BALANCE OF PAYMENTS

TRENDS IN INDIA
NAME OF THE FACULTY:
Ms. N. RADHIKA
• Balance of payment of India
• India's current account balance posted a
marginal surplus of USD 0.6 billion (0.1%
of GDP) in the Jan-Mar quarter 2020, as
against a deficit of USD 4.7 billion in Jan-
Mar 2019 and USD 2.6 billion in the
previous quarter.
• According to the Ministry of Commerce and
Industry, India’s Balance of Payments (BoP) in
2020-21 is going to be very strong.
• Key Points
• Strong BoP: The BoP is going to be strong on the
back of significant improvement in exports and a
fall in imports.

– The exports in July 2020 is at about 91% export level of

July 2019 figures.
– Imports are still at about 70-71% level as of July 2019.
• Trade Surplus in June 2020: India’s trade
has turned surplus for the first time in 18
years as imports dropped by 47.59% in
June 2020 as compared to June 2019.

– The country posted a trade surplus of USD 0.79

billion in June 2020.
• Domestic Manufacturing Being Boosted: The
government is taking steps to support and
promote domestic manufacturing and industry.
It has increased curbs on imports of products
and parts, especially from China, as part of its
‘Atmanirbhar Initiative’.
• The government also reviewed all Free-Trade
Agreement (FTA) done between 2009 and 2011
and found most of them to be asymmetrical.
– FTAs done earlier have permitted foreign goods to
come easily into the country. But Indian goods have
not been allowed reciprocal entry.
– E.g. European countries have opposed technical
standards imposed by India on import of tyres,
even as they have restricted export of tyres from
India.
• Change in Mode of Manufacturing: The
government has also asked firms investing in the
country to stop having an “assembly workshop”
approach that has typically characterised Indian
manufacturing.
 Balance of Payment

• Definition:
Balance of Payment (BoP) of a country can be
defined as a systematic statement of all
economic transactions of a country with the
rest of the world during a specific period
usually one year.
• It indicates whether the country has a surplus or a
deficit on trade.
When exports exceed imports, there is a trade
surplus and when imports exceed exports there is
a trade deficit.
• Purposes of calculation of BoP:
Reveals the financial and economic status of a
country.
• Can be used as an indicator to determine
whether the country’s currency value is
appreciating or depreciating.
• Helps the Government to decide on fiscal and
trade policies.
• Provides important information to analyze and
understand the economic dealings of a country
with other countries.
• Components of BoP:
For preparing BoP accounts, economic transactions
between a country and rest of the world are grouped
under - Current account, Capital account and Errors
and Omissions. It also shows changes in Foreign
Exchange Reserves.
• Current Account: It shows export and import of visibles
(also called merchandise or goods - represent trade
balance) and invisibles (also called non-merchandise).
Invisibles include services, transfers and income.
• Capital Account: It shows a capital
expenditure and income for a country.
It gives a summary of the net flow of both
private and public investment into an
economy.
• External Commercial Borrowing
(ECB), Foreign Direct Investment, Foreign
Portfolio Investment,etc form a part of
capital account.
- Errors and Omissions: Sometimes the balance of
payment does not balance. This imbalance is shown in
the BoP as errors and omissions. It reflects the
country’s inability to record all international
transactions accurately.
– Changes in Foreign Exchange Reserves: Movements in
the reserves comprises changes in the foreign currency
assets held by the Reserve Bank of India (RBI) and also
in Special Drawing Rights (SD R)balances.
– Overall the BoP account can be a surplus or a deficit. If
there is a deficit then it can be bridged by taking money
from the Foreign Exchange (Forex) Account.
If the reserves in the forex account are falling short
then this scenario is referred to as BoP crisis.
