BALANCE OF PAYMENT

(BOP)
 Introduction

• Each country having regular economic transactions with other

countries prepares periodically the final accounts of their foreign
receipts and payments and of their financial inflows and outflow
arising out of its international transactions.

• This account is called balance of payments (BOP).

• Statement of economic transactions of a country with the rest of

the world over a period of time.
 A country has to deal with other countries
in respect of the following

1. Visible items which include all types of physical goods exported

and imported.

2. Invisible items which include all those services whose export and
import are not visible. e.g. transport services, medical services etc.

3. Capital transfers which are concerned with capital receipts

and capital payment.
Balance of
Payments
According to Kindle Berger, "The balance of payments of a
country is a systematic record of all economic transactions
between the residents of the reporting country and residents
of foreign countries during a given period of time".
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
when we say “a country’s balance of payments” we are
referring to the transactions of its citizens and government.
Balance Of Payment :
Definition
The balance of payments of a country is a systematic record
of all economic transactions between the residents of a
country and the rest of the world. It presents a classified
record of all receipts on account of goods exported, services
rendered and capital received by residents and payments
made by them on account of goods imported and services
received from the capital transferred to non-residents or
foreigners.
- Reserve Bank of India
Features
o It is a systematic record of all economic
transactions between one country and the rest of the
world.
o It includes all transactions, visible as well as invisible.
o It relates to a period of time. Generally, it is an
annual statement.
o It adopts a double-entry book-keeping system. It has
two sides: credit side and debit side. Receipts are
recorded on the credit side and payments on the debit
side.
Balance of
Trade
The difference between a country's imports and its exports. Balance of
trade is the largest component of a country's balance of payments.
Debit items include imports, foreign aid, domestic spending abroad
and domestic investments abroad.
Credit items include exports, foreign spending in the
domestic economy and foreign investments in the domestic economy.
When exports are greater than imports than the BOT is
favourable
and if imports are greater than exports then it is unfavourable
Balance of Trade V/s Balance of
Payment
The Balance of Payment takes into account all the transaction with
the rest of the worlds

The Balance of Trade takes into account all the trade transaction with
the rest of the worlds
 BOP v/s
BOT
BOP BOT
1. It is a broad term. 1. It is a narrow term.
2. It includesall transactions related 2. It includes only visible items.
visible, invisible
to and capital transfers.
3. It is always balances itself.
3. It can be favourable or unfavourable.
4. BOP = Current Account +
4. BOT = Net Earning on
Account
Capital + or - Balancing item
(Errors and omissions) Export - Net payment for imports.

5. Following factors 5. Following are main factors

are main
which BO which affect BOT
affect
a)Conditions P a) cost of production
of foreign
b) Economic lend b) availability of raw materials
ers. c) Exchange rate
policy
of d) Prices of goods manufactured at
c) all the factors of BOT
home
Importance of BoP
1. BOP records all the transactions that create demand for and supply of a
currency.
2. Judge economic and financial status of a country in the short-term
3. BOP may confirm trend in economy’s international trade and exchange
rate of the currency. This may also indicate change or reversal in the
trend.
4. This may indicate policy shift of the monetary authority (RBI) of the
country.
5. BOP statements give warning signals for future policy formulation.
BoP Accounts
a. Current transactions.
 Current transactions include export and import of goods
and services, i.e., visible and invisible trade, unrequited
(non-repayable) receipts and payments in the current year.

a. Capital transactions.
 Capital transactions include inflows and outflows of
capital including foreign investments, gold transfers, and
foreign exchange reserves.
Distinctive features of two kinds of transaction

i. Current transactions change (increase or decrease) the current

level of consumption of the country or change the current level
of its nominal income,

ii. Capital transactions change the capital stock of the country,

iii. Current transactions are of flow nature,

iv. Capital transactions are mostly of stock nature.

