Macro Economics Assignment

Term 2
Balance Of Payments in India
For Last 5 Years

Submitted To
Dr. Shanthi
(Great Lakes Institute of Management, Chennai)
Submitted By (PGWPM Group 6)
S.M. Dev
S. Arulaazhi
S. Aravind
K.K. Ganesh

The Balance of Payments (BoP) is a systematic record of all economic transactions between the
residents of a given country and the residents of other countries or the rest of the world which is carried
out in a specific period of time, usually a year. BoP thus refers to all economic transactions including
invisible transactions like banking, insurance, transport services, etc. with the rest of the world.
For India, RBI releases the Balance of Payments data under the Special Data Dissemination requirements.
The items are classified as statement of all receipts which includes items that result in cash outflows like
goods exported, services rendered, capital received by residents, and the items that result in cash inflows
like payments made by them on account of goods imported, services received from and capital transferred
to foreign citizens/ units.
Current Account
The Current Account comprises of the merchandise transactions and the transactions of the invisibles.
Merchandise transactions include all the exports at free on board basis (f.o.b) and imports of movable
goods at cost, insurance and freight (c.i.f) basis. These transactions result in the transfer of ownership
from residents to non-residents for the exports and vice versa in case of imports. The invisibles include
travel, transportation, insurance, investment income and other services. Thus the Current Account reflects
the trade related transactions of the nation with the rest of the world.
Transfers can be official and private. Official Transfers comprises of funds from the government of India
to international institutions or any transfer including gifts of commodities by the government to nonresidents. Private transfers are mostly the cash remittances by non-resident Indians for their family
maintenance in India.
Capital Account
All transactions of financial nature that would result in a change in net countrys foreign financial assets
or in the foreign financial liabilities are entered in the Capital Account of the BoP statement. The capital
account transactions falls in to either of the below five head of accounts - (1) Foreign Investment, (2)
Loans, (3) Banking Capital, (4) Rupee Debt Service and (5) Other Capital.
The investment made by the individuals, companies, financial institutions outside the country or a
foreign government for the purpose of acquisition of physical assets in India would form the Foreign
Direct Investment .This results in the inflow of foreign capital. When a foreign national directly
purchases financial assets in the Indian securities market, it forms the Foreign Portfolio Investment. FIIs
and GDRs/ADRs come under Portfolio Investment.
Loans include the funds received by the government or public sector bodies on normal or on
concessional basis, long-term and medium-term commercial borrowings from the capital market which
are repayable under specific terms and conditions, bond issues and other short-term credits. The loan
amount disbursed to Indian resident entities appears as credit and the disbursement by Indian entities and
the amount repaid appear as debit items.
Banking capital comprise of all the changes involving the foreign assets and liabilities of private and
public commercial banks and also the co-operative banks which are authorized to deal in foreign
exchange.

The Rupee Debt Service is defined as the cost of meeting interest payments and regular contractual
repayments of principal of a loan along with any administration charges in rupees by India.
Other Capital refers to the advances and receivable to the trade transactions, which will be mostly the
difference between banking channel data and the actual custom data. This includes funds held abroad;
advance payments for exports, delayed export receipts, subscriptions to international institutions, quota
payment to IMF etc.
Errors and Omissions
Though recording of transactions in the BoP statement is made according to the principle of double entry,
certain discrepancies in estimation and timing may result in a situation where debits are not exactly equal
to the credits. The item Errors and Omissions indicates the value of such discrepancies. A negative value
indicates that receipts are overstated or payments are understated, or both, and vice versa. Persistently
large errors with the same sign are indicative of serious weaknesses in the recording of transactions or
flows.
Monetary Movements
The monetary movements keep record of (a) Indias transactions with the International Monetary Fund
(IMF), and, (b) Indias foreign exchange reserves which basically consist of RBI holdings of gold and
foreign currency assets. Drawings (essentially a type of borrowing) from the IMF or drawing down of
reserves are credit items, whereas, repayments made to IMF or additions made to existing reserves are
debit items.
The Balance of payment statement has two parts the autonomous transactions are recorded above the
BoP value and accommodating transactions are recorded below the BoP value.
The accommodating transactions are undertaken to adjust the surplus or deficit arising from autonomous
transactions. The overall deficits would be adjusted by drawings from IMF or decrease of reserves. The
surplus would be added to the reserves or for repayment of IMF commitments. These are recorded in the
Monetary Movement section of BoP Statement.
Movement in reserves comprises of the changes in foreign currency assets held by RBI and the SDR
balances held by Government of India. This is stated excluding the valuation changes that arises due to
appreciation or depreciation of non US denominated currencies in the reserves.
The Balance of Payments statement from 1950s at some intervals has been shown below:

