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Balance of Payment

The document discusses India's balance of payments. It provides details on the components of the balance of payments statement including the current account, capital account, and errors and omissions. It notes that India generally experiences a deficit in its balance of payments due to the need to import capital goods and technology to support industrialization. Recent trends in India's current account deficit and foreign exchange reserves are also summarized. Reasons for the poor performance of India's export trade such as high prices, poor quality, and inadequate promotion are outlined.

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134 views25 pages

Balance of Payment

The document discusses India's balance of payments. It provides details on the components of the balance of payments statement including the current account, capital account, and errors and omissions. It notes that India generally experiences a deficit in its balance of payments due to the need to import capital goods and technology to support industrialization. Recent trends in India's current account deficit and foreign exchange reserves are also summarized. Reasons for the poor performance of India's export trade such as high prices, poor quality, and inadequate promotion are outlined.

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Snehith
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BALANCE OF PAYMENT

(BOP)
A country has to deal with other countries in
respect of the following

1. Visible items which include all types of physical goods exported


and imported.

2. Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.

3. Capital transfers which are concerned with capital receipts


and capital payment.
Balance of Payments
According to Kindle Berger, "The balance of payments of a
country is a systematic record of all economic transactions
between the residents of the reporting country and residents of
foreign countries during a given period of time".
It is a double entry system of record of all economic transactions
between the residents of the country and the rest of the world
carried out in a specific period of time
when wesay “acountry’s balance of payments” weare
referring to the transactions of its citizens and government.
Features
o It is a systematic record of all economic transactions
between one country and the rest of the world.
o It includes all transactions, visible as well as invisible.
o It relates to a period of time. Generally, it is an annual
statement.
o It adopts a double-entry book-keeping system. It has two
sides: credit side and debit side. Receipts are recorded on
the credit side and payments on the debit side.
Balance of Trade
The difference between a country's imports and its exports. Balance of
trade is the largest component of a country's balance of payments.
When exports are greater than imports than the BOT is favourable
and if imports are greater than exports then it is unfavourable
Balance of Trade V/s Balance of Payment

The Balance of Payment takes into account all the transaction


with the rest of the worlds

The Balance of Trade takes into account all the trade transaction with
the rest of the worlds
The General Rule in BOP Accounting
a. If a transaction earns foreign currency for the nation, it is
a credit and is recorded as a plus item.

b. If a transaction involves spending of foreign currency it


is a debit and is recorded as a negative item.
The various components of a BOP statement
1. Current Account

2. Capital Account

3. Errors & Omissions


Current Account Balance
• BOP on current account is a statement of actual receipts and payments in
short period.
• It includes the value of export and imports of both visible and invisible
goods. There can be either surplus or deficit in current account.
Capital Account Balance
 It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
Capital Account Balance
 There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement in banking
capital, official capital transactions, reserves, gold movement
etc.
 These are classifies into two categories-
o Direct foreign investments
o Portfolio investments
o Other capital
Errors & Omissions
 The entries under this head relate mainly to leads and lags in
reporting of transactions

 It is of a balancing entry and is needed to offset the overstated or


understated components.
Disequilibrium In The Balance Of Payments
A disequilibrium in the balance of payment means its condition of
Surplus Or deficit
 A Surplus in the BOP occurs when Total Receipts exceeds Total
Payments. Thus,
BOP= CREDIT>DEBIT

 A Deficit in the BOP occurs when Total Payments exceeds Total


Receipts. Thus,
BOP= CREDIT<DEBIT
Causes of Disequilibrium In The Bop
 Cyclical fluctuations
 Short fall in the exports
 Economic Development
 Rapid increase in population
 Structural Changes
 Natural Calamites
Measures To Correct Disequilibrium in the BOP
1. Monetary Measures :-
a) Monetary Policy
b) Fiscal Policy
c) Exchange Rate Depreciation
d) Devaluation
Measures To Correct Disequilibrium in the BOP
II. Non- Monetary measures :-
a) Export Promotion
b) Import Substitutes
c) Import control
INDIA'S BALANCE OF PAYMENT
INDIA'S BALANCE OF PAYMENT

 A country, like India, which is on the path of development generally,


experiences a deficit balance of payments situation.

