Balance of Payments

Group No :3
Aayushi Maniar- 02
Devendra Newaskar-17
Fraveshi Gheesta -18
Kejul Shah- 26
Prachi Shah – 36
Sagar Vagadia- 43
 BALANCE OF PAYMENTS
The balance of payments, also known as balance of international payments of a country is the
record of all economic transactions between the residents of the country and the rest of the world
in a particular period.
 Standard Presentation of India's Balance of Payments as per BPM6 for the FY Ending 16-17
(INR Billion)

Apr-Jun 2016 PR Jul-Sep 2016 PR Oct-Dec 2016 PR Jan-Mar 2017 P Apr-Mar

2016-17 P
Credit Debit Net Credit Debit Net Credit Debit Net Credit Debit Net Credit Debit Net
1 Current Account (1.A+1.B+1.C) 8359 8385 -26 8549 8780 -231 8778 9315 -537 9267 9497 -230 34952 35976 -1024
1.A Goods and Services (1.A.a+1.A.b) 7090 7632 -541 7251 7875 -624 7477 8522 -1045 7912 8722 -810 29731 32751 -3020
1.A.a Goods (1.A.a.1 to 1.A.a.3) 4456 6051 -1594 4514 6229 -1715 4636 6879 -2243 5184 7175 -1992 18789 26334 -7545
1.A.b Services (1.A.b.1 to 1.A.b.13) 2634 1581 1053 2737 1646 1091 2842 1643 1199 2728 1547 1182 10942 6417 4525
1.B Primary Income (1.B.1to1.B.3) 245 667 -422 276 816 -539 271 701 -430 300 672 -372 1093 2856 -1763
1.C Secondary Income (1.C.1+1.C.2) 1024 86 938 1021 89 932 1029 92 938 1054 102 952 4128 369 3759
2 Capital Account (2.1+2.2) 15 4 11 4 5 -1 4 5 -1 6 5 2 29 19 10
3 Financial Account (3.1 to 3.5) 8625 8623 2 9300 9011 289 9346 8852 494 9720 9516 204 36990 36001 989
3.1 Direct Investment (3.1A+3.1B) 948 688 260 1612 473 1138 1251 594 656 938 603 335 4748 2359 2389
3.2 Portfolio Investment 3876 3735 141 4173 3767 405 3264 4028 -765 4763 4040 724 16075 15570 505
Financial derivatives (other than reserves) and 459 259 200 401 347 54 400 190 210 293 98 195 1553 893 659
3.3 employee stock options
3.4 Other investment 3343 3474 -131 3115 3853 -738 4348 4040 308 3725 4286 -560 14531 15653 -1122
3.5 Reserve assets 0 466 -466 0 570 -570 84 0 84 0 490 -490 84 1526 -1442
3 Total assets/liabilities 8625 8623 2 9300 9011 289 9346 8852 494 9720 9516 204 36990 36001 989
Of which: (by instrument):
3.0.1 Equity and investment fund shares 4532 3822 709 5273 3827 1447 4182 3601 581 5000 4013 987 18986 15263 3723
3.0.2 Debt instruments 3929 4164 -235 3912 4319 -406 4912 5062 -150 4368 4717 -349 17121 18262 -1141
3.0.3 Other financial assets and liabilities 165 637 -472 114 865 -751 252 188 64 352 786 -434 884 2477 -1593
4 Net errors and omissions 13 13 57 -57 45 45 25 25 82 57 25
PR: Partially Revised. P: Preliminary. Source : https://rbi.org.in/scripts/SDDS_ViewDetails.aspx?SDDSID=235&ID=5
 0.86 1.24
-7.11 -6.9 -4.06 -3.27
-6.97 -8.51 -7.31
-11.18 -11.43 -11.41
-13.18

-30.15

-0.69 -0.32 -0.38

-1.21
-3.45 -3.43
-6.12
-7.46 -7.7 -7.11 -7.96
-8.54
-10.94
-14.32
STRUCTURE OF BOP

 TRADE ACCOUNT BALANCE

 CURRENT ACCOUNT BALANCE

 CAPITAL ACCOUNT BALANCE

EFFECTS OF A TRADE DEFICIT
Raises a country's standard of living
Reduces the threat of inflation
Creates jobs outsourcing
Domestic industry lose the expertise needed to remain competitive

EFFECTS OF A TRADE SURPLUS

Country has control over it’s own currency
High demand of domestic goods in foreign market
Goods and services become more highly relied upon internationally.
 Effects ofRupee
• Devaluation of Fluctuations in leads
strengthens the US $ which FOREX Rate
to increase on BOP
in exports
•Devaluation makes the imports dearer and thereby leads to reduction in imports
•Attempts are made to substitute the imports with domestically produced goods
•Thus the net aggregate demand for domestic goods increases
• This will cause expansion in output and is therefore likely to increase GNP.
•Thus a devaluation or depreciation can therefore serve as a stimulus to the economy
•If one country devalues its currency to stimulate its economy, the other countries can also do so. Eg: The
Great Depression (1929-33)
• A country facing severe disequilibrium in its
BOP, devalues its currency to raise exports
and reduce imports and thus to restore
equilibrium in the balance of trade &
payments.