1950-51

1970-71

1980-81

1990-91

2000-01

2005-06

2009-10

Current Account

39

-445

-2214

-17368

-11598

-46856

-180626

Merchandise

-4

-408

-6211

-16933

-56737

-227963

-560746

Invisibles

42

-37

3997

-433

45139

181107

380120

services

29

1024

1761

7905

98437

169843

transfer payments

37

209

2717

4539

59967

107639

248277

Factor's income

-24

-254

-256

-6733

-22733

-24969

-38000

-4

502

1443

12661

39241

112752

252132

183

26744

80759

243641

FDI

183

14924

25424

89675

Portfolio
investment

11820

55335

153966

9929

24459

20423

External assistance

3955

2002

6405

13612

Commercial
borrowings

4045

20171

6427

13183

Short term

1929

2286

7591

34878

Banking capital

1225

-9144

5795

9844

Rupee debt services

-2140

-2760

-2557

-452

Other Capital

3464

1311

4101

-62574

Capital Account
Foreign investment

Loans

Errors and Omissions

-67

-128

234

-1369

4231

-7269

28

-10

-899

-4471

27643

65896

64237

-28

10

899

4471

-27643

-65896

-64237

IMF Positions

-79

383

2178

-115

Foreign Exchange reserves

-28

89

516

2293

-27528

-65896

-64237

Balance of Payments
Official Reserve Account
change
(Monetary
Movements)

- increase
+ decrease

Source: http://www.rbi.org.in

The Official Reserve changes would indicate a BoP surplus or deficit. In case of surplus the country may
gain in terms of overall reserves. This would result in the inflow of funds. The country may also decide to
repay the SDRs to IMF resulting in outflow of funds.
In case of deficit the country may borrow from IMF and spend from the reserves to meet the international
payments. The decrease in reserves would be shown as outflow of funds.
Thus monetary movement would be equal in amount but opposite in direction to the overall balance in the
BoP statement.
BoP deficits was high during 70s and was alarming during 80s when the transactions were funded both by
the drawings from IMF and decrease in the reserves. This resulted in the fall of Indias Foreign exchange
reserves to One billion US dollars. Since the initiation of the economic reforms in 1991, the situation has
reversed and India has recorded surplus continuously till 2009-10.

The above graph clearly states that the reserve position is almost steady and positive over past 4years.
Official reserve position of India is healthier compared to yester years, and retained a reserve of US$ 277
billion in March 2010.

Current Accounts in India For The Last 5 Years

Balance of payments improved to a 7-quarter high in Q1 of 2011-12: A significant increase in foreign

investments, particularly the banking capital has helped the overall balance of payments position to reach
a 7-quarter high of $5.4 billion in the first quarter of current financial year against a $2.03 billion a
quarter before and $3.7 billion a year before.
Current account deficit widened nearly 3-times to $14 billion: A steep rise in merchandise trade
deficit and a marginal fall in invisibles lead to a significant expansion in current account deficit to $14
billion from $5.4 billion in the last quarter of 2010-11 as well as from $12.1 billion in the first quarter of
2010-11.
Merchandise trade deficit expanded steeply to $35.5 billion: Though exports posted a significant
growth, imports surpassed them, leading to a notable expansion in trade deficit to $35.5 in Q1 of 2011-12
from $29.9 billion in Q4 of 2010-11 and from $31.8 billion in Q4 of the last year. Exports registering a
steep growth of 45% outpaced imports growth at about 33% in the first quarter of current financial year.
Invisibles moderated to $21.3 billion in Q1 of 2011-12: Net invisibles though remained high compared
to $19.7 billion the corresponding quarter a year ago, moderated marginally compared to $24.5 billion in
the quarter before.

CURRENT ACCOUNT - INDIA'S BOP LAST FIVE YEARS

40,000
20,000
Q1 (Apr-Jun)

Q2 (Jul-Sep)

Q3 (Oct-Dec)

Q4 (Jan-Mar )

(20,000)

Rs (Crores)
(40,000)
(60,000)
(80,000)
(100,000)

Source: http://www.rbi.org.in

600,000
400,000
200,000

235,579

304,185

411,544

374,901

392,494
II.INVISIBLES (a+b+c)
I. MERCHANDISE

0
-279,962
-200,000
-400,000
-600,000

-367,664
-543,158 -555,659 -595,028

Capital Account in India for last 5 years

The capital account in the last 5 years has undergone several changes pushing the net capital account to
34% increase (from Rs 203,673 crores to Rs 273,133 crores). The FDI and Bank account are the
contributors for the increase in capital account.

