DEDICATED AT HIS

DIVENE LOTUS FEET

BALANCE OF PAYMENTS

Balance of payments?

A systematic record of all the economic transactions ofgoods and services that take place between thedomestic country and the ROW. It represents aclassified record of all the receipts on the A/C of goodsand services traded and the capital received andinvested by the domestic country.

Why BOP?

Judge economic and financial status of a country inthe short-run.

Deficit signifies a tendency to take a stiff measures fordiminishing imports, exchange control andrestrictions on repatriation of dividends or theinterests.

Current A/C Capital A/C

Errors and Omissions

Overall BOP

Monetary Movements

Components Of Balance of Payments

Current A/C

BOP on Current A/C refers to the inclusion of twobalances:

Merchandise balance

Invisible balance

In other words, the net balance of the visible andinvisible trade defines the balance on the Currentaccount.

Capital A/C

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

Brief HistoryIn 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 theyear 1979 pushed up the Fiscal Deficit.

Direct taxes were continuously reduced.

Two immediate external shocks contributed to the largeCurrent A/C deficit of 3.1% during 1990-91.

GULF CRISIS in August 1990, where thepetroleum import costs in 1990-91 increased byhalf to $5.7 bn,

The GLOBAL RECESSION, where the worldgrowth reduced from 4.5% in 1988 to 2.25 in 1991.

MEASURES:

Economic Liberalization: to remove theinefficiencies in the economic system

Privatization: transfer of the activities ororganization from the public to private sector.

Globalization: growing economicinterdependence among the countries in theworld with regards to the capital, information,goods & services, etc.

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

The stress in India’s BOP, which was observed during 2011-12as a fallout of the euro zone crisis and inelastic domesticdemand for certain key imports, continued through 2012-13 andthe first quarter of 2013-14.

Capital flows (net) to India, however, remainedhigh and were sufficient to finance the elevated CAD in 2012-13, leading to a small accretion to reserves of US$ 3.8 billion.

The rise in imports owed to India’s dependence on crudepetroleum oil imports and elevated levels of gold imports sincethe onset of the global financial crisis.

Capital flows (net) moderated sharply from US$ 65.3billion in 2011-12 and US$ 92.0 billion in 2012-13 toUS$ 47.9 billion in 2013-14.

This moderation in levels essentially reflects a sharpslowdown in portfolio investment and net outflow inshort-term credit and other capital.

Those countries with large CADs saw larger volumes ofoutflows and their currencies depreciated sharply.

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.

The World Economic OutlookWEO 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 ,,

The financial situation in developed countries is posingchallenges in many EMEs. Bond markets are now moresensitive to changes in accommodative monetary policies inadvanced economies because foreign investors have crowdedinto local markets and can withdraw at the slightest hint ofadverse circumstances.

The Indian economy witnessed substantial improvement onthe external sector front. India’s BOP situation witnessed aturnaround during 2013-14 as

Exports increased modestlyDepreciating RupeeImports declined

ECONOMIC SURVEY2013-14

The government swiftly moved to correct the situationthrough restrictions in non-essential imports like gold,(customs duty hike in gold and silver to a peak of 10 percent), and measures to augment capital flows throughquasi-sovereign bonds and liberalization of externalcommercial borrowings.

The RBI also put in place a special swap window forForeign Currency Non-Resident deposit Banks [FCNR(B)] and banks’ overseas borrowings through whichUS$ 34 billion was mobilized.

Current A/C developments 2012-13

After registering strong growth in both imports andexports 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

The decline in exports owed largely to weak global demandarising from the slowdown in advanced economiesfollowing the euro zone crisis, which could only be partlycompensated by diversification of trade.

Net imports of PoL shot up to US$ 99.0 billion in 2011-12initially on account of a spurt in crude oil prices (Indianbasket) 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 in2011-12 and moderated only somewhat in 2012-13. Hence theand record high trade deficit in 2012-13.

With relatively static levels of net inflow under services andtransfers, it was the net outflow in income (mainly investmentincome), which explained the diminution in level of overall netinvisibles 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.

Current A/C developments in 2013-14

In terms of the major indicators, the broad trend witnessedsince 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.

Coordinated measures to promote exports, curb importsparticularly those of gold and non-essential goods, andenhance capital flows were taken by the govt. and RBI.

