Balance of Payments

BALANCE OF PAYMENTS
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.
It takes into account the export and
import of both visible and invisible
items.

BOP statement includes

All the receipts on account of goods
exported
Services rendered
Capital received by residents
Payments of residents
Capital transferred to foreign

Balance of trade
It deals with exports and imports
of visible items only.
It takes into account only
merchandise exports & imports
only.

Components of Balance of
Payments
Current
account
Capital
account

Current Account
It includes visible exports and imports,
and invisible items like receipts and
payments for various services.
It contains credit and debit items.
Credit includes merchandise exports and
invisible exports.
Debit includes merchandise imports and
invisible imports.

BOP position of India on current account

Its position is satisfactory at first five year plan.
During the period inflow of foreign capital was 127
cr. Deficit of current account was only 42.3 cr.
The second and third five year plans recorded
negative balance of payments.
The fourth and fifth five year plans recorded
positive balance of payments with 100 cr. and
3082 cr. respectively.
From 1985-86 to 1989-90 Balance of Payments are
negative.
During 2001-02 to 2004-05 India have surplus of
BOP, but 2005-06 onwards it suffered with the
deficit. Again India experienced positive BOP in
2008-09.

Reasons for Deficit

Balance
Government liberalized imports in 1985 this
leads to the increase in imports significantly.
the Gulf war in 1990s
the rapid industrialization (import of capital
goods, technology, etc.)
the slow growth of invisibles
the devaluation/depreciation of rupee
against importing countries
1990-91 crisis
less exports

Capital Account
It is divided into
private capital
banking capital and
official capital

Private capital
Long term (> 1 year)

Foreign investments
Long term loans
Foreign currency deposits
Estimated portion of the unclaimed receipts allocated
to the CA

Short term (< 1 year)

Bank capital
External financial assets
Liabilities of commercial and
cooperative banks authorized
to deal in foreign currency

Official capital
RBIs holdings in terms of foreign currency &
Special Drawing Rights
Capital outflow from home country to a foreign
country is treated as debit.
The inflow of capital from a foreign country to
home country is credit.
Credit includes foreign long-term investment in the
home country and short term investment in the
home country
Debit includes long term investments in foreign
country and short term investments in foreign
country.

Unilateral payment/transfers
account
These are giving the gifts
These include Government grants,
private remittances, disaster relief, etc.
Ex. India gave grant to an African country it
is debit side of Indias BOP a/c and credit
side of the African country.

Official Settlements
Account
The official sales of foreign currencies and
other reserves to foreign countries or
official purchases of foreign currencies or
other reserves from foreign countries.