CAPITAL ACCOUNT - INDIA'S BOP LAST FIVE YEARS

160,000
140,000
120,000
100,000
80,000

Rs (Crores)

60,000
40,000
20,000
0
Q1 (Apr-Jun)
-20,000
-40,000

Source: http://www.rbi.org.in

Q2 (Jul-Sep)

Q3 (Oct-Dec)

Q4 (Jan-Mar )

The graph above shows how the capital account varied in each quarter in the last 5 years. From the year
2006 quarter 2, the capital account started increasing. This is the period where there were more MNCs
that are coming in and contributing to the FDIs and FIIs. This boom in all the sectors continued till the
recession in 2008. The capital account increased from 31,336 crore rupees to 137,620 crores rupees.
Following that we had the tragedy of recession bringing the FIIs and FDI down. In fact the quarters Q3
and Q4 of 2008 to 2009 had negative capital account.
These ups and downs in the capital account are continuing till now due to unpredictable economic
situations around the world.
Foreign Investments:
Equity flows under foreign direct investment (FDI) and foreign portfolio investments constitute the major
forms of non-debt-creating capital flows to India. There has been a marked increase in the magnitude of
FDI inflows to India since the early 1990s, reflecting the liberal policy regime and growing investor
confidence.
In a major break from the past, the spurt in FDI flows to India in the recent period has been accompanied
by a jump in outward equity investment as Indian firms establish production, marketing and distribution
networks overseas to achieve global scale along with access to new technology and natural resources.
Investment in joint ventures (JV) and wholly owned subsidiaries (WOS) abroad has emerged as an
important vehicle for facilitating global expansion by Indian companies.
Foreign investment contribution to BoP in India increased from 66,791 crore rupees to 172,154 crore
rupees in the last 5 years. Foreign investments in Indian equity in these 5 years have shown a downward
trend from 12% to 7% in the overall FI contribution, interestingly the FI in equity was higher during the
year 2008 -2009, with a 17% contribution to the foreign investments. Lot of inflows happened in the
Indian equity during the global recession period, Indian equity could have been more reliable in this
period to the traders.

FDI in India for last 5 years

Amount in crore Rupees

200,000
150,000
100,000
50,000
0

Other Capital
Reinvested Earnings
Equity

Years

Source: http://www.rbi.org.in

The chart below shows the countries that contribute to Indian FDI in crore rupees in the last 5 years.
Source/Industry
Mauritius
Singapore
U.S.A
Cyprus
Japan
Netherlands
United Kingdom
Germany
UAE
France
Switzerland
Hong Kong
Spain
South Korea
Luxembourg

2006-07
15876
2444.4
2965.2
243.6
336
2347.8
7597.8
487.2
903
420
239.4
252
260.4
285.6
0

Source: http://www.rbi.org.in

2007-08
39975.6
11873.4
3990
2394
1919.4
2524.2
2133.6
2041.2
949.2
571.2
806.4
445.2
201.6
361.2
63

2008-09
42693
14112
5191.2
5086.2
1117.2
2864.4
2898
2566.2
982.8
1835.4
567
651
1524.6
399
96.6

2009-10
41164.2
9315.6
9290.4
6816.6
4078.2
3376.8
2700.6
2528.4
1566.6
1188.6
403.2
575.4
525
667.8
168

2010-11
23587.2
6468
4498.2
2398.2
5275.2
5951.4
2259.6
684.6
789.6
2041.2
558.6
877.8
768.6
571.2
1041.6

The chart below shows the sector wise inflow of FDI in the last 5 years (in Crore Rupees).
Source/Industry
Manufacture
Construction
Financial Services
Real Estate
Activities
Electricity and
other Energy
Generation,
Distribution &
Transmission
Communication
Services

2006-07
6892.2
4061.4
5586

2007-08
15649.2
10714.2
16170

2008-09
20063.4
9395.4
18606

2009-10
21600.6
14767.2
9265.2

2010-11
20130.6
6715.8
5682.6

1810.2

5611.2

7921.2

9202.2

1864.8

730.8

3481.8

2809.8

7883.4

5619.6

1776.6

277.2

8681.4

7778.4

5157.6

Business Services
10185
Miscellaneous
Services
1251.6
Computer
Services
3460.8
Restaurants &
Hotels
642.6
Retail &
Wholesale Trade
197.4
Mining
176.4
Transport
693
Trading
344.4
Education,
Research &
Development
180.6
Source: http://www.rbi.org.in

