2013-14.
 Imports continued to be at around 120-130 billion per
quarter for nine quarters in a row.
 Exports were below 80 billion for most quarters.
 Trade deficit remained elevated at around U.S. $ 45bn.
 The widening of the trade deficit in the first quarter
mainly owed to larger imports of gold and silver in the
first two months of 2013-14.

23. Coordinated measures to promote exports, curb imports
particularly those of gold and non-essential goods, and
enhance capital flows were taken by the govt. and RBI.
These measure led to a turnaround of the BOP position in the
latter three quarters of 2013-14.
RESULT:
o Significant rise in the exports (to U.S.$ 80bn)
o Reduction in imports (to U.S.$ 114bn)
o Significant contraction in trade deficit (to U.S.$ 30bn)
o Overall Exports – U.S.$ 318.6bn in 2013-14
Imports – U.S.$ 466.2bn in 2013-14
Trade deficit - U.S.$ 147.6bn in 2013-14

24. Decomposition of Trade Deficit
A decomposition of the performance of trade deficit in 2013-14
as against2012-13 indicates that of the total reduction of U.S.$
48.0bn.
 Reduction in imports of gold and silver - 47%
 Reduction in non-PoL and non-gold imports constituted - 40%
 Change in exports constituted 25%
 Net-invisible surplus remained stable at U.S.$ 28-29 per quarter
resulting in overall net surplus of U.S.$ 115.2 for 2013-14
• Software services improved modestly from US$ 63.5 billion
in 2012-13 to US$ 67.0 billion in 2013-14.

25. Capital / Finance A/C in
2012-13
 In terms of macroeconomic identity, the resource
expenditure imbalance in one sector needs to be financed
through recourse to borrowing from other sectors and the
persistence of high CAD requires adequate net
capital/financial flows into India. Any imbalance in demand
and supply of foreign exchange, even if frictional or cyclical,
would lead to a change in the exchange rate of the rupee.
 FII on a net yearly basis has remained more or less +ve since
2008 crisis.
 Post 2008 crisis the CAD remained elevated at many times
the pre 2008 levels

26.  In 2012-13, net capital inflows were placed at US$ 92.0 billion
and were led by FII inflows (net) of US$ 27.6 billion and
short-term debt (net) of US$ 21.7 billion.
 There was some diminution in net inflows in 2011-12 on
account of the euro zone crisis.
 In net terms, capital inflows increased significantly by 40.9
per cent to US$ 92.0 billion (4.9 per cent of GDP) in 2012-13
as compared to US$ 65.3 billion (3.5 per cent of GDP) during
2011-12.

27. Capital / Finance A/C in
2013-14
Outcomes in 2013-14 were a mixed bag.
 The higher CAD in the first quarter of 2013-14 was financed
to a large extent by capital flows.
 The moderation observed in the fourth quarter of 2012-13
continued through 2013-14.
 The communication by the US Fed in May 2013 about its
intent to roll back its assets purchases and market reaction
thereto led to a sizeable capital outflow from forex markets
around the world.
 Net capital inflows became negative leading to a large reserve
drawdown of US$ 10.4bn in (July-September 2013) quarter.

28. Quarter wise updates
 FIRST & SECOND QUARTER: FDI net inflows continued to
be buoyant with steady inflows into India backed by low
outgo of outward FDI.
 THIRD QUARTER: there was turnaround in the flows of FIIs
and copious inflows under NRI deposits in response to the
special swap facility of the RBI.
 FOURTH QUARTER: while FDI inflow slowed, higher
outflow on account of overseas FDI together with outflow of
short term credit moderated the net capital inflows into
India.

29. Foreign Exchange Reserves
Change in foreign exchange reserves can be decomposed into
change in reserves on BOP basis and valuation changes in the
assets held by the RBI, which are denominated in US dollars.
 As against a reserve accretion of US$ 15.5 billion on BOP
basis as at end March 2014, foreign exchange reserves in
nominal terms increased by only US$ 12.2 billion as there was
a valuation loss in the non-US dollar assets held owing to
cross-currency movements and the decline in gold prices. As
at end May 2014, foreign exchange reserves stood at US$ 312.2
billion.

30.  Foreign exchange reserves were placed at US$ 304.2 billion at
end March 2014 as against a level of US$ 292.0 billion at end
March 2013.
 Foreign currency assets are the main component of foreign
exchange reserves and were US$ 276.4 billion at end March
2014.
 A second major component of the reserves was gold, valued
at US$ 21.6bn at end March 2014, lower than at end March
2013.

31.  India continues to be one of the countries that have sizeable
foreign exchange reserves particularly considering that some
of the other major reserve holders are nations with large
current account surpluses.
 In the specific context of developments in 2013-14, the
intervention was to provide a measure of comfort against the
elevated levels of vulnerability indicators which are
expressed as proportions of reserves.

32. Composition of
FOREIGN TRADE
 This means the composition of the EXPORTS and the
IMPORTS.
 This shows the rate of the structural changes and the effect
on the economic development.
 Any country that imports raw materials & food and exports
capital good then the country is in the DEVELOPING
STAGE.
 Any country that imports capital goods and exports raw
materials & food, then the country is in the
UNDERDEVELOPED STAGE.

33.  The II-five year plan focused on the INDUSTRIALIZATION
which changed the composition of the trade.
EXPENDITURE PATTERN: During –
o 1960-61 > 1/3rd of the total expenditure on the capital goods.
o 1996-97 > 1/5th of the total expenditure was on the capital
goods.
o 2010-11 > 13.5% of the total expenditure was on the capital
goods.
o 36.7% of the imports constituted of POL in 2013-14.
o 13.2% reduction in the imports from 2012-13 to 2013-14.

34. Direction of TRADE
 British controlled the trade of India.
 USA was the major exporter to India during the planning
period.
 During the FY – 2010-11 the major imports were from –
1. CHINA > 11.4%
2. UAE > 8%
3. SWITZERLAND > 6.1%

35.  During the FY – 2013-14, the imports were from
a) OCED countries
b) OPEC countries
c) EASTERN countries
d) UAE
e) Other Developing countries
 50% of the exports was to the ASIAN countries.
 The top trading countries of India are CHINA, USA and UAE.
 INDIA has ever been in trade deficit except for the FYs -
1972-73 and 1976-77.4

36. International Comparison
 A cross-country comparison of total external debt of the 20
most indebted developing countries, based on the World
Bank’s International Debt Statistics 2014 showed that India’s
position was THIRD in terms of absolute external debt stock,
after China and Brazil.
 The ratio of India’s external debt stock to gross national
income (GNI) at 20.8 per cent was the FOURTH lowest with
China having the lowest ratio at 9.2 per cent.
 In terms of the cover of external debt provided by foreign
exchange reserves, India’s position was SEVENTH at 71.4 per
cent.