BALANCE OF PAYMENT

CHAPTER: 1
INTRODUCTION

1.1 INTRODUCTION:
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THE BALANCE OF PAYMENTS(BOP):

Balance of Payments (BOP) is a record of all transactions made between one particular
country and all other countries during a specified period of time. Usually, the BOP is
calculated every quarter and every calendar year. BOP compares the dollar difference of the
amount of exports and imports, including all financial exports and imports. A negative
balance of payments means that more money is flowing out of the country than coming in,
and vice versa. Balance of payments may be used as an indicator of economic and
political stability. For example, if a country has a consistently positive BOP, this could mean
that there is significant foreign investment within that country. It may also mean that the
country does not export much of its currency.
All trades conducted by both the private and public sectors are accounted for in the BOP in
order 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 and,
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.

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CHAPTER: 2
CONCEPTUAL DATA

2.1BALANCE OF PAYMENT IN INDIA:

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In news that will bring some cheer, the Economic Survey for 2013-14 highlighted that India's
Balance of Payments (BoP) position has improved dramatically in 2013-14. "This has
happened particularly in the last three quarters. This is owed in large part to measures taken
by the government and the Reserve Bank of India (RBI) and in some part, to the overall
macroeconomic slowdown that fed into the external sector," the survey said.

2.2 DIFFERENCE BETWEEN BOP AND BOT:

Basis

of

Balance of Trade (BOT)

Balance

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Payment

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Difference
1. Definition

Balance of trade may be defined as

(BOP)
Balance of payment is flow of

difference between export and

cash between domestic country

import of goods and services.

and all other foreign countries.

It includes not only import and
export of goods and services but
also includes financial capital

2.

Formula BOT

Net

Earning

on

transfer.
BOP = BOT + (Net Earning

Export - Net payment for imports on foreign investment - payment

made to foreign investors) +
Cash
Transfer + Capital Account +or Balancing Item
or
BOP = Current Account +
Capital Account + or Balancing item ( Errors and
3.

Favorable

If

export

is

more

than

omissions)
Balance of Payment will be

or

import, at that time, BOT will be favorable, if you have surplus in

Unfavorable

favorable. If import is more than current account for paying your

export, at that time, BOT will be all
unfavorable.

past

loans

in

your

capital

account.
Balance of payment will be
unfavorable, if you have current
account deficit and you took
more loan from foreigners. After
this,

you

have

to

pay high interest on extra loan

and this will make your BOP
unfavorable.
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BALANCE OF PAYMENT
4. Solution of To Buy goods and services

To

Unfavorable

from domestic country.

from foreign countries.

Problem
5. Factors

Following

are

which
a)

main

affect
cost

of

factors

stop

taking

of

loan

Following are main factors

BOT which

affect

BOP

production a) Conditions of foreign lenders.

b) availability of raw materials

c)

Exchange

rate b) Economic policy of Govt.

d) Prices of goods manufactured at c) all the factors of BOT

home
6. Meaning of If you
Debit
Credit

and

see

RBI'

Overall

Credit means to receipt and

balance of payment report, it shows earning both current and capital

debit and credit of current account.
Credit

means

total

export

account and debit means total

of outflow of cash both current and

different goods and services and capital account and difference

debit means total import of goods between debit and credit will be
and services in current account.

net balance of payment.

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2.3 STRUCTURE OF BALANCE OF PAYMENTS:

The Balance of Payment (BOP) of a country is a systematic account of all economic
transactions between a country and the rest of the world, undertaken during a specific period
of time. BOP is the difference between all receipts from foreign countries and all payments to
foreign countries. If the receipts exceed payments, then a country is said to have favorable
BOP, and vice versa.
According to Charles Kindle Berger "The BOP of a country is a systematic recording of all
economic transactions between residents of that country and the rest of the world during a
given period of time".
The Balance of payments record is maintained in a standard double - entry book - keeping
method. International transactions enter into record as credit or debit. The payments received
from foreign countries enter as credit and payments made to other countries as debit. The
following table shows the elements of BOP.

