RECENT TRENDS IN INDIA’S BALANCE OF PAYMENT: PROBLEMS

AND PROSPECTS

Submitted by- Aashi Jain

Sap no.:53002160038
SYBMS

INTRODUCTION-

BALANCE OF PAYMENT:

A balance of payment, also known as balance of international payments is an accounting

statement that provides a country's systematic record of all the economic transactions
between its residents and the rest of the world for a given period i.e. a financial year.
It is a statement of a country's sources and uses of foreign exchange. The main sources
include: exports, transfers and remittances from abroad, borrowings from abroad, foreign
investments whereas uses of foreign exchanges are: imports, transfers to abroad, lending
abroad and purchase of assets, etc.
The balance of payments record is maintained in a standard double- entry book-keeping
method. Components of balance of payment are-

CURRENT ACCOUNT: the inflow and outflow of goods, services, investment incomes and
transfer payments are measured by balance of payments in the current account.

The main components of the current account are:

1. Trade in visible items i.e. goods

2. Trade in invisible items, e.g. insurance and services
3. Investment incomes, e.g. dividends, interest and migrants remittances from abroad
4. Net transfers – e.g. International aid

CAPITAL ACCOUNT: It records all the receipts and payments that involve the residents of a
country changing either their assets or liabilities to residents of other countries.
The transactions under this title involve direct investment, portfolio investment and
borrowings and lending from and to other countries.

FOREX RESERVES: These are the reserves which the country holds in the form of foreign
currencies usually in hard currencies like dollar, pound etc., gold and special drawing rights
(SRDs). They are used for adjusting surplus or deficit in balance of payment.

Key Features of India’s Balance of Payment in Q1 of 2017-18 given by RBI

are-
 India’s current account deficit (CAD) at US$ 14.3 billion (2.4 per cent of GDP) in Q1
of 2017-18 increased sharply from US$ 0.4 billion (0.1 per cent of GDP) in Q1 of 2016 -
17 and US$ 3.4 billion (0.6 per cent of GDP) in Q4 of 2016-17.
  The widening of the CAD on a year-on-year (y-o-y) basis was primarily on account of
a higher trade deficit (US$ 41.2 billion) brought about by a larger increase in merchandise
imports relative to exports.
 Net services receipts increased by 15.7 per cent on a y-o-y basis mainly on the back of
a rise in net earnings from travel, construction and other business services.
 Private transfer receipts, mainly representing remittances by Indians employed
overseas, at US$ 16.1 billion increased by 5.3 per cent over the corresponding quarter of
previous year.
 In the financial account, net foreign direct investment at US$ 7.2 billion in Q1 of 2017-
18 almost doubled from its level in Q1 of 2016-17.
 Net portfolio investment recorded substantial inflow of US$ 12.5 billion in Q1 of 2017-
18, primarily in the debt segment, as compared with US$ 2.1 billion in Q1 of last year.
 Net receipts on account of non-resident deposits amounted to US$ 1.2 billion in Q1 of
2017-18; this was lower than US$ 1.4 billion a year ago.
 In Q1 of 2017-18, there was an accretion of US$ 11.4 billion to the foreign exchange
reserves (on Balance of Payamnet basis) as compared with US$ 7.0 billion in Q1 of 2016-
17and US$ 7.3 billion in the preceding quarter.

Table 1: Major Items of India's Balance of Payments

(US$ Billion)
April-June 2017 P April-June 2016
Credit Debit Net Credit Debit Net
A. Current Account 140.5 154.8 -14.3 125.0 125.4 -0.4
1. Goods 73.7 114.9 -41.2 66.6 90.5 -23.8
Of which:
POL 8.2 23.2 -15.1 6.8 19.0 -12.2
2. Services 45.9 27.7 18.2 39.4 23.6 15.7
3. Primary Income 4.8 10.6 -5.8 3.7 10.0 -6.3
4. Secondary Income 16.1 1.7 14.5 15.3 1.3 14.0
B. Capital Account and Financial Account 155.2 141.3 14.0 129.2 129.0 0.2
Of which:
Change in Reserves (Increase (-)/Decrease (+)) 0.0 11.4 -11.4 0.0 7.0 -7.0
C. Errors & Omissions (-) (A+B) 0.4 0.4 0.2 0.2
P: Preliminary
Note: Total of subcomponents may not tally with aggregate due to rounding off.