• India recorded a trade deficit of USD 2 .720 billion in
September of 2020, lower than initial estimates of a USD
2.9 billion gap and well below a USD 11.67 billion
shortfall a year earlier. Exports jumped 6 percent from
a year earlier to USD 27.58 billion, following six months
of declines and reaching the highest reading since
February, before the coronavirus pandemic. Imports
went down 19.6 percent to USD 30.3 billion also the
highest value since the pandemic started but well below
USD 37.5 billion in February. Considering the April to
September period, the trade gap narrowed sharply to
USD 20 trillion from USD 83.25 trillion in the same
period in 2019. source: Ministry of Commerce and
Industry, India
• India Trade Gap Revised Lower in
SeptemberIndia recorded a trade deficit of
USD 2 .720 billion in September of 2020, lower
than initial estimates of a USD 2.9 billion gap
and well below a USD 11.67 billion shortfall a
year earlier. Exports jumped 6 percent from a
year earlier to USD 27.58 billion, following six
months of declines and reachi... more
• 2020-10-15
• India Trade Deficit Narrows in September
India's trade deficit narrowed sharply to USD
2.9 billion in September 2020 from USD 10.9
billion in the same period of the previous year,
a preliminary estimate showed. Exports
jumped 5.3 percent driven by sales of
engineering goods, petroleum, pharmaceuticals
and readymade garments. Meanwhile,
imp... more
• 2020-10-02
• India Trade Gap Halved in AugustIndia's
trade deficit narrowed sharply to USD 6.77
billion in August of 2020 from USD 13.86
billion in the same month last year, in line with
market forecasts of USD 6.75 billion, amid a
prolonged coronavirus lockdown. Exports sank
12.7% to USD 22.7 billion, with sales declining
the most for cashew ... more
• 2020-09-15
• India Balance of Trade
• India has been recording sustained trade deficits
since 1980 mainly due to the strong imports growth,
particularly of mineral fuels, oils and waxes and
bituminous substances and pearls, precious and
semi-precious stones and jewelry. In recent years,
the biggest trade deficits were recorded with China,
Switzerland, Saudi Arabia, Iraq and Indonesia.
India records trade surpluses with the US, United
Arab Emirates, Hong Kong, United Kingdom and
Vietnam.
• India Trade Deficit Narrows in JulyIndia's
trade deficit narrowed to USD 4.83 billion in
July 2020 from USD 1343 billion in the same
month last year and compared to market
expectations of USD 2.0 billion. Exports
declined 10.21 percent led by sales of
petroleum products (-51.54 percent), gems &
jewelry (-49.61 percent), leather &... more
• 2020-08-14.
• Balance of Payments Position in India:
• The balance of payments position of the country reflects on its
economic health. The balance of payments of any country is a
comprehensive and systematic accounts of all the different
transactions occurred between the residents of a country and the
rest of the world during a particular period of lime.
• The balance of payments maintains detailed classified records of
different types of receipts against exports of goods, services and
all the capital received by its residents on the one hand and also
of all the payments made by the residents against imports of
goods and services received along with the capital transferred to
non-residents and foreigners, on the other hand. Thus the
balance of payments is much wider than the balance of trade
which refers to only merchandise exports and imports.
• The balance of payments is broadly classified
into:
• (a) Current account and
• (b) Capital account.
• The current account includes: visible exports
and import; invisible items relating to receipts
and payments for various services like
banking, insurance, shipping, travel etc. and
other unilateral transfer of payments like
donations, grants, taxes etc.
• The capital accounts of balance of payments include all the
current economic transaction for the country’s international
financial position resulting changes in the foreign financial
assets and liabilities. The capital transaction includes both
private, banking and official transactions.
• The balance of payment account is maintained on the basis
of double entry system of book keeping. If a country faces
deficits in the current account of its balance of payment then
such deficit is normally met either by liquidating its assets or
through borrowing from abroad. Thus a persistent deficit in
the balance of payments of a country results in a heavy debt
burden on the economy.
• The Balance of Payment Position of India on Current
Account since Independence:
• With the introduction of planning in India, the balance of
payments position of the country has been recording
considerable changes with the continuous changes in its
imports and exports.
• Balance of Payments (BOP) Position during the First Four
Plans:
• The balance of payments position during the First Plan
period was quite satisfactory as the country experienced a
deficit in its current account only to the extent of Rs. 42.3
crore. In this period, the inflow of foreign capital was only
Rs. 13.6 crore and the foreign exchange reserve was about
Rs. 127 crore.
