2. MEANING
The balance of payments (BOP) of a country is the
systematic record of all economic transactions between the
residents of a country and the rest of the world in a particular
period.
It takes into account the export and import of both visible and
invisible items.
3. IMPORTANCE & USES
BOP provides :
Indications, future repercussions of countries past trade
performances.
Data for the country’s SWOT analysis.
Changes in the composition and magnitude of foreign trade
Forecast a country’s market potential in short run.
Guides to its monetary fiscal exchange & other polices.
4. STRUCTURE OF BOP
BOP
CURRENT
ACCOUNT
TRADE
TRANSFER /
FACTOR
PAYMENTS
INVISIBLES
CAPITAL
ACCOUNT
FDI / FII
PORTFOLIO
INVESTMENT
NRE / NRI ‘S
ACCOUNT
RESERVES
GOLD
RESERVE
FOREX
RESERVE
IMF LOANS
ERRORS &
OMMISSIONS
6. COMPONENTS OF CAPITAL
ACCOUNT
The debit side records
Disinvestment of capital.
Country’s investment abroad.
Loans given to the foreign
government or a foreign party.
The bank balances held abroad.
RECEIPTS
• Long term inflow of funds
• Short term inflow of funds
The credit side records
The official and private borrowing
from abroad net of repayments.
Direct and portfolio investment.
Short term investments into the
country.
The bank balances of non residents
held in the country.
PAYMENTS
• Long term inflow of funds
• Short term inflow of funds
7. COMPONENTS OF RESERVES &
ERRORS OF OMISSION
RESERVES
• Gold reserve
• Forex reserve
• IMF loans
ERRORS OF OMISSION
• Legal transactions
• Flight capital
• Inaccurate statistics
8. FACTORS AFFECTING BOP
Cost of
production
Demand
and
supply
Cost of
availability
Domestic
business
policies
Trade
agreements
External
pressure
9. BOP DISEQUILIBRIUM &
TYPES
• Total receipts and total
payments inequality shows
disequilibrium of balance of
payments account.
• BOP = RECEIPTS –PAYMENTS
• Positive BOP = Surplus. (R>P)
• Negative BOP = Deficit. (R<P)
Cyclical Structural
Short run Long run
10. CAUSES OF BOP DISEQUILIBRIUM
Fall in foreign
demand
Inflationary
pressures in
the economy
Developmental
expenditures
Increase in
cost structure
of export
industries
Decrease in
supply
Appreciation
in the
exchange rate
Increased debt
burden
Demonstration
effect
Population
pressure
Political
factors
11. MEASURES TO CORRECT BOP
DISEQUILIBRIUM
Depreciation
Devaluation
Import control
Export promotion
Exchange controls
Production of import substitutes
Monetary policy
Fiscal policy
Capital import
12. BALANCE OF PAYMENT VS
BALANCE OF TRADE
BOP is a broad
term.
BOP includes all
transactions
related to visible,
invisible and
capital transfers.
BOP always
balances itself.
BOP = Current
Account + Capital
Account + or -
Balancing item
(Errors and
omissions)
Following are main
factors which affect BOP
1.Economic policy
2.Conditions of foreign
lenders.
3.All the factors of BOT
BOT is a narrow
term.
BOT includes only
visible items.
BOT can be
favorable or
unfavorable.
BOT = Net Earning
on
Export - Net
payment for
imports.
Following are main factors
which affect BOT
1.cost of production.
2.availability of RM.
3.Exchange rate.
4.Prices of goods
manufactured at home.
13. WHY BOP ALWAYS BALANCES?
BOP = Current Account + Capital Account
= Credits - Debits ≈ 0
14. GLOBAL FINANCIAL CRISIS.
• India’s BOP came under stress in
2008-09 reflecting the impact of
global financial crisis.
• Capital flows plummeted - India had
to draw down its foreign currency
assets by US $ 20 billion during
2008-09.
• Decline in India’s merchandise
exports and deceleration in growth
in services exports.
• 2010-11 – Pick up in exports mainly
led by diversification of trade in
terms of composition as well as
direction.
2011-12 - slowdown in advanced
economies spilled over to emerging
and developing economies.
Sharp increase in oil and gold
imports.
The limitations of financing CAD
through debt creating flows were
exposed in the 1991 crisis.
Subsequent reforms and opening up
the capital account to non-debt
creating flows of Foreign direct
investment (FDI) – financing BOPs-
addition to reserves.
15. RECENT DEVELOPMENTS IN INDIA’S BOP
(JULY TO SEPTEMBER 2014-2015)
Increase in CAD ( from 1.7% to 2.1% of GDP ).
Decrease in merchandise export growth (from 11.9% to 4.9%).
Increase in merchandise imports by 8.1%.
Net services receipts improved by 3.4%.
Net outflow under trade credits and advances at US$ 0.2 billion.
net inflows of NRI deposits lowered to US$ 4.1 billion.
16. CONCLUSION
The balance of payment situation of India started improving
since 1992-93.
There was a satisfactory balance of payment position in that
period; the reasons are
(i) High earnings from invisibles.
(ii) Rise in external commercial borrowings.
(iii) Encouragement to foreign direct investment.