Budgetary allocation-
Total revenue ₹2399147 crore (US$370 billion)
Total expenditure ₹2920484 crore (US$450 billion)
Debt payment ₹575795 crore (US$88 billion)
Fiscal deficit ₹624276 crore (US$96 billion) (3.3%)
Revenue deficit ₹416034 crore (US$64 billion) (2.2%)
Recent Data Trend:
In the corresponding quarter a year ago, Current account deficit (CAD) of India has worsened
to USD 13.5 billion (2% of GDP) during Oct-Dec'17 (Q3 2017-18) from a level of USD 8
billion (1.4% of GDP). During Q3 2017-18, the widening of CAD was on account of an
increase in imports by 19% year-on-year (YoY). The import bill for India has been increased
due to the surge in crude oil prices.The global crude oil price rose by 25% YoY, in the
concerned period.
India's trade deficit widened during Q3 2017-18 from a level of USD 33.3 billion to USD 44.1
billion in the year-ago period. Due to a stronger capital account surplus, despite, the soaring
CAD, the economy received an accretion of USD 9.4 billion in forex reserves. This was in
contrast to the deficit of 1.2 billion in the year-ago period.
The capital and financial account surplus rose to USD 12.6 billion in Q3 2017-18 from USD
7.3 billion in Q3 2016-17, supported by stronger portfolio investment inflows worth USD 5.3
billion.
We believe, with the CAD soaring and risks of fiscal slippage breathing (as fiscal deficit
reached 4% of GDP by end Jan'18), the rupee is likely to witness a downward pressure. The
combination of soaring CAD and a high fiscal deficit will bring in inflationary pressures and
likely weigh down on the rupee, which has already lost 1.4% against USD since the beginning
of 2018.

PROBLEMS:

1. Ever Expanding Trade Gap:

Gap due to a big rise in imports against a small growth in exports of the country over the years
is known as trade gap. The result of trade gap is trade deficit.

Due to the following reasons country’s expenditure on imports has risen at an alarming rates
in the eighties:

(i) Import Liberalisation:

There has been a quantum jump in imports of capital goods and modern technology due to
import liberalisation during the eighties. Further liberalisation of imports has been favoured
because of the new economic and trade policies of 1991.

(ii) Increase in Import Intensity:

The pattern of industrial development and growth of national income during the seventh plan
led to a higher propensity to import. There has been a growth in import demand for consumer
durables.

(iii) Import of Oil:

The single most important item in India's import bill has been petroleum oil and lubricants
(POL). During seventies and eighties constituted nearly one-third of total imports of the
country.
Concerns have been expressed about growing protectionist tendencies in some countries and
it remains to be seen as to how the situation unfolds. Additionally, average crude oil (Indian
basket) prices have risen by around 14 per cent so far in 2017-18 (mid-January 2018) vis-à-
vis 2016-17. Going by the recent trends, the average crude oil prices could be in the vicinity
of US$ 56-57 per barrel in the current financial year and could rise further by another 10- 15
per cent in 2018-19. Some of these factors could have dampening effect on GDP growth in
the coming year.
(iv) Import of Essential Items:
The country had to import essential items such as cereals and edible oils on a large scale due
to scarcity created by drought conditions from time to time.

(v) Rising Prices of Imports:

In international markets, the country's import bill has been rising due to the rising prices of
goods. Especially, oil prices have been arbitrarily hiked by the oil supplying countries. The
average nominal price of crude oil was about US 13.8 a barrel in 1986. Which had went up to
US 18 a barrel in 1987. Similarly, prices of fertilisers, etc., also have gone up.