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BALANCE OF PAYMENTS ACCOUNT

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Trade Balance :Trade balance is the difference between export and import of goods, usually referred

as visible or tangible items. If the exports are more than imports, there will be trade surplus
and if imports are more than exports, there will be trade deficit. Developing countries have
most of the time suffered a deficit in their balance of payments. The trade balance forms a
part of current account. In 2008-09, trade deficit of India was 118.6 US $ billion.

2.

Current Account Balance :It is the difference between the receipts and payments on account of current account

which includes trade balance. The current account includes export of services, interest,
profits, dividends and unilateral receipts from abroad and the import of services, profits,
interest, dividends and unilateral payments abroad. There can be either surplus or deficit in
current account. When debits are more than credits or when payments are more than receipts
deficit takes place. Current account surplus will take place when credits are more and debits
are less.
Current account balance is very significant. It shows a country's earning and payments
in foreign exchange. A surplus balance strengthens the country's international financial
position. It could be used for development of the country. A deficit is a problem for any
country but it creates a serious situation for developing countries. In 2009-10 Indias current
account deficit was 38.4 US $ billion.

3.

Capital Account Balance :It is the difference between receipts and payments on account of capital account. The

transactions under this title involves inflows and outflows relating to investments, short term
borrowings I lending, and medium term to long term borrowings / lending. There can be
surplus or deficit in capital account. When credits are more than debits surplus will take place
and when debits are more than credits deficit will take place. In 2009-10. Indias capital
account surplus was 51.8 US $ billion.

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Errors and Omissions :The double entry book - keeping principle states that for every credit, there is a

corresponding debit and therefore, there should be a balance in BOP as well. In reality BOP
may not balance, due to errors and omissions. Errors may be due to statistical discrepancies
(differences) and omissions may be due to certain transactions may not get recorded. For Eg.,
remittance by an Indian working abroad to India may not get recorded etc. If the current and
capital account shows a surplus of 20,000 $, then the BOP should show an increase of 20,000
$. But, if the statement shows an increase of 22,000 $, then there is an error or omission of
2,000 $ on credit side.

5.

Foreign Exchange Reserves :The balance of foreign exchange reserve is the combined effect of current and capital

account balances. The reserves will increase when:a) The surplus capital account is much more than the deficit in current account.
b) The surplus in current account is much more than deficit in capital account.
c) Both the current account and capital account shows a surplus.
In 2009-10 Indias foreign exchange reserves increased by 13.4 US $ billion.

2.4 MAIN CAUSES OF BOP DISEQUILIBRIUM:

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Any disequilibrium in the balance of payment is the result of imbalance between receipts and
payments for imports and exports. Normally, the term disequilibrium is interpreted from a
negative angle and therefore, it implies deficit in BOP.
The disequilibrium in BOP is caused due to various factors. Some of them are
IMPORT - RELATED CAUSE:
The rise in imports has been the most important factor responsible for large BOP deficits. The
causes of rapid expansion of imports are :-

Population Growth:

Population Growth may increase the demand for imported goods such as food items and
non food items, to meet their growing needs. Thus, increase in imports may lead to BOP
disequilibrium.

Development Programme:

Increase in development programmes by developing countries may require import of

capital goods, raw materials and technology. As development is a continuous process,
imports of these items continue for a long time landing the developing countries in BOP
deficit.

Imports Of Essential Items:

Countries which do not have enough supply of essential items like Crude oil or Capital
equipments are required to import them. Again due to natural calamities government may
resort to heavy imports, which adversely affect the BOP position.
Reduction Of Import Duties:
When import duties are reduced, imports becomes cheaper as such imports increases.
This increases the deficit in BOP position.

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Inflation:

Inflation in domestic markets may increase the demand for imported goods, provided the
imported goods are available at lower prices than in domestic markets.