• During the Second Plan, the deficit in the
balance of trade was to the tune of Rs. 2,339
crore and the surplus of invisibles and
donations ultimately reduced the deficit in
balance of payment to Rs. 1,725 crore. This
higher deficit in the balance of payment,
during the Second Plan was resulted from
heavy imports of capital goods, huge imports
of food grains and raw materials and lesser.
• During the Third Plan the country experienced
a current account deficit in its BOP to the
extent of Rs. 1,941 crore which was financed
by loans from foreign countries under various
schemes. During the Fourth Plan, the
Government introduced both export
promotion and import substitution measures
for wining out the deficits in the BOP.
Moreover, due to sudden increase in the
invisibles accounts receipts to the extent of Rs.
1,680 crore in 1973-74, the plan ended with a
surplus of Rs. 100 crore in its BOP.
• BOP During the Fifth Plan:
• During the Fifth Plan period, due to the
applicability of two factors like hike in oil
prices arid increase in the value of exports due
to promotional measures, although a surplus in
trade balance was attained in 1976-77 (Rs. 316
crore) but the plan experienced an increasing
trend in trade deficit to the extent of Rs. 3,179
crore. But due to higher entry of net invisibles,
the Fifth Plan ended with surplus of Rs. 3,082
crore.
• BOP During the Sixth to Tenth Plan:
• The balance of payments position has
recorded a total change since 1979-80. India
started to record a heavy deficit in its
balance of payments since 1979- 80. Table
7.6 shows the growing deficit in trade
balance along with the growing deficit in its
balance of payments position during the
Sixth to Tenth Plan.
• Thus the table reveals that due to the mounting deficit in trade
balance, i.e., from Rs. 5,967 crore in 1980-81 to Rs. 6,721 crore
in 1984-85, India maintained a huge deficit in its balance of
payments to the extent of Rs. 11,384 crore during the Sixth Plan
period. Again due to a persistent growing deficit in trade
balance the cumulative deficits in the balance of payment during
the Seventh Plan rose further to Rs. 38,313 crores, showing the
annual average deficit of Rs. 7,662 crore.
• Again in 1990-91, total amount of deficits in the balance of
payments was as high as Rs. 17,369 crore. But in 1999-2000 and
2000-2001, the total amount of deficits in the balance of
payments was Rs. 20,331 crore and Rs. 11,431 crore
respectively. In 2001-02, total surplus in BOP was Rs. 16,426
crore and the total surplus further increased to Rs. 47,952 crore
in 2003-04. In 2008-09, total deficit in BOP was Rs. (-) 1,31,614
crore.
• This huge deficit in the balance of payments
position during the entire Sixth, Seventh and
Eighth and Ninth Plan periods was the result
of tremendous rate of growth of imports
accompanied by a poor rate of growth of
exports. The trade deficits during these four
plans were so heavy that it could not be offset
by the flow of funds under net invisibles. The
following table depicts a clear picture about
the amount of deficits in the balance of
payments from the First Plan to the Ninth
Plan.
• Recovery in Balance of Payments Position in India since
1991-92, i.e., After Economic Reforms:
• The balance of payments position, which had reached a
point of near collapse in June 1991, gradually stabilized
during the course of 1991-92. In 1990-91, foreign
currency reserves had declined to $ 1.1 billion despite
heavy borrowing from the IMF. In order to restore
international confidence, the Government negotiated a
stand by arrangement with the IMF in October 1991 for
$ 2.3 billion over a 20 month period, a Structural
Adjustment Loan with the World Bank of $ 500 billion
and a Hydrocarbon Sector Loan with ADB for $ 250
million.
• Along with this effort, the Government also
launched the India Development Bonds
aimed at mobilizing NRI sources of funds.
With the assurance of external support
through these efforts, the balance of
payments position was gradually stabilized
in 1991-92 and the foreign exchange
reserves were restored to the level of $ 5.6
billion at the end of March 1992
• Thus, the balance of payments position in India
showed a steady improvement since 1991-92 with
exports covering a larger proportion of imports
than in the earlier years. The export-import ratio
has averaged nearly 90 per cent during 1991-92 to
1993-94 compared to an average of about 65 per
cent for the preceding three years.
