Macro Economics Assignment Term 2
Balance Of Payments in India For Last Last 5 Ye Years
Sumitted To !r" S#ant#i $%reat La&es Institute of Management' (#ennai) Sumitted By * $P%+PM * %rou, -)
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’ li!e ban!ing, insurance, transport services, etc. with the rest of the world. "or #ndia, $B# releases the Balance of Payments data under the %pecial &ata &issemination re'uirements. The items are classified as statement of all receipts which includes items that result in cash outflows li!e goods eported, services rendered, capital received by residents, and the items that result in cash inflows li!e payments made by them on account of goods imported, services received from and capital transferred to foreign citiens* units. (urrent Account
The +urrent ccount comprises of the merchandise transactions and the transactions of the invisibles. Merc#andise transactions include all the eports 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 eports and vice versa in case of imports. The in.isiles include travel, transportation, insurance, investment income and other services. Thus the +urrent ccount reflects the trade related transactions of the nation with the rest of the world. Transfers can be official and private. fficial Transfers comprises of funds from the government of #ndia 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 #ndians for their family maintenance in #ndia.
Capital Account ll transactions of financial nature that would result in a change in net country’s foreign financial assets or in the foreign financial liabilities are entered in the +apital ccount of the BoP statement. The capital account transactions falls in to either of the below five head of accounts - (/) "oreign #nvestment, (0) 1oans, (2) Ban!ing +apital, (3) $upee &ebt %ervice and (4) ther +apital. The investment made by the individuals, companies, financial institutions outside the country or a foreign government for the purpose of ac'uisition of physical assets in #ndia would form the Foreign !irect In.estment .This results in the inflow of foreign capital. 5hen a foreign national directly purchases financial assets in the #ndian securities mar!et, it forms the "oreign Portfolio #nvestment. "##s and 6&$s*&$s come under Portfolio #nvestment. 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 mar!et which are repayable under specific terms and conditions, bond issues and other short-term credits. The loan amount disbursed to #ndian resident entities appears as credit and the disbursement by #ndian entities and the amount repaid appear as debit items.
Ban&ing ca,ital comprise of all the changes involving the foreign assets and liabilities of private and public commercial ban!s and also the co-operative ban!s which are authoried to deal in foreign echange.
The ‘/u,ee !et Ser.ice’ 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 #ndia. Ot#er (a,ital refers to the advances and receivable to the trade transactions, which will be mostly the difference between ban!ing channel data and the actual custom data. This includes funds held abroad7 advance payments for eports, delayed eport receipts, subscriptions to international institutions, 'uota payment to #8" 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 eactly e'ual to the credits. The item ‘9rrors and missions’ indicates the value of such discrepancies. 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 wea!nesses in the recording of transactions or flows. Monetary Mo.ements
The monetary movements !eep record of (a) #ndia’s transactions with the #nternational 8onetary "und (#8"), and, (b) #ndia’s foreign echange reserves which basically consist of $B# holdings of gold and foreign currency assets. &rawings (essentially a type of borrowing) from the #8" or drawing down of reserves are credit items, whereas, repayments made to #8" or additions made to eisting 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 underta!en to ad:ust the surplus or deficit arising from autonomous transactions. The overall deficits would be ad:usted by drawings from #8" or decrease of reserves. The surplus would be added to the reserves or for repayment of #8" commitments. These are recorded in the 8onetary 8ovement section of BoP %tatement. 8ovement in reserves comprises of the changes in foreign currency assets held by $B# and the %&$ balances held by 6overnment of #ndia. This is stated ecluding the valuation changes that arises due to appreciation or depreciation of non ;% denominated currencies in the reserves. The Balance of Payments statement from /<4=’s at some intervals has been shown below>
015350
014340
0130
011310
230
253-
2130
(urrent Account
61
3775
32207
3046-
30051
37-5-
30-2-
8erchandise
-3
-3=?
-@0//
-/@<22
-4@A2A
-00A<@2
-4@=A3@
#nvisibles
30
-2A
2<
-322
34/2<
/?//=A
2?=/0=
services
0<
?