These measure led to a turnaround of the BOP position in thelatter 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 2013-14Trade deficit - U.S.$ 147.6bn in 2013-14

Decomposition of Trade DeficitA decomposition of the performance of trade deficit in 2013-14as 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.

Capital / Finance A/C in2012-13

In terms of macroeconomic identity, the resourceexpenditure imbalance in one sector needs to be financedthrough recourse to borrowing from other sectors and thepersistence of high CAD requires adequate netcapital/financial flows into India. Any imbalance in demandand 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 since2008 crisis.

Post 2008 crisis the CAD remained elevated at many timesthe pre 2008 levels

In 2012-13, net capital inflows were placed at US$ 92.0 billionand were led by FII inflows (net) of US$ 27.6 billion andshort-term debt (net) of US$ 21.7 billion.

There was some diminution in net inflows in 2011-12 onaccount of the euro zone crisis.

In net terms, capital inflows increased significantly by 40.9per cent to US$ 92.0 billion (4.9 per cent of GDP) in 2012-13as compared to US$ 65.3 billion (3.5 per cent of GDP) during2011-12.

Outcomes in 2013-14 were a mixed bag.

The higher CAD in the first quarter of 2013-14 was financedto a large extent by capital flows.

The moderation observed in the fourth quarter of 2012-13continued through 2013-14.

The communication by the US Fed in May 2013 about itsintent to roll back its assets purchases and market reactionthereto led to a sizeable capital outflow from forex marketsaround the world.

Net capital inflows became negative leading to a large reserve drawdown of US$ 10.4bn in (July-September 2013) quarter.

Capital / Finance A/C in2013-14

Quarter wise updates FIRST & SECOND QUARTER: FDI net inflows continued to

be buoyant with steady inflows into India backed by lowoutgo of outward FDI.

THIRD QUARTER: there was turnaround in the flows of FIIsand copious inflows under NRI deposits in response to thespecial swap facility of the RBI.

FOURTH QUARTER: while FDI inflow slowed, higheroutflow on account of overseas FDI together with outflow ofshort term credit moderated the net capital inflows intoIndia.

Foreign Exchange ReservesChange in foreign exchange reserves can be decomposed intochange in reserves on BOP basis and valuation changes in theassets held by the RBI, which are denominated in US dollars.

As against a reserve accretion of US$ 15.5 billion on BOPbasis as at end March 2014, foreign exchange reserves innominal terms increased by only US$ 12.2 billion as there wasa valuation loss in the non-US dollar assets held owing tocross-currency movements and the decline in gold prices. Asat end May 2014, foreign exchange reserves stood at US$ 312.2billion.

Foreign exchange reserves were placed at US$ 304.2 billion atend March 2014 as against a level of US$ 292.0 billion at endMarch 2013.

Foreign currency assets are the main component of foreignexchange 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.

India continues to be one of the countries that have sizeableforeign exchange reserves particularly considering that someof the other major reserve holders are nations with largecurrent account surpluses.

In the specific context of developments in 2013-14, theintervention was to provide a measure of comfort against theelevated levels of vulnerability indicators which areexpressed as proportions of reserves.

Composition of FOREIGN TRADE

This means the composition of the EXPORTS and theIMPORTS.

This shows the rate of the structural changes and the effecton the economic development.

Any country that imports raw materials & food and exportscapital good then the country is in the DEVELOPINGSTAGE.

Any country that imports capital goods and exports rawmaterials & food, then the country is in theUNDERDEVELOPED STAGE.

The II-five year plan focused on the INDUSTRIALIZATIONwhich 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.

Direction of TRADE British controlled the trade of India.

USA was the major exporter to India during the planningperiod.

During the FY – 2010-11 the major imports were from –

1. CHINA > 11.4%

2. UAE > 8%

3. SWITZERLAND > 6.1%

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

International Comparison A cross-country comparison of total external debt of the 20

most indebted developing countries, based on the WorldBank’s International Debt Statistics 2014 showed that India’sposition was THIRD in terms of absolute external debt stock,after China and Brazil.

The ratio of India’s external debt stock to gross nationalincome (GNI) at 20.8 per cent was the FOURTH lowest withChina having the lowest ratio at 9.2 per cent.

In terms of the cover of external debt provided by foreignexchange reserves, India’s position was SEVENTH at 71.4 percent.