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Balance of Payment: (India's BOP)

This document provides an overview of India's balance of payments (BOP), including its key components and recent trends. It notes that India's current account deficit reached a historic high in 2004-05 due to a sharp rise in merchandise imports, particularly oil, outpacing export growth. However, strong growth in services exports such as software and tourism helped offset this imbalance. Foreign investment inflows and foreign exchange reserves increased substantially over this period as well. The document also discusses various trade policy instruments like tariffs, quotas, and import licensing that countries use to manage trade balances and protect domestic industries.

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48 views21 pages

Balance of Payment: (India's BOP)

This document provides an overview of India's balance of payments (BOP), including its key components and recent trends. It notes that India's current account deficit reached a historic high in 2004-05 due to a sharp rise in merchandise imports, particularly oil, outpacing export growth. However, strong growth in services exports such as software and tourism helped offset this imbalance. Foreign investment inflows and foreign exchange reserves increased substantially over this period as well. The document also discusses various trade policy instruments like tariffs, quotas, and import licensing that countries use to manage trade balances and protect domestic industries.

Uploaded by

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BALANCE OF PAYMENT

(Indias BOP)

BALANCE OF PAYMENT
BOP is an accounting statement that
summarizes all the economic transactions
between residents of home country and
residents of all other countries.
The data includes transactions as trade in
merchandise and service, transfer
payments, loans and short term
investments.

Components of BOP
Current Account: Records flow of
Goods, Services, and Transfers.
Capital Account: Shows public and
private investment and lending activity.
Official Reserve Account: Which
measures changes in holdings of gold
and foreign currency - reserve assets by official monetary institutions.

CURRENT ACCOUNT
The balance on current account
reflects the net flow of goods and
unilateral transfers. It includes export,
import of merchandise and service
transactions/ invisibles
INVISIBLES: Tourism, investment
income, travel ,transportation,
insurance, banking charges etc.

CAPITAL FLOWS

FDI
PORTFOLIO INVESTMENT
EXTERNAL ASSISTANCE
NRI DEPOSITS
EXTERNAL COMMERCIAL
BORROWINGS
EXTRNAL ASSISTANCE
SHORT TERM CREDITS

OFFICIAL RESERVES
The change in official reserves
measures a nations surplus or deficit
on its current and capital account
transaction by netting reserve liabilities
from reserve assets. A surplus will lead
to an increase in official holdings of
foreign currencies and gold.

Indias Balance of Payments: AprilMarch 2004-05


(US $ million)
Exports
Imports
Trade Balance
Invisibles
Current Account
Capital account
Change in
reserves

April-March
2004-05
80,832
118,961
-38,129
31,697
-6432

April-March
2003-04
64,723
80,177
-15,454
26,015
10,561

32,592
-26,159

20,860
-31,421

Reasons for record high Trade


deficit
Merchandise export growth significantly above
the target (16% growth) set by Ministry of
Commerce & Industry.
Sharp rise of 48.4 % in merchandise import
payment oil import bill up by 45.1 %; non-oil
import payments higher by 49.5 %.
Volume growth of POL imports moderated to 5.5
% but average Indian basket of international
crude rose 40 % from US $ 27.8 per barrel in
03-04 to US $ 38.9 per barrel in 04-05

Trade deficit reached a historic high of US $


38.1 billion.
Invisible receipts up by 46.3 % due to
significant growth in travel, transportation,
software exports and other professional and
business services.
Private transfers, comprising primarily
remittances by NRIs- US $ 20.9 billion.
Invisible payments grew sharply 69.8 % due
to surge in outbound tourist

traffic,transportation, consultancy etc.


Net FDI into India up on favourable
investment climate. Outward FDI also surged,
due to takeovers etc.

Non-oil import growth led primarily by imports of


capital goods and industrial inputs due to
strengthening domestic industrial activity.
Invisible receipts up by 46.3 % due to significant
growth in travel, transportation, software exports and
other professional and business services.
Substantial buoyancy in travel receipts reflected a
rise of 25% in international tourist traffic to India.
At the end of March 2005, India held the fifth largest
stock reserves in the world at US $ 141.5 billion

FDI & THE BOP


Given the current account deficits, the BOP
effects of FDI can be an important consideration
for the Govt. The three potential consequences of
FDI on BOP are:
1. Initial capital inflow, which is one time effectthis is credit. Next is the outflow of earnings to
the foreign parent co. 2. If the FDI is a substitute for imports of goods
or service it helps in the current account. e.g:
Japanese automobile COs.

3. The third potential benefit is the MNC


uses a foreign subsidiary to export goods
and services to other countries. This is
sometimes a pre requisite by the host
country to allow a MNC to set up base.
Example: Hyundai, Pepsi.

Costs for a host country due to FDI:


1. Adverse effects on the competition: Money
power of the MNC.
Infant
industry concern.
2. Adverse effect on the BOP:
Outflow of dividends and profits. - this is
tackled by restricting the amount repatriated.
3. National sovereignty & autonomy.
(US producing PCs in Mexico- Comparative
adv.)

INSTRUMENTS OF TRADE
POLICY:
(Import trade restrictions / Trade
protectionism)

Protecting home market from foreign


competition (but trying to gain access to
the markets of others for their exports)WHY ?
REASONS:
Political + Economic reasons
To protect domestic producers and jobs
from foreign competition.

METHODS OF TRADE
PROTECTION:
1. Tariffs: It is the oldest and simplest form of
trade barrier. It is a tax levied on exports.
Specific tariffs: are levied as a fixed charge
for each unit (e.g.: $ 3 per barrel of oil).
Ad-valorem: as a proportion of the value of
the imported goods.
Objectives of the govt.?
Who suffers and who gains ?

WTO / GATT
General Agreement on Tariff and Trade
was signed in 1947.
Objective: to reduce trade barriers such
as tariff in order to bring about free
trade, so that the world could benefit
from more efficient specialisation.

WTO succeeded GATT on 1st


Jan. and has 147 nations. It
encourages:
1. Liberalized trade
2. Non discrimination
3. No unfair encouragement of exports.

Other forms of protectionism:


Import Quota:
1. Tariff quota: Import of a commodity
upto a specified vol. Is permitted to
enter a country at a specially low rate of
duty (or free duty). In case the import
goes above a specified vol. The
increased import duty is levied.
2. Unilateral quota
3. Bilateral quota

4. Mixing quota: Utilisation of certain


proportion of RM.
5. Import Licensing: To avoid various
difficulties in allotting quotas. This
method makes an even distribution of
quotas between different suppliers is
ensured without in any way disrupting
the market.

Quotas are allotted by:


1. Competitive auction (the best way
and rarest).
2.Fixed favoritism (most arbitrary way)
3. Resource using application
procedures (most inefficient way)

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