/=03
/A@/
A<=4
/@
transfer payments
2A
0=<
0A/A
342<
4<<@A
/=A@2<
03?0AA
"actors income
-03
-043
-04@
-@A22
-00A22
-03<@<
-2?===
37
52
0776
02--0
61270
002452
252062
/?2
0@A33
?=A4<
032@3/
"&#
/?2
/3<03
04303
?<@A4
Portfolio investment
=
//?0=
44224
/42<@@
<<0<
0334<
0=302
9ternal assistance
2<44
0==0
@3=4
/2@/0
+ommercial borrowings
3=34
0=/A/
@30A
/2/?2
%hort term
/<0<
00?@
A4
23?A?
Ban!ing capital
/004
-
4A<4
$upee debt services
-0/3=
-0A@=
-044A
-340
ther +apital
23@3
/2//
3/=/
-@04A3
(a,ital Account
"oreign investment
1oans
9rrors and missions
A
-@A
-/0?
023
-/2@<
302/
-A0@<
Balance of Payments
2
30
311
37740
24-76
-51-
-7264
-0?
/=
?<<
33A/
-0A@32
-@4?<@
-@302A
#8" Positions
=
-A<
2?2
0/A?
-//4
=
=
"oreign 9change reserves
-0?
?<
4/@
00<2
-0A40?
-@4?<@
-@302A
fficial $eserve ccount change (Monetary
- increase
Mo.ements)
C decrease
%ource> http>**www.rbi.org.in
The fficial $eserve changes would indicate a BoP surplus or deficit. #n case of surplus the country may gain in terms of overall reserves. This would result in the inflow of funds. The country may also decide to repay the %&$s to #8" resulting in outflow of funds. #n case of deficit the country may borrow from #8" 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 e'ual in amount but opposite in direction to the overall balance in the BoP statement. BoP deficits was high during A=s and was alarming during ?=s when the transactions were funded both by the drawings from #8" and decrease in the reserves. This resulted in the fall of #ndia’s "oreign echange reserves to ne billion ;% dollars. %ince the initiation of the economic reforms in /<
The above graph clearly states that the reserve position is almost steady and positive over past 3years. fficial reserve position of #ndia is healthier compared to yester years, and retained a reserve of ;%D 0AA billion in 8arch 0=/=.
(urrent Accounts in India For T#e Last 5 Years
Balance of ,ayments im,ro.ed to a 438uarter #ig# in 90 of 200302 > significant increase in foreign investments, particularly the ban!ing capital has helped the overall balance of payments position to reach a A-'uarter high of D4.3 billion in the first 'uarter of current financial year against a D0.=2 billion a 'uarter before and D2.A billion a year before. (urrent account deficit :idened nearly 63times to ;07 illion< steep rise in merchandise trade deficit and a marginal fall in invisibles lead to a significant epansion in current account deficit to D/3 billion from D4.3 billion in the last 'uarter of 0=/=-// as well as from D/0./ billion in the first 'uarter of 0=/=-//. Merc#andise trade deficit e=,anded stee,ly to ;65"5 illion > Though eports posted a significant growth, imports surpassed them, leading to a notable epansion in trade deficit to D24.4 in E/ of 0=//-/0 from D0<.< billion in E3 of 0=/=-// and from D2/.? billion in E3 of the last year. 9ports registering a steep growth of 34F outpaced imports growth at about 22F in the first 'uarter of current financial year. In.isiles moderated to ;20"6 illion in 90 of 200302< Get invisibles though remained high compared to D/<.A billion the corresponding 'uarter a year ago, moderated marginally compared to D03.4 billion in the 'uarter before.
CURRENT ACCUNT ! "ND"A#S B$ %AST &"'E (EARS 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)
%ource> http>**www.rbi.org.in
600,000 400,000 200,000
235,579
304,185
411,544
374,901
392,494 !"#S$%&S (a''c) ! M&*+A"DS&
0 -279,962 -200,000 -400,000 -600,000
-367,664 -543,158 -555,659 -595,028
(a,ital Account in India for last 5 years
The capital account in the last 4 years has undergone several changes pushing the net capital account to 23F increase (from $s 0=2,@A2 crores to $s 0A2,/22 crores). The "&# and Ban! account are the contributors for the increase in capital account.
