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ACKNOWLEDGEMENT
OBJECTIVES OF BOP
SCOPE OF BOP
MEANING AND DEFINITIONS OF BOP
APPLICATIONS OF BOP
ANALYSIS AND COMPARISON OF BOP OF INDIA WITH ITS NEIGHBOURING COUNTRIES
VIEWS
CONCLUSION
BIBLIOGRAPHY
OBJECTIVES
To study and compare the components of BOP of India with respect to its neighboring
countries.
To find how BOP affect exchange rate.
To find the various factors that cause disequilibrium.
To suggest views to attain BOP equilibrium in India.
SCOPE OF BOP
The balance of payments (BOP) is the method countries use to monitor all international
monetary transactions at a specific period. Usually, the BOP is calculated every quarter and
every calendar year. All trades conducted by both the private and public sectors are accounted
for in the BOP to determine how much money is going in and out of a country. If a country has
received money, this is known as a credit, and if a country has paid or given money, the
transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets
(credits) and liabilities (debits) should balance, but in practice, this is rarely the case. Thus, the
BOP can tell the observer if a country has a deficit or a surplus and from which part of the
economy the discrepancies are stemming.
APPLICATIONS OF BOP
The use of the IIP and BOP financial account to analyze vulnerability to external shocks
in a world of increasingly mobile financial flows. The role of timely and comprehensive
balance of payments statistics: market expectations and uncertainties in fundamentals.
The current account balance as an indicator of excess or under-spending. Temporary
and cyclical deficit /surpluses on the current account, and their impact on inflation and
countrys terms of trade.
The use of BOP data for an understanding the movements in the exchange rate through
analysis of the supply and demand of foreign currencies driven by the trends in the BOP
components.
The role of BOP data in the money market operations of central banks. Changes in the
net foreign assets of the central bank as important explanatory variables of changes in
the liquidity requirement in the money market.
Trends in the financial account in response to financial market conditions and economic
developments for understanding the link between a change in interest rate conditions
and the amount, direction, and structure of external financial flows.
Statistics on international banking flows and stocks may be useful to understand issues
in the globalization of international banking and to help focus on the soundness of the
domestic banking system.
The use of IIP data as an alternative way of assessing an economy's relations with the
rest of the world.
BOP OF INDIA
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 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.
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.
INDIA AND ITS NEIGHBOURS
BOP OF CHINA
Both foreign trade and international financing in China are state monopolies, with policies
and transactions administered by the People's Bank of China (PBC). Among its various
functions, the PBC sets exchange rates for FOREIGN CURRENCIES. The PBC releases
FOREIGN EXCHANGE to the Bank of China, which plays a major payments role through its
branches in Hong Kong, Singapore, and other overseas financial centers. The government
has, overall, maintained a record of financial stability, linked to a policy of stringent controls
over its international transactions. Adhering generally to a principle of self-reliance, it has
resorted to the use of commercial credit at certain junctures but until the 1970s avoided
falling into long-term indebtedness as a means of financing major development goals. In the
period 195860, the Great Leap Forward and the succeeding years of economic crisis
caused a sharp deterioration in China's international payments position. In 1960, large
negative clearing account balances with Communist countries (-$625 million) were even
more than the foreign exchange reserves of $415 million. By the end of 1964, however, the
negative balance with Socialist nations had been reduced to $55 million, and China's net
international financial resources stood at a surplus of $345 million, owing to monetary gold
holdings of $215 million and foreign exchange balances from trade with non-Communist
countries amounting to $185 million. By 1965, the Chinese had completely cleared their
long-term debt to the former USSR, and by 1968, China had redeemed all national bonds
and was free of all long-term external and internal debts. Publication of official balance-of-
payments statistics was discontinued during the Cultural Revolution and not resumed until
September 1985. According to Western analyses, the period 197881 saw a continuing
surplus in current accounts, as rising levels of imports were generally matched or exceeded
by increases in exports over the same period. In addition, transfers of an estimated $1.1
billion in 1978 and $1 billion in 1980, derived from increased earnings in tourism, shipping,
and remittances from Hong Kong and other sources, resulted in overall current accounts
surpluses of $900 million and $1.2 billion in 1978 and 1980, respectively. China's drive to
industrialize under the Four Modernizations policy resulted in an unprecedented deficit on
capital accounts of $1.1 billion in 1978. The subsequent unilateral decisions to cancel $2.6
billion in contracts with Japan (1979) and $2 billion with Japan and Western nations (1981)
were interpreted by some observers as an indication of acute cash-flow problems and a
reordering of investment priorities at the highest levels. The trade account was helped by
the slow but steady devaluation that occurred after China went to a managed float
exchange rate system in January 1991. Tourism receipts and visitor figures also continued to
grow, passing pre-Tiananmen levels. Foreign investment boomed in the 1990s, with a total
of nearly $45 billion committed in 1998 alone. Approximately half of China's loans came
from the Asian Development Bank, the World Bank, and Japan; external debt reached $159
billion in 1998. A usually positive current account balance stockpiled China's reserves. In
1998, China had some $147 billion in official reserves, but state industries had accumulated
a huge amount of what was called triangular debt with the state banks and other lending
agencies. Government infrastructure and industrial projects received funding for goods that
could not be sold domestically in 1999 due to lower demand, losing money for each party
involved. In effect, external trade plays a secondary role in China's economy because of
normally high, unsatisfied domestic demand. Agreements with the WTO threaten to
increase China's dependence on foreign trade. China's external debt stood at $149.4 billion
in 2002.
The US Central Intelligence Agency (CIA) reports that in 2002 the purchasing power parity of
China's exports was $312.8 billion while imports totaled $268.6 billion resulting in a trade
surplus of $44.2 billion.