• In 1994-95, this export-import ratio stood at 91.9
per cent. The current account deficit has also
declined, averaging about 0.7 per cent of GDP for
these three years (1991-94), compared to an average
of about 2.6 per cent of GDP in the preceding three
years.
• In this connection, Economic Survey, 1995-96 observed, “The
development in India’s trade and payments over the past five
years mark a noticeable structural change towards a more
stable and sustainable balance of payments. During the post-
liberalization period, there has been a sharp improvement in the
coverage of import payments through export earnings. The
coverage ratio has averaged around 88 per cent since 1992-93,
compared with only 52.4 per cent at the beginning of the 1980’s
and about 70 per cent at the end of the 1980’s. There has also
been a marked improvement in the flow of invisible receipts.
Together, these changes brought about a sharp reduction in the
ratio of the current account deficit to GDP from an
unsustainable level of 3.2 per cent in 1990-91 to 0.8 per cent in
1994-95.”
• There has been a structural change in the capital account in terms
of a sharp reduction in debt creating flows and an increased
recourse to non-debt creating foreign investment flows. For
example, debt creating flows, as a percentage of total capital flow
in the balance of payments, averaged as much as 97 per cent
during the Seventh Plan Period (1985-86 to 1989-90).
• But the ratio declined very sharply to less than 18 per cent in
1994-95. This declining trend is shared by all the major
components of debts flows, namely external assistance,
commercial borrowing and non-resident deposits. This favourable
shift, away from recourse to debt creating flows for financing the
current account deficit, has obvious implications for moderating
and reducing future debt service liabilities.
• During the recent years, the balance of payments position of the
country experienced a mixed scenario. The year 2004-05 marked
a significant departure in the structural composition of India’s
balance of payment (BOP), with the current account, after three
consecutive years of surplus, turning into a deficit. In a significant
transformation, the current account deficit, observed for 24 years
since 1977-78, had started shrinking from 1999-2000.
• The contraction gave way to a surplus in 2001-02, which
continued until 2003-04. However, from a surplus of US $14.1
billion in 2003-04, the current account turned into a deficit of US
$5.4 billion in 2004-05. This deficit was caused by a burgeoning
excess of merchandise imports over exports, which was left
uncompensated by the net surplus in invisibles.
• Which the magnitude of deficit is one of the highest in recent times, it
underscored the rising investment demand in the economy. As a
proportion of LSDPP, the turnaround in the current account balance
was from a surplus equivalent to 2.3 per cent in 2003-04 to a deficit of
0.8 per cent in 2004-05.
• The turn around in the current account during 2004-05 was
accompanied by a significant strengthening of more than 80 per cent in
the capital account resulting in continued reserve accretion. Compared
with 2003-04, when loan inflows and turned not net outflows, such
inflows shot up rapidly during 2004-05 and bolstered the rise of the
capital account surplus with good support from robust foreign
investment inflows. Reserve accumulation during 2004-05, at around
four-fifths of such accumulation during 2003-04, maintained India’s
status as one of the largest reserve holding economies in the world.
• Rise in Trade Deficit during 1995-96 and
Thereafter:
• India’s trade deficit during 1995-96 swelled
to $ 4,538 billion—more than double of the
deficit of $ 2.027 billion in the previous
financial year. The country’s exports during
1995-96 were estimated at $ 31,830 billion
signifying growth of 21.38 per cent over the
exports during the previous fiscal year
valued at $ 26,623 billion.
• Against a target of 18 to 20 per cent growth rate for the year 1995- 96,
the actual achievement were considerably higher at 21.4 per cent in
dollar terms. Import during 1995-96 were estimated at $ 36,369
billion against $ 28,251 billion during the previous fiscal year
reflecting a growth of 28.74 per cent. Thus the rise in the trade deficit
during 1995-96 has been resulted mostly from the sudden spurt in
imports, in spite of attaining a considerable higher growth in exports.
• 1996-97:
• The balance of payments position of India has been experiencing
some changes in the year 1996-97 as India’s exports went up by only
4.01 per cent and imports grew by 5.99 per cent during 1996-97 as
compared to that of 21.58 per cent and 28.74 per cent recorded
respectively during 1995-96.