CA$"TA% ACCUNT ! "ND"A#S B$ %AST &"'E (EARS 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
%ource> 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 'uarter in the last 4 years. "rom the year 0==@ 'uarter 0, the capital account started increasing. This is the period where there were more 8G+s that are coming in and contributing to the "&#s and "##s. This boom in all the sectors continued till the recession in 0==?. The capital account increased from 2/,22@ crore rupees to /2A,@0= crores rupees. "ollowing that we had the tragedy of recession bringing the "##s and "&# down. #n fact the 'uarters E2 and E3 of 0==? to 0==< 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 In.estments<
9'uity flows under foreign direct investment ("&#) and foreign portfolio investments constitute the ma:or forms of non-debt-creating capital flows to #ndia. There has been a mar!ed increase in the magnitude of "&# inflows to #ndia since the early /<<=s, reflecting the liberal policy regime and growing investor confidence. #n a ma:or brea! from the past, the spurt in "&# flows to #ndia in the recent period has been accompanied by a :ump in outward e'uity investment as #ndian firms establish production, mar!eting and distribution networ!s overseas to achieve global scale along with access to new technology and natural resources. #nvestment in :oint ventures (HI) and wholly owned subsidiaries (5%) abroad has emerged as an important vehicle for facilitating global epansion by #ndian companies. "oreign investment contribution to BoP in #ndia increased from @@,A
&D" in "ndia +or last , -ears
Aount in crore Rupees
200,000 150,000 100,000 50,000 0
Oter *aptal en.e/te &arnn/ &ut
(ears
%ource> http>**www.rbi.org.in
The chart below shows the countries that contribute to #ndian "&# in crore rupees in the last 4 years. Source>Industry
8auritius %ingapore ;.%. +yprus Hapan Getherlands ;nited Jingdom 6ermany ;9 "rance %witerland Kong Jong %pain %outh Jorea 1uembourg
2-34
/4?A@ 0333.3 0<@4.0 032.@ 22@ 023A.? A4
%ource> http>**www.rbi.org.in
243
2<
231
30@<2 /3//0 4/
2130
3//@3.0 <2/4.@ <0<=.3 @?/@.@ 3=A?.0 22A@.? 0A==.@ 040?.3 /4@@.@ //??.@ 3=2.0 4A4.3 404 @@A.? /@?
20300
024?A.0 @3@? 33
The chart below shows the sector wise inflow of "&# in the last 4 years (in +rore $upees). Source>Industry
8anufacture +onstruction "inancial %ervices $eal 9state ctivities 9lectricity and other 9nergy 6eneration, &istribution L Transmission +ommunication %ervices
2-34
243
231
2130
20300
@?<0.0 3=@/.3 44?@
/4@3<.0 /=A/3.0 /@/A=
[email protected] <2<4.3 /?@=@
0/@==.@ /[email protected] <[email protected]
0=/2=.@ @A/4.? 4@?0.@
/?/=.0
4@//.0
A<0/.0
<0=0.0
/?@3.?
A2=.?
23?/.?
0?=<.?
A??2.3
4@/<.@
/AA@.@
0AA.0
?@?/.3
AAA?.3
4/4A.@
Business %ervices /=/?4 8iscellaneous %ervices /04/.@ +omputer %ervices 23@=.? $estaurants L Kotels @30.@ $etail L 5holesale Trade / http>**www.rbi.org.in
3?@2.@
0A==.@
@40@.?
02?<.?
A
@/02.@
2A0<.@
0/2A.?
