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Balance of PaymentsINDIA 2006-12

VARUN GANDHI (038)VISHWAROOP SENYOGESHWAR SINGHVISHWANATHAN BALASUBRAMANIANVINOD RANA

COURSE ORGANIZATIONAL BEHAVIOURPGDM PT

It is a record of transactions done by resident country with the rest of world. Resident country: IndiaSources of fund for nation: exports or receipts of loans and investments, are recorded as positive or surplus items.Uses of funds: imports or to invest in foreign countries, are recorded as negative or deficit items.

What is BOPWhen all components of the BOP accounts are included they must sum up to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways such as by funds earned from its foreign investments inflows, by running down existing central bank reserves or by accepting loans (with stringent conditionalities) from outside.

Structure of BOPBOPPortfolio InvestmentsTradeCapital AccountCurrent AccountTransfer / factor PaymentsFDI/FIIsForex ReservesReservesGold ReservesInvisiblesNRE/NRI A/csIMF LoansComponents of BOPCurrent Account (CA):-

That part of balance of payments recording a nations export and import of goods and services and transfer pay.

Balance of trade,

Net factor income,

Net transfer payment.

CA = Exports (X) Imports (M)

Components of BOPCapital Account (KA):-

That part of balance of payments that reflects net change in national ownership of assets.

Capital Account = Foreign direct investment +Portfolio investment +Other investment

KA = Capital Inflow (cr) Capital Outflow (dr)

Components of BOPOfficial Reserves:Records the purchase or sale of official reserve assets by the Central Bank. These assets includeCommercial Paper, Treasury Bills and BondsForeign CurrencyMoney deposited with the IMFThis account shows the change in foreign exchange reserves held by the Central Bank.Since the BOP must balance

CA + KA + RFX = 0

CA + KA = RFXThe Balance of Payments Identity

Summary of BOP 2006-12

During 2010-11, exports crossed the US$ 200 billion mark for the first time, increasing by 37.3 per cent from US$ 182.4 billion in 2009-10 to US$ 250.5 billion.

Like exports, imports also recorded a 26.8 per cent increase to US$ 381.1 billion in 2010-11 from US$ 300.6 billion in 2009-10. Oil imports showed an increase of 19.3 per cent in 2010-11.

The trade deficit increased by 10.5 per cent to US$ 130.6 billion as compared to US$ 118.2 billion in 2009-10.

Main Components affecting

The BOP provides an extremely useful data for the economic analysis of the countrys weakness and strength as a partner in international trade.BOP also reveals the changes in the composition and magnitude of foreign trade.BOP also provides indications, future repercussions of countries past trade performances.USES OF BOP:-DISEQUILIBRIUM Total receipts and total payments inequality shows disequilibrium of balance of payments account

B = R PWhere, B stands for balance of payments, R denotes receipts from foreigners, P stands for payments made to foreignersA country whose balance of payments is positive is called as surplus country (R>P)A country whose balance of payments is negative is called as deficit country (P>R)

Types of DisequilibriumCyclical disequilibrium: It occurs on account of trade cycles. Cyclical fluctuations in demand are caused by changes in Income, employment, output & price.

Structural disequilibrium: It is caused because of fluctuation in the demand based on changes in tastes, fashions, habits, income, economic progress etc.

Short run disequilibrium: When a country borrows or lends internationally, it will have short run disequilibrium, as these are usually for short period.

Long run disequilibrium: It occurs because of accumulation of deficits or surpluses over a long period.1515Causes for Indias BOP deficit

Huge development & investment programs : Due to huge development and investment programs , Import goes on increasing , requirement of capital for rapid industrialization, while exports may not be boosted up to that extent. Thus, there will be structural changes in the balance of payments and structural equilibrium will result.Population growth: High population growth in poor countries has adverse impact on their balance of payments. Increase in the population increases the needs of these countries for imports and decreases the capacity of export.Huge external borrowing: A country will have adverse balance of payments when it borrows heavily from another countryInflation: Rapid economic development, increase in the income & price will adversely affect BOP position of a developing country like India.

Causes for Indias BOP deficitHow to correct the Balance of Payment ?Earning more foreign exchange through additional exports or reducing importsQuantitative changes in exports and imports require FURTHER policy changesSuch policy measures are in the form of monetary, fiscal and non-monetary measures.

1. The Quantitative Easing Tapering Policy announced in Aug 2013 by the US Federal Reserve Bank by which Additional Supply of 80 Billion $ per Month will cease, caused the flight of FII. Therefore hereafter FII should be taken as only birds of passage and treated as opportunistic investors. The Rupee lost 19 % of its value. We must plan for CAD to come under 1% of GDP over the next 4 years.2. Even a small nation like S. Korea exports manufactured goods 10 times that of India! A nations competitiveness is judged by its manufacturing and marketing efficiency. Thus there is the urgent need for political direction, bureaucratic coordination, a supporting financial system (sub 10 % interest rates), all out emphasis on infrastructure improvements, and a separate Ministry of International Trade & Exports.3. We must convert this CAD Problem and Rupee Downslide situation into an Opportunity, by taking strong Policy Measures over the next 3 Months speeding up Investments internally, bringing in Monthly Performance Accountability Audit in all Govt Depts, taking all Measures to double Indias Manufactured Goods Exports over the next 4 Years, and creating Brand India value abroad. The Nation should live the CREDO of doing International Commerce, for generating Growth.

Conclusion