Demonstration Effect:

An increase in income coupled with awareness of higher living standard of foreigners,

induce people at home to imitate the foreigners. Thus, when people become victims of
demonstration effect, their propensity to import increases.

EXPORT RELATED CAUSES :-

Even though export earnings have increased but they have not been sufficient enough to meet
the rising imports. Exports may reduce without a corresponding decline in imports. Following
are the causes for decrease in exports

Increase In Population :

Goods which were earlier exported may be consumed by rising population. This reduces
the export earnings of the country leading to BOP disequilibrium.

Inflation :

When there is inflation in domestic market, prices of export goods increases. This reduces
the demand of export goods which in turn results in trade deficit.

Appreciation Of Currency :

Appreciation of domestic currency against foreign currencies results in lower foreign

exchange to exporters. This demotivates the exporters.

Discovery Of Substitutes :

With technological development new substitutes have come up. Like plastic for rubber,
synthetic fibre for cotton etc. This may reduce the demand for raw material requirement.

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Technological Development :

Technological Development in importing countries may reduce their imports. This can be
possible when they start manufacturing goods which they were exporting earlier. This
will have an adverse effect on exporting countries.
Protectionist Trade Policy :
Protectionist trade policy of importing country would encourage domestic producers by
giving them incentives, whereas, the imports would be discouraged by imposing high
duties. This will affect exports.

OTHER CAUSES :

Flight of Capital:

Due to speculative reasons, countries may lose foreign exchange or gold stocks. Investors
may also withdraw their investments, which in turn puts pressure on foreign exchange
reserves.

Globalization:

Globalization and the rules of WTO have brought a liberal and open environment in
global trade. It has positive as well as negative effects on imports, exports and
investments. Poor countries are unable to cope up with this new environment. Ultimately
they become loser and their BOP is adversely affected.

Cyclical Transmission:

International trade is also affected by Business cycles. Recession or depression in one or

more developed countries may affect the rest of the world. The negative effects of trade
cycle (low income, low demand, etc.) are transmitted from one country to another. For eg.
The current financial crisis in U.S.A. is affecting the rest of the world.

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Structural Adjustments:

Many countries in recent years are undergoing structural changes. Their economies are
being liberalised. As a result, investment, income and other variables are changing
resulting in changes in exports and imports.

Political factors:

The existence of political instability may result in disrupting the productive apparatus of
the country causing a decline in exports and increase in imports. Likewise, payment of
war expenses may also serious affect disequilibrium in the countrys BOP. Thus political
factors may also produce serious disequilibrium in the countrys BOPs.

2.5TYPES OF DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS:

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1.Cyclical
Disequilibrium

2.Structural
Disequilibriu
m

3.Short-run
Disequilibriu
m

4.Long-run
Disequilibriu
m

1.CYCLICAL DISEQUILIBRIUM:
It occurs on account of trade cycles. Depending upon the different phases of trade cycles like
prosperity and depression, demand and other forces vary, causing changes in the terms of
trade as well as growth of trade and accordingly a surplus or deficit will result in the balance
of payments.
Cyclical disequilibrium in the balance of payments may occur because:

Trade cycles follow different paths and patterns in different countries. There are no
identical timings and periodicity of occurrence of cycles in different countries.

No identical stabilisation programmes and measures are adopted by different

countries.

Income elasticities of demand for imports in different countries are not identical.

Price elasticities of demand for imports differ in different countries.

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In short, cyclical fluctuations cause disequilibrium in the balance of payments because of

cyclical changes in income, employment, output and price variables. When prices rise during
prosperity and fall during a depression, a country which has a highly elastic demand for
imports experiences a decline in the value of imports and if it continues its exports further, it
will show a surplus in the balance of payments.Since deficit and surplus alternatively take
place during the depression and prosperity phase of a cycle, the balance of payments
equilibrium is automatically set forth over the complete cycle.