323A
@
[email protected]
243=.@
//A@
/33=.@
0?/?.0
?3= /<[email protected] 230A.0 A2<.0
/023.? 33/ /@?3.0 /@?=
004/.0 //04.@ <03 ?2/.@
/@30.0 [email protected] /333.? @44.0
@44.0
/=0=.@
2?0.0
024.0
Loans<
9ternal assistance, eternal commercial borrowings (9+Bs), trade long term and short term credit constitute the ma:or portion of the eternal debt in #ndia. 9ternal assistance, which consists of eternal aid flows from bilateral and multilateral sources, constituted the ma:or source of eternal financing for #ndia in the /<4=s and /<@=s. #ts importance has declined steadily during the last three decades as it gave way to private capital flows, with the share in #ndia’s total capital flows falling from 2/.0F in /<<=*
rupees. #n the year 0==A 0==?, the 9+B stood around //4,40< crore rupees but due to recession in the year 0==? to 0==< it dropped significantly to @/A00 crore rupees and now it’s coming up again. %hort term credits are basically the short term fund transfer by G$# to #ndia for getting the interest benefits. #n the /
The net ban!ing capital went through ups and downs in the last 4 years. The net ban!ing capital is the sum of difference between debit and credit of ssets and liabilities in a ban!. The net ban!ing capital increased from ?,3AA crore rupees in 0==@-=A to 00,=04 crore rupees in 0=/=-//. #n other terms the ban!ing capital increased 2 times in the last 4 years. &uring the year 0==?-=<, however the ban!ing capital went highly negative at around -/<,0=4 crore rupees. The ma:or contributor towards the liabilities of the ban!ing capital is the G$#s. The chart below shows the percentage contribution of G$# in the liabilities part of ban!ing account.
NR" $ercenta/e "n Total %ia0ilities 100!00 95!00 90!00 85!00 $ercenta/e
" *ret n %alte/
80!00
" Det n %alte/
75!00 70!00
(ears
%ource> http>**www.rbi.org.in #n the last 4 year, we see that the ban!s liabilities to the G$# are around ?=F to <@F. The G$# debt percentage was more in the year 0==@ and 0==A, but recession in the year 0==?-0=/= caused more G$#
credit than debit. gain last year we could see more G$# credits happening than G$# debit, which means that recession is coming to normal. /u,ee !et Ser.ice<
The rupee debt service increased steadily from -A04 crore rupees in 0==@-=A to 2/2 crore rupees in 0=/=-//. This means that the cost of meeting interest payments and other administrative charges increased over the period of 4 years.
Ot#er (a,ital<
The other capital in the last 4 years shows a tremendous change, it moved on from a positive value of /?,@<@ in 0==@-=A to -3A,A0@ in 0=/=-0=//. This 0.4 times decrease in the other capital could be attributed to higher debit than the credit in funds held abroad, advance payments for eports, delayed eport receipts, subscriptions to international institutions etc. Errors and Omissions<
ver the years 0==@ 0=//, the errors and omission summed up to -2,@0/crore rupees. The more debit than the credit in the errors and omissions, brings down the surplus and 'uestions the validity of data. 8ore error and omissions, that too in the negative side, decreases the credibility of investing in #ndia to the foreign investors. FII ?s E=c#ange /ate
#n #ndia, with the gradual removal of restrictions on international capital flows and greater integration of domestic with global financial mar!ets, understanding the precise nature of the causal relationship among capital flows, the echange rate, interest rates and reactions of monetary policy has certainly become more comple. The response lag of the echange rate and domestic li'uidity to monetary policy actions in the form of direct intervention in the echange mar!et as well as changes in the short-term policy rates has important implications for the stability of foreign echange mar!ets and eternal price competitiveness. The table below shows how the change in rupee against dollars varied over the years with respect to the "## net flows. 5hen "## new flow increases the rupee value increases and increases the imports. n the other hand when the net "## flow decreases the rupee value decreased and this triggers more eports.
(ear
&"" Net &lo1s )2 illion* 18,518 (12,918) 18,005 29,321 (209)
Chan/e in rupee a/ainst dollars )in 3*
2007 11 2008 -23!8 2009 4!7 2010 -3!9 2011 -18!2 %ource> http>**www.timesofindia.com
/eferences<
www.rbi.org.in Balance of payments for the last 4 years values, "&# sector wise and country wise inflows and outflows. http>**www.bis.org*ifc*publ*ifcb0?:.pdf - Trends in portfolio investment www.bis.org*publ*bppdf*bispap33m.pdf - #nformation on capital account www.timesofindia.com "## vs 9change rate