(vi) Deterioration in the Exchange Rate of Rupee:

In term of US dollar the external value of rupee, has continuously depreciated over the years.
As a result of devaluation of rupee in 1991, the country had to pay high prices of imports in
rupee terms.

The value of imports of the country had gone up consequently which would not have posed a
problem as our exports would have kept an equal price. Actually, rate of growth imports was
much faster than that of our exports which means that our exports are not sufficient to finance
our imports. The trade-gap has widened, consequently, trade-deficit has increased over the
years because of slow rise in export earnings of the country.

2. Rising Current Account Deficit:

India's current account Balance of payment deficit has also increased sharply from an average
of 1.3 per cent of GDP in the Sixth Plan to 2.7 per cent of GDP in 1988-89, as a consequence
of rising trend in trade deficit.

The main factor contributing to the rising current account deficit is decline in the growth of
net invisible earnings. The country's earnings from invisibles declined sharply from Rs. 4311
crores in 1-980-81 to Rs. 1,025 crores in 1989-90. Net invisibles earnings financing only 24
per cent of trade deficit during the seventh plan as against financing over 60 per cent of trade
deficit in the sixth plan.

In fact, net invisibles which financial over 90 per cent of trade deficit in 1978-79 financial
only 14 per cent in 1989-90. Further owing to deterioration in the invisibles account the
overall current deficit in 1990-91 at 7.3 billion was 1.4 billion higher than in the previous
year.

Another factor decline is migrants' remittance from abroad. Moreover, the country's
repayment obligation and debt servicing to the IMF and other sources of external public debt
adds to current account BoP deficit.
In 1993-94, the current account deficit came down to $ 0.8 billion from $ 3.6 billion in 1992-
93.

3. Deficits on Capital Transactions:

Deficit on capital account has been growing in the recent years, due to country's rising
obligations to meet amortisation payments. Due to a fall in the availability on concessional
aid to finance the deficits and flattering out a private remittances, the situation is worsened.

The government has also resorted to external commercial borrowings, assistance from IMF
and MRI deposits, invitation to foreign capital and encouragement to direct foreign
investment so is to ease the situation.

These constitute substantial future liabilities. A noted economist Bimal Jalan, writes that, the
economy is plunged into a crisis that these sources of financing the Balance of payment
deficits are dried up. In 1990-91, the balance of payment position of India was highly
precarious. The country was caught in a vicious circle of low reserves, low credit rating and
poor capacity to raise resources. Even in the beginning of 1991-92, the situation became no
better. The government had to compress imports and also to find, sources of exceptional
financing to meet the current account deficit to deal with this problem.

PROSPECTS:
India's current account deficit is increasing which leads to the fall of trade balance. Capital
flows have balanced this deficit for now but this is not sustainable for long term.
In case of panic, all these flows will stop which will lead to more increase in deficit. Exports
will decrease and imports will increase which will lead to devaluation of the Indian currency
and money in the reserves will diminish. Trade deficit is not likely to improve in the future. It
will not improve until and unless there are reforms in the agricultural and manufacturing
sector. India majorly depends on the service sector which has its limitations.

CONCLUSION-
The invisibles account and the capital account have been critical in avoiding Balance of
payment crisis. One of the goals of liberalising FDI is to boost exports, which does not seem
to be happening. Given the liberal imports, the trade deficit remains a matter of concern.
Investment, both FDI and FPI, may result in reversals taking the economy into payments and
currency crisis. It seems prudent to rely on short terms selective controls on trade and capital
flows for moderating short term volatility when the market mechanism fails to assist.
REFRENCES-
 https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=41684
 https://www.indiamacroadvisors.com/page/category/economic-
indicators/international-balance/balance-of-payment-bop