• Devaluation is likely to worsen the balance of

trade for the first few quarters . However,
after a time lag, the balance of trade may
improve as per the “J” Curve in Fig 28.8
Source: http://www.economicsdiscussion.net/foreign-exchange-rate-2/effects-of-depreciation-and-devaluation-of-the-exchange-rate/10855
 Composition of Export-Imports
• Major Exported goods:
Software, Engineering goods
Gems and Jewellery
Agricultural product
Textile goods, Chemicals
Leather manufactures

• Major Imported goods:

Crude oil
Aircraft spare parts
Electronics & Electrical goods
Telecom Equipments
Machinery
 Balance of Payments Surplus Implications
• A Surplus in the BOP occurs when Total Receipts exceed Total Payments.
• Contributor to GDP i.e. net external demand is positive
• Might cause demand-pull inflationary pressure
• Accumulation of foreign exchange reserves
• Pressure on the currency to appreciate
• Allows a country to be a net exporter of capital
• Huge surpluses could trigger protectionist responses
• Reveals that the country produces enough economic output to pay for its growth.
• Indicates that the government and residents are savers. They provide enough capital to pay for all
domestic production. They might even lend outside the country.
• A surplus boosts economic growth in the short term. That's because it's lending money to
countries that buy its products. That boosts its factories, allowing them to hire more people.
 Balance of Payments Deficit Implications
• A Deficit in the BOP occurs when the Total Payments exceed Total Receipts.
• A deficit leads to lower aggregate demand and therefore slower growth
• In the long run, persistent trade deficits undermine the standard of living
• Trade deficit can lead to loss of jobs in home-based industries
• Deficit countries need to import financial capital to achieve balance
• A trade deficit can lead to currency weakness and higher imported inflation
• Countries may run short of vital foreign currency reserves
• A trade deficit is a reflection of lack of price / non-price competitiveness
• Currency weakness can lead to capital flight / loss of investor confidence
• A balance of payments deficit means the country imports more goods, services and capital than
it exports. It must borrow from other countries to pay for its imports.
• In the long-term, the country becomes a net consumer, not a producer, of the world's economic output.
It will have to go into debt to pay for consumption instead of investing in future growth. If the deficit
continues long enough, the country may have to sell off its assets to pay its creditors. These assets
include natura; resources ,land and commodities.
Impact of Monetary Policy on Balance of Payments
• Appropriate adjustment between demand and supply for money
• Price Stability
• Credit Control
• Creation & Expansion of Financial institutions
• Suitable Interest Rate Structure
• Debt Management
Impact of Fiscal Policy on Balance of Payments
1. Fiscal Policy of Restraint: A policy of fiscal restraint is exercised when the economy is
operating at full capacity and inflation begins to set in.
• A fiscal policy of restraint will cause both the government and consumers to slow its
spending.
• A general decrease in overall spending will lead to outflow of cash decreasing therefore
reducing the debit side of Balance of Payments.
2. Fiscal Stimulus Policy: When the economy is sluggish and unemployment
is rising a stimulus fiscal policy may be used to jumpstart the economy.
• By lowering taxes and increasing government spending ,demand increases and jobs are
created.
• When more people are employed & discretionary spending increases as a result of
decreased taxes ,consumers purchase more goods.
• As a result ,the outflow of cashflow may increase ,the debit side of Balance of Payments
increases.
 Comparison With Other Economies
Current Account Balance (in Billions Net Financial Account (in Billions US$)
178.611
US$)
304.164 91.523
-122.571
134.134 -102.278
-22.457 -462.961 -22.88 -195.223

China Japan India United United China Japan India United United
Kingdom States Kingdom States

Current Account Balance as % of GDP Net Capital Account (in Billions US$)
2.749 3.06
0.316 0.037 -0.043
-1.694
-1.063 -4.284 -2.567 China Japan India United United
China Japan India United United Kingdom States
Kingdom States
-2.253

Source: https://data.worldbank.org
 Causes of BOP Imbalances
a. Exchange Rates
b. The Governments Fiscal Deficit
c. Business Competitiveness
d. Willingness of the consumer

Balancing Mechanisms
a. Rebalancing by changing Exchange Rates
b. Rebalancing by adjusting internal price and demand

Source: https://en.wikipedia.org/wiki/Balance_of_payments#Causes_of_BoP_imbalances
 Recommendations to Improve BOP

Measures to Increase Exports : Measures to Reduce Imports :

• Exploring & Utilizing the untapped domestic sources
• Trade Liberalization
of oil, energy & gas sources to bring down the
• Product Diversification by exporters
imports.
• Renegotiate on unfavourable trade pacts
• Reducing imports of defence equipment through the
• Strong Emphasis on Manufacturing Sector
Make in India movement
• Simplify Regulations & Taxation laws
• Making Strong Technological Trade Agreements with
• Better Availability of Export Credit
inclusion of ToT clause
• Imposing high anti-dumping duties on Chinese
products which are dumped in Indian markets
 Case -Manmohan Singh : The Man who saved
Indian Economy in 1991
Reasons for the Crisis
• Loss of Investor Confidence
• Large and Growing fiscal imbalances over
1980s
• Restrictions of Foreign Direct Investments
• Inward looking and highly interventionist
policies
• Fiscal Deficit at 8% of GDP & WPI at 13%
• Minimal Economic Growth and Employment
• Manufacturing Sector was in bad shape

Corrective Measures
• Economic Liberalisation
• Strategic End to License Raj & Reworked
Trade Policy
• Devaluation & Partial Convertibility of rupee
• Mortgage Gold Holdings
• Foreign Investment
• Power Distribution and
• Financial Support from IMF, World Bank
THANK YOU