2.STRUCTURAL DISEQUILIBRIUM:
It emerges on account of structural changes occurring in some sectors of the economy at
home or abroad which may alter the demand or supply relations of exports or imports or both.
Suppose the foreign demand for Indias jute products declines because of some substitutes,
then the resources employed by India in the production of jute goods will have to be shifted
to some other commodities of export.
If this is not easily possible, Indias exports may decline whereas with imports remaining the
same, disequilibrium in the balance of payments will arise. Similarly, if the supply condition
of export items is changed, i.e., supply is reduced due to crop failure in prime commodities or
shortage of raw materials or labour strikes, etc. in the case of manufactured goods, then also
exports may decline to that extent and structural disequilibrium in the balance of payments
will arise.
Moreover, a shift in demand occurs with the changes in tastes, fashions, habits, income,
economic progress, etc. Propensity to import may change as a result. Demand for some
imported goods may increase, while that for certain goods may decline leading to a structural
change.
Furthermore, structural changes are also produced by variations in the rate of international
capital movements. A rise in the inflow of international capital tends to have a direct impact
on a countrys balance of payments.

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3.SHORT-RUN DISEQUILIBRIUM:
A short-run disequilibrium in a countrys balance of payments will be a temporary one,
lasting for a short period, which may occur once in a while. When a country borrows or
lends internationally, it will have short-run disequilibrium in its balance of payments, as these
loans are usually for a short period or even if they are for a long duration, they are repayable
later on; hence the position will be automatically corrected and poses no serious problem.
As such, a disequilibrium arising from international lending and borrowing activities is
perfectly justified. However, a short-run disequilibrium may also emerge if a countrys
imports exceed its exports in a given year.
This will be a temporary one if it occurs once in a way, because later on, the country will be
in a position to correct it easily by creating the required credit surplus by exporting more to
offset the deficit. But even this type of disequilibrium in the balance of payments is not
justified, because it may pave the way for a long-term disequilibrium.
When such disequilibrium (arising from imports exceeding exports or even vice versa) occurs
year after year over a long period, it becomes chronic and may seriously affect the countrys
economy and its international economic relations. A persistent deficit will tend to deplete its
foreign exchange reserves and the country may not be able to raise any more loans from
foreigners.

4. LONG-RUN DISEQUILIBRIUM:
The long-term disequilibrium thus refers to a deep- rooted, persistent deficit or surplus in the
balance of payments of a country. It is secular disequilibrium emerging on account of the
chronologically accumulated short-term disequilibria deficits or surpluses.
It endangers the exchange stability of the country concerned. Especially, a long-term deficit
in the balance of payments of a country tends to deplete its foreign exchange reserves and the
country may also not be able to raise any more loans from foreigners during such a period of
persistent deficits.

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In short, true disequilibrium is a long-term phenomenon. It is caused by persistent deeprooted dynamic changes which slowly take place in the economy over a long period of time.
It is caused by changes in dynamic forces/factors such as capital formation, population
growth, territorial expansion, technological advancement, innovations, etc.
A newly developing economy, for instance, in its initial stages of growth needs huge
investment exceeding its savings. In view of its low capital formation, it has also to import a
large amount of its capital requirements from foreign countries and its imports thus tend to
exceed its exports. These become a chronic phenomenon. And in the absence of a sufficient
inflow of foreign capital in such countries, a secular deficit balance of payments may result.

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2.6 DIFFERENT MEASURES TO CORRECT DISEQUILIBRIUM IN

BALANCE OF PAYMENT:
Any disequilibrium (deficit or surplus) in balance of payments is bad for normal internal
economic operations and international economic relations. A deficit is more harmful for a
countrys economic growth, thus it must be corrected sooner than later. The measures to
correct disequilibrium can be broadly divided into four groups

MONETA
RY
POLICY

FISCAL
POLICY

EXCHAN GENERAL
GE RATE MEASUR
POLICY
ES

1.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.
Inflation :
If in the country there is inflation, the Central Bank through its monetary policy will make
an attempt to reduce inflation. The Central Bank will adopt tight monetary policy. Money
supply will be controlled by increase in Bank Rate, Cash Reserve Ratio, Statutory Ratio
etc.