• 1998- 99:
• The balance of payments (BOP) position of India has been
gradually improving in recent years. India’s BOP remained
comfortable in 1998-99 partly due to anticipatory policy
action’s, such as issue of Resurgent India Bonds. The deficit in
the current account of the BOP in 1998-99 had declined to about
1.0 per cent of GDP as against 1.7per cent in 1995-96 and 1.4
per cent in 1997- 98, mainly reflecting sharp declines in POL
and non-customs imports.
• Reflecting the trends in exports and imports, the deficit on the
trade account of BOP in 1998-99 narrowed to US $ 13.25 billion
from US $ 15.51 billion in 1997-98 or from 3.8 per cent of GDP
in 1997-98 to 3.1 per cent of GDP in 1998-99.
• 1999- 2000:
• India’s Balance of payments position in
1999-2000 remained comfortable. The
current account deficit in 1999-2000 was
contained to 0.9 per cent of GDP, despite an
unfavourable international trade and
financial backdrop including a near two-
third like in India’s oil import bill.
• 2000- 01:
• India’s balance of payments (BOP) position in 2000-01 remained
comfortable and the external sector experienced a distinct
improvement. There were, however, some pressures on the BPO
during the first half of the year on account of significant
hardening of international oil prices, the sharp downturn in
international equity prices and successive increases in interest
rates in the United Suites and Europe; but the situation cased
with the mobilization of funds under the India Millennium
Deposits, which helped to revert the declining trend in reserves
and enhanced confidence in the strength of India’s external
sector. As a result, the BOP situation experienced a turn around
0.5 per cent of GDP from 1.1 per cent of GDP in 1999-2000.
• 2001- 02:
• India’s balance Of payments in 2001-02 exhibited mixed developments.
While exports, on BOP basis, remained stagnant at previous year’s level,
but imports declined by 2.8 per cent, thus resulting in a decline in
merchandise trade deficit, as per cent of GDP, from 3.1 per cent in 2000-
01 to 2.6 per cent in 2001-02. Moreover, the current account BPO turned
into a surplus in 2001-02, after a gap of 24 years (last recorded in 1977-
78).
• 2007-08 and 2008-09:
• Both the year 2007-08 and 2008-09 were marked by adverse
developments in the external sector of the economy, reflecting impact of
global financial crisis on the emerging economies including India.
India’s BOP exhibited considerable resilience during fiscal 2008-09
despite one of the severest external shock.
• The current account balance [(-) 2.4 per cent of
GDP in 2008-09 vis-a-vis (—) 1.3 per cent in
2007-08] remained well within sustainable
limits and there was limited use of foreign
exchange reserves despite massive decline in
net capital flows to US $ 7.2 billion in 2008-09
as against US $ 106.6 billion in 2007-08. As a
result, the total net capital account of BOP as
per cent of GDP stood at only 0.6 per cent in
2008-09 as compared to that of 8.8 per cent in
2007-08.
• Convertibility of Rupee:
• For the first time, the Union Budget for 1992-93 has made
the Indian rupee partially convertible. This was an
inevitable move for the expeditious integration of Indian
economy with that of the world In order to face the serious
current account deficit in the balance of payments, the
Government of India introduced the partial convertibility
of rupee from March 1. 1992.
• Under this system, which remained in operation for a
period of one year, 60 per cent of the exchange earnings
were convertible in rupees at market determined exchange
rate and the remaining 40 per cent earnings were
convertible in rupees at the officially determined exchange
rate.
• The entire foreign exchange requirement for meeting
import obligations was required to be purchased at market
determined exchange rate, excepting a few specified
imports and imports on the government account.
• The term convertibility of a currency indicates that it
can be freely converted into any other currency.
Convertibility can also be identified as the removal of
quantitative restrictions on trade and payments on
current account. Convertibility establishes a system
where the market place determine the rate of exchange
through the free interplay of demand and supply forces.
• In India, hawala trade normally handle about 4 billion
dollars a year. Until recently, this was traceable to the
increasing differential between official and hawala
exchange rates. This convertibility of rupee has bridged
this gap and in check the hawala trade effectively.