4863.6

2700.6

6526.8

2389.8

7984.2

6123.6

3729.6

2137.8

4347

6917.4

3637.2

3540.6

1176

1440.6

2818.2

915.6

840
1936.2
3427.2
739.2

1234.8
441
1684.2
1680

2251.2
1125.6
924
831.6

1642.2
2486.4
1444.8
655.2

655.2

1020.6

382.2

235.2

Loans:
External assistance, external commercial borrowings (ECBs), trade long term and short term credit
constitute the major portion of the external debt in India.
External assistance, which consists of external aid flows from bilateral and multilateral sources,
constituted the major source of external financing for India in the 1950s and 1960s. Its importance has
declined steadily during the last three decades as it gave way to private capital flows, with the share in
Indias total capital flows falling from 31.2% in 1990/91 to 2.4% in 2010/2011. It was in fact even lesser
in the 2007/2008 around 1.9%.
ECBs (External commercial borrowing) rose significantly in the latter half of the 1990s, responding to the
strong domestic investment demand, favorable global liquidity conditions, the upgrade of Indias
sovereign credit rating, lower risk premium on emerging market bonds, and an upward phase of the
capital flow cycle to the EMEs. The net ECBs in the last 5 years increased from 91,095 to 96802 crore

rupees. In the year 2007 2008, the ECB stood around 115,529 crore rupees but due to recession in the
year 2008 to 2009 it dropped significantly to 61722 crore rupees and now its coming up again.
Short term credits are basically the short term fund transfer by NRI to India for getting the interest
benefits. In the 1970s, the two oil shocks shifted substantial resources towards oil-exporting countries,
which provided investment and employment opportunities in the oil-rich countries. The Reserve Bank
devised specific deposit schemes to tap the savings of NRIs employed in these countries. Non-Resident
Indians/Overseas Corporate Bodies were allowed to open and maintain bank accounts in India under
special deposit schemes, both rupee- and foreign currency denominated. The net short term credits to
India increased in the last 5 years increased from 126,404 crore rupees in 2006-07 to 210,743 crore rupees
in 2010-11. In the year 2008-2009 the net short term credits went in negative, which means there was
more debit than the credit.
Banking Capital:
The net banking capital went through ups and downs in the last 5 years. The net banking capital is the
sum of difference between debit and credit of Assets and liabilities in a bank. The net banking capital
increased from 8,477 crore rupees in 2006-07 to 22,025 crore rupees in 2010-11. In other terms the
banking capital increased 3 times in the last 5 years. During the year 2008-09, however the banking
capital went highly negative at around -19,205 crore rupees. The major contributor towards the liabilities
of the banking capital is the NRIs. The chart below shows the percentage contribution of NRI in the
liabilities part of banking account.

NRI Percentage In Total Liabilities

100.00%
95.00%
90.00%
85.00%
Percentage

NRI Credit % in Liabilities

80.00%

NRI Debit % in Liabilities

75.00%
70.00%

Years

Source: http://www.rbi.org.in
In the last 5 year, we see that the banks liabilities to the NRI are around 80% to 96%. The NRI debt
percentage was more in the year 2006 and 2007, but recession in the year 2008-2010 caused more NRI

credit than debit. Again last year we could see more NRI credits happening than NRI debit, which means
that recession is coming to normal.
Rupee Debt Service:
The rupee debt service increased steadily from -725 crore rupees in 2006-07 to 313 crore rupees in
2010-11. This means that the cost of meeting interest payments and other administrative charges
increased over the period of 5 years.

Other Capital:
The other capital in the last 5 years shows a tremendous change, it moved on from a positive value of
18,696 in 2006-07 to -47,726 in 2010-2011. This 2.5 times decrease in the other capital could be
attributed to higher debit than the credit in funds held abroad, advance payments for exports, delayed
export receipts, subscriptions to international institutions etc.
Errors and Omissions:
Over the years 2006 2011, the errors and omission summed up to -3,621crore rupees. The more debit
than the credit in the errors and omissions, brings down the surplus and questions the validity of data.
More error and omissions, that too in the negative side, decreases the credibility of investing in India to
the foreign investors.
FII Vs Exchange Rate
In India, with the gradual removal of restrictions on international capital flows and greater integration of
domestic with global financial markets, understanding the precise nature of the causal relationship among
capital flows, the exchange rate, interest rates and reactions of monetary policy has certainly become
more complex. The response lag of the exchange rate and domestic liquidity to monetary policy actions in
the form of direct intervention in the exchange market as well as changes in the short-term policy rates
has important implications for the stability of foreign exchange markets and external price
competitiveness. The table below shows how the change in rupee against dollars varied over the years
with respect to the FII net flows. When FII new flow increases the rupee value increases and increases the
imports. On the other hand when the net FII flow decreases the rupee value decreased and this triggers
more exports.
FII Net
Change in rupee
Flows
Year
against
($
dollars (in %)
million)
2007
18,518
11
2008
(12,918)
-23.8
2009
18,005
4.7
2010
29,321
-3.9
2011
(209)
-18.2
Source: http://www.timesofindia.com

References:
www.rbi.org.in Balance of payments for the last 5 years values, FDI sector wise and country wise
inflows and outflows.
http://www.bis.org/ifc/publ/ifcb28zj.pdf - Trends in portfolio investment
www.bis.org/publ/bppdf/bispap44m.pdf - Information on capital account
www.timesofindia.com FII vs Exchange rate