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The monetary policy measures may reduce money supply, and encourage people to save
more, which would reduce inflation. If inflation is reduced, the prices of domestic market
will decrease and also that of export goods. In foreign markets there will be more demand
for export goods, which would correct BOP disequilibrium.
Deflation :
During deflation the Central Bank of the country may adopt easy monetary policy. It will
try to increase money supply and credit in the economy, which would increase
investment. More investment leads to more production. Surplus can be exported, which
in turn may improve BOP position.

2.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.
Inflation:
During inflation the government may adopt easy fiscal policy. The tax rates for corporate
sector may be reduced, which would encourage more production and distribution
including exports. Increased exports will bring more foreign exchange there by making
the BOP position favorable.
Deflation:
During deflation the government would adopt restrictive fiscal policy. It may impose
additional taxes on consumers or may introduce tax saving schemes. This may reduce the
consumption of citizens, which in turn may enable more export surplus.
To restrict imports the government may also impose additional tariffs or customs duties
which may improve the BOP position.

3. EXCHANGE RATE POLICY:

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Foreign exchange rate in the market may directly or indirectly be influenced by the
Government.

Devaluation:
When foreign exchange problem is faced by the country, the government tries to reduce
imports and .increase exports. This is done through devaluation of domestic currency.
Under devaluation, the- government makes a deliberate effort to reduce the value of home
country. If devaluation is carried out, then the exports will become cheaper and imports
costlier. This is turn will help to reduce imports and increase exports.

Depreciation
Depreciation like devaluation lowers the value of domestic currency or increases the
value of foreign currency. Depreciation of a country's currency takes place in free or
competitive foreign exchange market due to market forces. Depreciation and devaluation
have the same effect on exchange rate. If there is high demand for foreign currency than
its supply, it will appreciate and vice versa. However, in several countries the system of
managed flexibility is followed. If there is more demand for foreign exchange, the central
bank will release the foreign currency in the market from its reserves so as to reduce the
appreciation of foreign currency. If there is less demand for foreign exchange, it will
purchase the foreign currency from market so as to reduce the depreciation of foreign
country and appreciation of domestic currency.
Due to devaluation and depreciation of domestic currency, the exports become cheaper
and imports become expensive. This helps to increase exports.

4. NON-MONETARY / GENERAL MEASURES :

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A deficit country along with monetary measures may adopt the following non-monetary
measures too, which will either restrict imports or promote exports.

Tariffs :
Tariffs refer to duties on imports to restrict imports. Tariff is a fiscal device which may be
used to correct an adverse balance of payments. The imposition of import duties will raise
the prices of imports. This will lead to a reduction in demand for imports thereby
improving the balance of payments position.

Quotas :
Under 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
quota system, the deficit is reduced and the balance of payments position is improved.

Export Promotion :
The government may introduce a number of export promotion measures to encourage
exporters to export more so as to earn valuable foreign exchange, which in turn would
improve BOP Situation. Some of the incentives are Subsidies, Tax Concessions, Grants,
Octroi refund, Excise exemption, Duty Drawback, Marketing facilities etc.

Import Substitution:
Governments, especially, that of the developing countries may encourage import
substitution so as to restrict imports and save valuable foreign exchange. The government
may encourage domestic producers to produce goods which were earlier imported. The
domestic producers may be given several incentives such as Tax holiday, Cash Subsidy,
Assistance in Research & Development, Providing technical assistance, Providing Scarce
inputs etc.