The General Rule in BOP
Accounting
a. If a transaction earns foreign currency for the nation, it is
a credit and is recorded as a plus item.

b. If a transaction involves spending of foreign currency it

is a debit and is recorded as a negative item.
 The various components of a BOP
statement
1. Current Account

2. Capital Account

3. Reserve Account

4. Errors & Omissions

Current Account
Balance
• BOP on current account is a statement of actual receipts and payments in
short period.
• It includes the value of export and imports of both visible and invisible
goods. There can be either surplus or deficit in current account.
• The current account includes:- export & import of services, interests,
profits, dividends and unilateral receipts/payments from/to abroad.
• BOP on current account refers to the inclusion of three balances of
namely – Merchandise balance, Services balance and Unilateral Transfer
balance
Types of
Balances
Trade Balance
Merchandise: exports - imports of goods
Services: exports - imports of services

Income Balance
Net investment income: net income receipts from assets
Net international compensation to employees: net compensation
of Employees
Net Unilateral Transfers
Gifts from foreign countries minus gifts to foreign countries
 Capital Account
Balance
 The capital account records all international transactions that involve a
resident of the country concerned changing either his assets with or his
liabilities to a resident of another country. Transactions in the capital
account reflect a change in a stock – either assets or liabilities.
 It is difference between the receipts and payments on account of capital
account. It refers to all financial transactions.
 The capital account involves inflows and outflows relating to investments,
short term borrowings/lending, and medium term to long term
borrowing/lending.
 Capital Account
Balance
There can be surplus or deficit in capital account.
 It includes: - private foreign loan flow, movement in banking
capital, official capital transactions, reserves, gold movement
etc.
 These are classifies into two categories-
o Direct foreign investments
o Portfolio investments
o Other capital
The Reserve
Account
Three accounts: IMF, SDR, & Reserve and Monetary
Gold are collectively called as The Reserve Account.
The IMF account contains purchases (credits) and
re- purchase (debits) from International Monetary Fund.
Special Drawing Rights (SDRs) are a reserve asset created
by IMF and allocated from time to time to member
countries. It can be used to settle international payments
between monetary authorities of two different countries.
 Errors &
Omissions
 The entries under this head relate mainly to leads and lags in
reporting of transactions

 It is of a balancing entry and is needed to offset the overstated

or understated components.
Balance of Payments: Current Account
 Disequilibrium In The Balance Of
APayments
disequilibrium in the balance of payment means its condition
of Surplus Or deficit
 A Surplus in the BOP occurs when Total Receipts exceeds
Total Payments. Thus,
BOP= CREDIT>DEBIT

 A Deficit in the BOP occurs when Total Payments exceeds

Total Receipts. Thus,
BOP= CREDIT<DEBIT
Causes of Disequilibrium In The
Bop
 Cyclical fluctuations
 Short fall in the exports
 Economic Development
 Rapid increase in population
 Structural Changes
 Natural Calamites
 International Capital Movements
 Measures To Correct Disequilibrium in the
1.BOP
Monetary Measures :-
a) Monetary Policy
The monetary policy is concerned with money supply and credit in the
economy. The Central Bank may expand or contract the money supply in
the economy through appropriate measures which will affect the prices.
b) Fiscal Policy
Fiscal policy is government's policy on income and expenditure.
Government incurs development and non - development expenditure,. It
gets income through taxation and non - tax sources. Depending upon the
situation governments expenditure may be increased or decreased.
Measures To Correct Disequilibrium in the
BOP
c) Exchange Rate Depreciation
By reducing the value of the domestic currency, government can correct the
disequilibrium in the BoP in the economy. Exchange rate depreciation
reduces the value of home currency in relation to foreign currency. As a
result, import becomes costlier and export become cheaper. It also leads to
inflationary trends in the country,
d) Devaluation
devaluation is lowering the exchange value of the official currency. When a
country devalues its currency, exports becomes cheaper and imports become
expensive which causes a reduction in the BOP deficit.
Measures To Correct Disequilibrium in the
BOP
e) Deflation
Deflation is the reduction in the quantity of money to reduce prices and
incomes. In the domestic market, when the currency is deflated, there is a
decrease in the income of the people. This puts curb on consumption and
government can increase exports and earn more foreign exchange.
f) Exchange Control
All exporters are directed by the monetary authority to surrender their
foreign exchange earnings, and the total available foreign exchange is
rationed among the licensed importers. The license-holder can import any
good but amount if fixed by monetary authority.
 Measures To Correct Disequilibrium in the
II. BOP
Non- Monetary measures :-
a) Export Promotion
To control export promotions the country may adopt measures to stimulate exports
like:
 export duties may be reduced to boost exports
 cash assistance, subsidies can be given to exporters to increase exports
 goods meant for exports can be exempted from all types of taxes.
b) Import Substitutes
Steps may be taken to encourage the production of import substitutes. This will
save foreign exchange in the short run by replacing the use of imports by these
import substitutes.
 Measures To Correct Disequilibrium in the
BOP
c) Import Control
Import may be kept in check through the adoption of a wide variety of measures like quotas
and tariffs. Under the quota system, the government fixes the maximum quantity of goods
and services that can be imported during a particular time period.
1. Quotas – Under the quota system, the government may fix and permit the
maximum quantity or value of a commodity to be imported during a given period.
By restricting imports through the quota system, the deficit is reduced and the
balance of payments position is improved.
2. Tariffs – Tariffs are duties (taxes) imposed on imports. When tariffs are imposed,
the prices of imports would increase to the extent of tariff. The increased prices
will reduced the demand for imported goods and at the same time induce domestic
producers to produce more of import substitutes
INDIA'S BALANCE OF
PAYMENT
 INDIA'S BALANCE OF PAYMENT

