Balance of Payments

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When countries trade there are financial transactions among

businesses or consumers of different nations
Money constantly flows into and out of a country
The system of accounts that records a nations international
financial transactions is called its balance of payments (BP)
It records all financial transactions between a countrys firms,
and residents, and the rest of the world usually over a year
The BP is maintained on a double-entry bookkeeping system

Balance of Payments
The BP is the difference between receipts and payments
BP Receipts
BP Payments
merchandise export sales.
money spent by foreign tourists.
transportation.
payments of dividends and
interest from FDI abroad.
new foreign investments in the
INDIA.

costs of goods imported.

spending by INDIA. tourists
overseas.
new overseas investments.
cost of foreign military and
economic aid.

Balance of Payments
The BP includes three accounts:
(1)
(1) current
current accounta
accounta record
record of
of
all
all merchandise
merchandise exports,
exports, imports,
imports,
and
and services
services plus
plus unilateral
unilateral
transfers
transfers of
of funds;
funds;

(2)
(2) the
the capital
capital accounta
accounta record
record of
of
direct
direct investment,
investment, portfolio
portfolio
investment,
investment, and
and short-term
short-term capital
capital
movements
movements to
to and
and from
from countries;
countries;

(3)
(3) the
the official
official reserves
reserves accounta
accounta record
record of
of exports
exports and
and imports
imports of
of gold,
gold,
increases
increases or
ordecreases
decreases in
in foreign
foreign exchange,
exchange, and
and increases
increases or
or decreases
decreases in
in
liabilities
liabilities to
to foreign
foreign central
central banks;
banks;

Current Account
Credit (receipts)

(Rs.)

Debit (payments)

Goods exported
Services exported
Incomes from
Investment in the
Foreign country
Unilateral receipts

xxx
xxx

Goods imported
xxx
Services imported
xxx
Incomes to
Foreigners on
Investment in the
Reporting country
xxx
Unilateral payments xxx

xxx
xxx

(Rs.)

Capital Account
Credit (receipts)
Short term
Borrowings
Long term
Borrowings
Sale of gold/assets

(Rs.)
xxx
xxx
xxx

Debit (payments)

(Rs.)

Short term lending

Long term lending
Purchase of
gold/assets
Errors and
Omissions

xxx
xxx
xxx
xxx

INDIA POSITION OF BOP FROM

INDEPENDENCE(1947) TILL
1990(GLOBALISATION PERIOD)

India's Balance of Payments: 2006-07 (AprilMarch)

(US $ million)

Items

2006-07 P

2005-06 PR

Exports

127,090

105,152

Imports

191,995

156,993

Trade Balance

-64,905

-51,841

Invisibles, net

55,296

42,655

Current Account Balance

-9,609

-9,186

Capital Account*

46,215

24,238

-36,606

-15,052

Change in Reserves (- Indicates

increase) #

*: Including errors and omissions. #: On BoP basis excluding valuation.

P: Preliminary PR: Partially Revised.

Causes of Disequilibrium in the

BOP

The various causes of disequilibrium in the BOP are:

Business Cycles
Economic Development
Population Pressure
Demonstration Effect
Heavy External Borrowing
Inflation
Flight of Capital
Changing Market Demand
Non Tariff Barriers
Globalisation