2.7 FACTORSAFFECTING BALANCE OF PAYMENTS:

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EXPORT OF GOODS AND SERVICES:

The Prevailing Exchange Rate of the Domestic Currency:
A lower value of the domestic currency results in the domestic price getting translated
into a lower international price. This increases the demand for domestic goods and
services and hence their export. This is likely to result in a higher demand for the
domestic currency. A higher exchange rate would have an exactly opposite effect.
Inflation Rate:
The inflation rate in an economy vis--vis other economies affects the international
competitiveness of the domestic goods and hence their demand. Higher the inflation,
lower the competitiveness and lower the demand for domestic goods. Yet, a lower
demand for domestic goods and services need not necessarily mean a lower demand for
the domestic currency. If the demand for domestic goods is relatively inelastic, then the
fall in demand may not offset the rise in price completely, resulting in an increase in the
value of exports. This would end up increasing the demand for the local currency. For
example, suppose India exports 100 quintals of wheat to the US at a price of Rs.500 per
quintal. Further, assume that due to domestic inflation, the price increases to Rs.530 per
quintal and there is a resultant fall in the quantity demanded to 96 quintals. The exports
would increase from Rs.50,000 to Rs.52,800 instead of falling.
World Prices of a Commodity:
If the price of a commodity increases in the world market, the value of exports for that
particular product shows a corresponding increase. This would result in an increase in the
demand for the domestic currency. A fall in the demand for domestic currency would be
experienced in case of a reduction in the international price of a commodity. This impact
is different from the previous one. The previous example considered an increase in the
domestic prices of all goods produced in an economy simultaneously, while this one
considers a change in the international price of a single commodity due to some
exogenous reasons.
Incomes of Foreigners:
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There is a positive correlation between the incomes of the residents of an economy to

which the domestic goods are exported, and exports. Hence, other things remaining the
same, an increase in the standard of living (and hence, an increase in the incomes of the
residents) of such an economy will result in an increase in the exports of the domestic
economy Once again, this would increase the demand for the local currency.
Trade Barriers:
Higher the trade barriers erected by other economies against the exports from a country,
lower will be the demand for its exports a hence, for its currency.
IMPORTS OF GOODS AND SERVICES:
Imports of goods and services are affected by the same factors that affect the exports. While
some factors have the same effect on imports as on exports, so of them have an exactly
opposite effect.
Value of the Domestic Currency:
An appreciation of the domestic currency results in making imported goods and services
cheaper in terms of domestic currency, hence increasing their demand. The increased
demand imports results in an increased supply of the domestic currency depreciation of
the domestic currency have an opposite effect.
Level of Domestic Income:
An increase in the level of domestic income increases the demand for all goods and
services, including imports and it results in an increased supply of the domestic currency.
International Prices:
The. International demand and supply positions deter the international price of a
commodity. A higher international price would translate into a higher domestic price. If
the demand for imported goods is inelastic, this would result in a higher domestic
currency value of in increasing the supply of the domestic currency.
In case of the demand elastic, the effect on the supply of the domestic currency would
depend the effect on the domestic currency value of imports.
Inflation Rate:

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A domestic inflation rate that is higher than the inflation of other economies, would result
in imported goods and services bee relatively cheaper than domestically produced goods
and services would increase the demand for the former, and hence, the supply domestic
currency.
Trade Barriers:
Trade barriers have the same effect on imports exports - higher the barriers, lower the
imports, and hence, lower the supply of the domestic currency.
Income on Investments:
Both payments and receipts on account of interest, dividends, profits etc., depend on the
level of past investments and the current rates of return that can be earned in an economy.
For payments, it is the level of past foreign investments and the current domestic rates of
return; while for the receipts it is the past domestic investments in foreign economies and
the current foreign rates of return, which are relevant.

Transfer Payments:
Transfer payments are broadly affected by two factors. One is the number of migrants to
or from a country, who may receive money from or send money to relatives. The second
is the desire of a country to generate goodwill by granting aids to other countries along
with the economic capability to do so, or its need to take aids and grants from other
countries to tide over difficulties.
Capital Account Transactions:
Four major factors affect international capital transactions. The foremost is the rate of
return which can be earned on the investments as compared to the returns that can be
earned on domestic investments. The higher the differential returns offered by a country,
the higher will be the capital inflows. Another factor is the additional risk that
accompanies these returns. More the risk, lower the capital inflows. Diversification across
countries may offer some extra benefit in addition to the returns offered by a particular
investment. This benefit arises from the fact that different economies may be at different
stages of economic cycle at a given time, thus making their performance unrelated.
Higher the diversification benefits, higher the inflows. One more factor, which has a very
significant effect on these transactions, is the expected movement in the exchange rates. If
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the exchange rates are quite stable, or the movement is expected to be in the investors'
favor, the capital inflows will be higher.