 A country, like India, which is on the path of development generally,

experiences a deficit balance of payments situation.

 This is because such a country requires imported machines, technology

and capital equipment's in order to successfully launch and carry out the
programme of industrialization
 BOP OF INDIA

 India’s current account balance recorded a deficit of US$ 23.9 billion (2.8 per
cent of GDP) in Q1:2022-23, up from US$ 13.4 billion (1.5 per cent of GDP) in
Q4:2021-221 and a surplus of US$ 6.6 billion (0.9 per cent of GDP) a year ago.
 Net services receipts increased, both sequentially and on a year-on-year (y-o-y)
basis, on the back of rising exports of computer and business services.
 Services exports grew y-o-y by 35.4 per cent, led by broad-based growth in
computer, business, transportation, and travel services.
 Private transfer receipts, mainly representing remittances by Indians employed
overseas, amounted to US$ 25.6 billion, an increase of 22.6 per cent from their
level a year ago.
 BOP OF INDIA

 In the financial account, net foreign direct investment increased to US$

13.6 billion from US$ 11.6 billion a year ago.

 Net foreign portfolio investment recorded outflows of US$ 14.6 billion as

against net inflows of US$ 0.4 billion during Q1:2021-22.

 Net external commercial borrowings to India recorded an outflow of US$

3.0 billion in Q1:2022-23 as against an inflow of US$0.2 billion a year ago.

 Non-resident deposits recorded net inflows of US$0.3 billion as compared

with US$ 2.5 billion in Q1:2021-22.
 REASONS FOR POOR PERFORMANCE OF
INDIA’S EXPORT TRADE

There are Several reasons for India’s Poor performance. Some off them are:
I.Export - Related Problems :-
1.High Prices :-
As compared to other Asian Countries the price of Indian goods is high.
Prices are high due to documentation formalities, high transaction costs
& also to make higher profits.
2. Poor - Quality :-
Many Indian exporters do not give much importance to quality control,
so their products are of poor quality. Due to low quality many times
Indian goods are rejected & sent back to India by foreign buyers.
 REASONS FOR POOR PERFORMANCE OF
INDIA’S EXPORT TRADE

3.Poor Negotiation Skills :- Indian exporters lack Negotiation Skills due to

poor training in Marketing. They fail to Convince & induce the foreign buyers
to place orders.
4.Inadequate Promotion :-For Export Marketing, Promotion is important.
Many Indian Exporters do not give much importance to promotion. A good
no. of Indian exporters are not professional in advertising & Sales
promotion. They do not take part in trade fairs & exhibitions.
5.Poor follow-up of sales :-Indian exporters are ineffective in providing after-
sale-service. They do not bother to find out the reactions of buyers after sale.
This results in poor performance of India’s export trade.
 REASONS FOR POOR PERFORMANCE OF
INDIA’S EXPORT TRADE

II. General Causes

1. Good Domestic Market

Sellers find a ready market for their goods within the country, so they do
not take parts to get orders from overseas markets.
2. Number of formalities

There are number of documentation & other formalities due to which the
some marketers do not enter the export field. So there is a need to
simplify formalities.
 REASONS FOR POOR PERFORMANCE OF
INDIA’S EXPORT TRADE

3. Problem of Trading Blocs

Trading blocs reduce trade barriers on member nations, but they impose trade barriers
on non-members. As India is not a member of some powerful trading blocs, it has to
face some problems.
4. Negative Attitude
Some of the overseas buyers have a negative attitude towards Indian goods. They feel
that Indian goods are inferior goods. Thus there is a need to correct this attitude.
5. Poor Infrastructure
Indian infrastructure is poor. Indian exporters find it difficult to get orders & also to
deliver them at time.