 This is because such a country requires imported machines, technology


and capital equipment's in order to successfully launch and carry out the
programme of industrialization
BOP OF INDIA
 India’s current account deficit (CAD) narrowed to US$ 6.2 billion (1.2 per cent of
GDP) in Q1 of 2015-16 from US$ 7.8 billion (1.6 per cent of GDP) a year ago.
 This improvement was mainly on account of the merchandise trade deficit (US$
34.2 billion during Q1 of 2015-16) which contracted on a year-on-year (y-o-y)
basis due to a larger absolute decline in merchandise imports relative to
merchandise exports.
 The reduction in the CAD was also enabled by higher net earnings through
services and lower outflow on account of primary income (profit, dividend and
interest).
 Private transfer receipts, mainly representing remittances by Indians employed
overseas, amounted to US$ 16.2 billion, a marginal decline from their level a
year ago.
BOP OF INDIA

 In the financial account, net inflows of foreign direct investment were


higher on a y-o-y basis, however, portfolio investment declined sharply.
 Non-resident Indian (NRI) deposits received by commercial banks during
the quarter at US$ 5.9 billion were more than double the net inflow into
these accounts in Q1 of last year.
 In April-June 2015 there was net accretion of US$ 11.4 billion to India’s
foreign exchange reserves on a BoP basis; which was marginally higher
than the accretion in the corresponding quarter of last year .
REASONS FOR POO R PERFORMANCE
OF INDIA’S EXPORT TRADE

There are Several reasons for India’s Poor performance. Some off them are:
I.Export - Related Problems :-
1.High Prices :-
As compared to other Asian Countries the price of Indian goods is high.
Prices are high due to documentation formalities, high transaction costs
& also to make higher profits.
2. Poor - Quality :-
Many Indian exporters do not give much importance to quality control,
so their products are of poor quality. Due to low quality many times
Indian goods are rejected & sent back to India by foreign buyers.
REASONS FOR POOR
PERFORMANCE OF INDIA’S
EXPORT TRADE

3.Poor Negotiation Skills :- Indian exporters lack Negotiation Skills due to


poor training in Marketing. They fail to Convince & induce the foreign buyers
to place orders.
4.Inadequate Promotion :-For Export Marketing, Promotion is important.
Many Indian Exporters do not give much importance to promotion. A good
no. of Indian exporters are not professional in advertising & Sales promotion.
They do not take part in trade fairs & exhibitions.
5.Poor follow-up of sales :-Indian exporters are ineffective in providing after-
sale-service. They do not bother to find out the reactions of buyers after sale.
This results in poor performance of India’s export trade.
REASONS FOR POOR
PERFORMANCE OF INDIA’S
EXPORT TRADE
II. General Causes

1. Good Domestic Market

Sellers find a ready market for their goods within the country, so they do
not take parts to get orders from overseas markets.
2. Number of formalities

There are number of documentation & other formalities due to which the
some marketers do not enter the export field. So there is a need to
simplify formalities.
REASONS FOR POOR
PERFORMANCE OF INDIA’S
EXPORT TRADE
3. Problem of Trading Blocs
Trading blocs reduce trade barriers on member nations, but they impose trade barriers
on non-members. As India is not a member of some powerful trading blocs, it has to
face some problems.
4. Negative Attitude
Some of the overseas buyers have a negative attitude towards Indian goods. They feel
that Indian goods are inferior goods. Thus there is a need to correct this attitude.
5. Poor Infrastructure
Indian infrastructure is poor. Indian exporters find it difficult to get orders & also to
deliver them at time.

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