• Current Account Convertibility:
• Current account convertibility is the next phase for
attaining full convertibility of rupee. Current account
convertibility relates to the removal of restrictions on
payments relating to the international exchange of goals,
services and factor incomes, while capital account
convertibility refers to a similar liberalization of a
country’s capital transactions such as loans and
investment, both short term and long term.
• The International Monetary Fund (IMF) which works
towards the establishment of multilateral system of
payments, requires member countries to move towards
restoration of current account convertibility, but permits
them to restrict convertibility for capital transactions.
• Current account convertibility has been defined as
the freedom to buy or sell foreign exchange for the
following international transactions:
• (a) All payments due in connection with foreign
trade, other current business, including services and
normal short term banking and credit facilities;
• (b) Payments due as interest on loans and as net
income from other investments;
• (c) Payments of moderate amount of amortization of
loans or for depreciation of direct investment; and
• (d) Moderate remittances for family living expenses.
• Capital Account Convertibility:
• The next and final step in this line is the convertibility of rupee on
capital account. But we must draw a sharp distinction between
currency convertibility in the current and capital accounts. Capital
account convertibility refers to a liberalization of a country’s capital
transactions such as loans and investment, both short term and long
term as well as speculative capital flows.
• When it comes to capital account convertibility, one has to be more
prudent and be very much sure about its capacity to launch such a
system. If the country can build a large stock of international reserves,
then only this system could provide a bonus. Confidence in the
financial system and a steady macro-economic environment are very
much essential to the introduction of capital account convertibility of
rupee in near future.
• Capital account convertibility in India can be introduced in stages by
gradually widening access to resident Indians to external financial
markets. In the light of historical experience, the general view is that
opening up of the capital account should occur late in the sequencing
of stabilization and structural reforms.
• Capital account convertibility is likely to be sustainable only if it is
supported by credible macro- economic policies, listing reduction in
fiscal deficit, moderation in inflation and a flexible financial system
which can adapt to changing situations as some of the essential pre-
conditions for capital account convertibility. Thus capital account
convertibility implies the right to transact in financial assets with
foreign countries without restrictions. Although the rupee is not fully
convertible on the capital account, convertibility exists in respect of
certain constituent elements.
• These are as follows:
• (a) Capital account convertibility exists for foreign
investors and Non-Resident Indians (NRIs) for
undertaking direct and portfolio investment in India.
• (b) Indian investment abroad up to US $ 4 million is
eligible for automatic approval by the RBI subject to
certain conditions.
• (c) In September 1995, the RBI appointed a special
committee to process all applications involving Indian
direct foreign investment abroad beyond US $ 4 million
or those not qualifying for fast track clearance.
• But in the context of the need for attracting higher capital inflows
into the country, it is also important for the Government to
introduce convertibility on capital account, as foreign investors
may enter confidently only when there is an assurance that the exit
doors will always remain open.
• The Budget 2002-03 has adopted a cautious step towards Capital
Account Convertibility by allowing NRI to repatriate their Indian
income. Considering the present condition along with the
comfortable foreign exchange reserve of the country at present, the
government is now favouring a make towards fuller capital account
convertibility in the context of changes in the last two decades. For
the mean time on 18th March, 2006 Prime Minister Dr. Manmohan
Singh asked the Finance Ministry and RBI to work out a roadmap
for fuller capital account convertibility based on current realities.
Dr. Singh is of the view that such roadmap for fuller capital
account convertibility would attract greater foreign investments
into the country.
• Thus it is expected that the Government of India and the
RBI are going to announce a roadmap soon for the
attainment of fuller capital account convertibility of the
country. However, while taking decision for full
convertibility of rupee, the Government should take
adequate care of its possible consequences.
• In the mean time on 29th March, 2006, 160 renowned
Indian economists asked the government to desist from
mowing towards full convertibility of rupee as it was
brought with dangerous consequences. They argued,
“We urge the UPA government from such an
unnecessary and dangerous measure……. This (full float
of rupee) would expose Indian economy to extreme
volatility”.
• The statement made by about 160 leading
economists from various institutions across
the country and signed by Prof. Prabhat
Patnaik of JNU, Delhi also expressed
apprehension that to expose the country to
unpredictable movements in capital flows
would create a potential for fragility and
crisis and particularly when the stock
market is witnessing a speculative boom.