3. Balance of Payment
• Balance of Payment of a country is a systematic record of all
economic transactions between a country & rest of the world, for a
given financial year. BOP is the difference between receipts from and
payments to foreign countries. BOP is favorable if receipts exceed
payments.
4. Balance of Payment
•“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 and capital transferred to non-residents or foreigners.”
–Reserve Bank of India
5. Components
Current Account
• Import and Export of goods
• Import and Export of services
• Unilateral transfers from one country to another
Capital Account
• Foreign Investment
• FDI & portfolio Investment
• Loans
• Commercial Borrowings, External Assistance & Banking Capital Transactions
6. Calculation
•Current Account Balance =
•Balance of Visible Trade(goods) +
•Balance of Invisible Trade(services) +
• Balance of Unilateral transfers
•Capital Account Balance =
• Inflow of foreign exchange –
outflow of foreign exchange
•Official Reserves:
The holdings of foreign reserves and gold by official institutions like the
central bank
Overall Balance of Payment =
Current Account Balance + Capital account balance +
Official Reserve Account
7. BOP Disequilibrium
•Current amount deficit (CAD) refers to excess of
value of imports of goods & services over value
of exports of goods and services and investment
income.
8. Causes
• Fixed Exchange Rate
• Economic Growth
• Decline in Competitiveness
• Recession in other Countries
• Borrowing Money
• Demonstration Effect
• Development Programmes
• Natural Factors
• Poor Marketing Strategies
9. Crisis – Factors and Causes
•Economic factors
• Huge development expenditure owing to which there are large scale imports
• Business cycles in terms of recession, depression, recovery and boom
• High rate of inflation running up to large scale imports of essential goods
• Decline of import substitutes which would necessitate and increase in imports
• Change in cost structure of trading partners
•Political factors
• Political Instability leading to decline in FDI and FII
• Populism policies which may encourage imports
•Social factors
• Change in tastes and preferences leading to demand changes
• Cross border prejudices which may lead to expensive sources of imports
10. Crisis in India
1. Trade Deficit
Import liberalization
Increase in prosperity to import
Oil Crisis
Negative Attitude towards Indian Goods
2. Inflation
3. Fiscal Deficit
11. Steps to Overcome
1. Monetary Measure
• Inducing Deflation
• Depreciation or Devaluation
2. Non – Monetary Methods
• Tariffs
• Quotas
• Export Promotion
• Import Substitution