The International Monetary Fund (IMF) reports that in 2001 China had exports of goods
totaling $266 billion and imports totaling $232 billion. The services credit totaled $33.3
billion and debit $39.3 billion. The following table summarizes China's balance of payments
as reported by the IMF for 2001 in millions of US DOLLARS.
China
Current Account 17,401
Balance on goods 34,017
Balance on services -5,933
Balance on income -19,175
Current transfers 8,492
Capital Account -54
Financial Account 34,832
Direct investment abroad -6,884
Direct investment in China 44,241
Portfolio investment assets -20,654
Portfolio investment liabilities 1,249
Other investment assets 20,813
Other investment liabilities -3,933
NET Errors and Omissions -4,732
Reserves and Related Items -47,447
BOP OF PAKISTAN
Pakistan, since independence, has been experiencing deficit (un-favourable) in its balance of
payment except the following five years i. e., 1950-51, 1954-55, 1955-56, 1958-59, and 1959-
60. In 1965-66, the balance of payment was highly deficit due to war against India.
According to the Economic Survey of Pakistan 2010-11, imports of Pakistan are $ 32.3 billion
and its exports are $ 24 billion. It is showing a deficit of $ 8.3 billion. Above situation is showing
that Pakistan faces a continuous deficit in its balance of payment
COMPARISON BETWEEN BOP OF INDIA AND PAKISTAN
GDP (Nominal) of India and Pakistan is $2050 billion and $250 billion respectively in 2014. On
PPP basis, GDP of India and Pakistan is $7,376 billion and $882 billion respectively. India is 9th
largest of the world in nominal method and 3rd largest economy in ppp method. Nominal
ranking of Pakistan is 43 and PPP ranking is 26. India's economically largest states Maharashtra
has GDP ($289 billion) greater than Pakistan.
According to CIA Facebook sector wise GDP composition of India in 2014 are as follows :
Agriculture (17.9%), Industry (24.2%) and Services (57.9%). Sector wise GDP composition of
Pakistan in 2014 are : Agriculture (25.1%), Industry (21.3%) and Services (53.6%).
GDP of India is 8.19 and 8.36 times more than Pakistan at nominal and ppp terms, respectively.
India crossed $1 trillion mark in 2007 and $2 trillion mark in 2014. While Pakistan have yet to
cross $1 trillion mark. In 1980, size of economy of India and Pakistan was $181 and $31,
respectively.
GDP of Pakistan at ppp terms is 3.53 times more than compare to nominal basis. This ratio for
India is 3.60.
Both country has been neck-to-neck in gdp per capita terms. Till 2006 in nominal basis and till
2008 in ppp basis, per capita income of pakistan was more than India. In 2014, GDP per capita
of India is more than Pakistan in both terms. Per capita Income of India is $1627 and $5855 in
nominal and ppp terms, respectively. Per capita Income of Pakistan in nominal and ppp terms is
$1343 and $4736, respectively. World rank of India is 145 (nominal) and 125 (PPP). World rank
of Pakistan is 152 (nominal) and 134 (PPP).Out of 33 Indian states/UTs, 24 states/UTs are more
richer than Pakistan.
Growth rate of Pakistan is estimated at 4.14% in 2014. India's growth rate is estimated at 7.17%
in 2014. During period 1980-2014, Average GDP growth of Pakistan was 5.02% compare to
India's 6.23% in same period.
Conclusion
Pakistan scores high on income and consumption growth, poverty reduction and integration
with the world economy. India has done very well in developing its human resource base and
excelled in the field of science and technology. Both countries face a set of common problems --
the inherited legacy of a control mind-set among the government and rent-seeking private
sector, widespread corruption, poor fiscal management, weak financial system and congested
and overcrowded urban services. But there is an important and perceptible positive shift in
most of the indicators of India since 1991. Export growth rates have almost doubled, GDP
growth is averaging 6 to 7 percent in recent years, current account deficit is down and foreign
capital flows for investment have risen several fold. The edge that Pakistan has gained over
India in most of these indicators until 1990 is fast eroding. Pakistan, on the other hand, has
made greater progress in privatization of state owned enterprises and in attracting foreign
investors to expand power generating capacity in the country.
BOP OF SRILANKA
Sri Lanka recorded a trade deficit of 828 USD Million in March of 2017 compared to 617 USD
Million gap a year ago. Exports rose 9.8 percent to 1042 USD Million and imports went up 19.4
percent to 1,869 USD Million. Balance of Trade in Sri Lanka averaged -484.62 USD Million from
2003 until 2017, reaching an all time high of -50.10 USD Million in May of 2003 and a record
low of -1100.70 USD Million in November of 2011.
Sri Lanka exports mostly textiles and garments (40% of total exports) and tea (17%). Others
include: spices, gems, coconut products, rubber and fish. Main export partners are United
States, United Kingdom, Germany, Belgium and Italy. Sri Lanka imports petroleum, textile
fabrics, foodstuffes and machinery and transportation equipment. Main import partners are
India, China, Iran and Singapore.
A change in a country's balance of payments can cause fluctuations in the exchange rate
between its currency and foreign currencies. The reverse is also true where a fluctuation in
relative currency strength can alter the balance of payments. There are two different and
interrelated markets at work: the market for all financial transactions on the international
market (balance of payments) and the supply and demand for a specific currency (exchange
rate).
These conditions only exist under a free or floating exchange rate regime. The balance of
payments does not impact the exchange rate in a fixed-rate system because central banks
adjust currency flows to offset the international exchange of funds.
BIBLIOGRAPHY
www.wikipedia.com
www.investopeda.com
www.imf.org
www.scribd.com
www.yourarticlelibrary.com
www.nationsencyclopedia.com
www.ahsankhaneco.blogspot.ae
www.indexmundi.com
www.economicsdiscussion.com
www.nationmaster.com