2.8 BALANCE OF PAYMENT ALWAYS BALANCES:

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The balance of payment is based upon system of double-entry book-keeping, the total debits
must equal to total credits. This is because two aspects of each transaction recorded are equal
in amount but appear on opposite sides of the balance of payments account. In this
accounting sense, balances of payments for a country must always balance

The debit side shows the use of total foreign exchange acquired in a particular period.

The credit side shows the sources from which the foreign exchange is acquired during a
particular period.
Against every credit entry, there is an offsetting debit entry &vise-versa, so the receipts and
payments on these two sides must be equal. Hence the two sides must necessary balance.
If X imports from Y, Y would also import from X. Hence there would be a debit and credit
entries in the balance of payments of both the countries X & Y.
The individual items in the balance of payments may not balance. But the total credits of the
country must be equals to its total debits.
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If there is any deficit in any individual account, it would be covered by a surplus in other
accounts, if there is any difference between total debits and total credits, it would be settled
under 'errors & omissions'. Hence in the accounting sense, the balance of payments of a
country always balances.

Balance of Payments (BOP) Account of a Country

The items 1 to 7 show the total receipts from all sources. These receipts amount to Rs. 1000
Crores.
The items 1(a) to 7(a) Show the total payments on all accounts. These payments amount to
Rs. 990 Crores. When item 8 included, the total payment is Rs. 1000 Crores, hence the total
credit is equal to the total debit.
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Thus the current account and capital account Balance each other. Thus surplus in the current
account is equal to the deficit in the capital account. A deficit in the current account is equal
to the surplus in the capital account.
In the above given table, the balance of current account shows a deficit of Rs. 200 crores But
there is a corresponding surplus of Rs. 200 crores in the balance of capital account.
Hence the credit and debit sides balance & the balance of payments is in equilibrium.
The balance of trade of a country may not balance. For instance, if exports exceed imports,
there is a surplus and a favorable balance of trade and vice-versa. Only if the value of exports
is equal to the value of imports, the balance of trade is said to be in equilibrium.
But the balance of payments always balances because every transaction must be settled.
Hence total debits must be equal to the total credits.

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CHAPTER: 3
CONCLUSIONS

3.1 CONCLUSION:
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BALANCE OF PAYMENT

It has been found that devaluation as a mechanism of current account surplus i.e.
improving export and reducing import is not sufficient because empirical studies
prove that there exist no significant relationship b/w exchange rate devaluation and
current account surplus. Hence we have to consider other factor discussed below.
Other factor which improve balance of payment area.

Real economic factors i.e. supply side policies, quality of product traded etc.

World economic factor i.e. world demand for export.

Terms of trade: this in turn depends upon relative price ratio of tradable to
non-tradable goods. i.e. if price of oil falls then this ratio will fall and terms of
trade will improved.

Foreign remittance i.e. if price of oil rises then foreign remittances from gulf
nations will increase.

FDI &FII3.

Export oriented policies: We have not been able to diversify our export basket
especially in favour of more technology and knowledge intensive goods that are less
susceptible to price pressures and are much more value adding and faster growing.
India should consolidate its presence in traditional export industries and move up the
value chain in traditional products. We should also consolidate Indian advances in
generic pharmaceuticals, small cars, two-wheelers, and metals .We need to leverage
the large market size for developing new industries. We should encourage exporters of
equipment

to

start

local

manufacturing

units

by

offering pioneer industry incentives and offsets programmes as done by the East Asia
ncountries to generate local value added and jobs while saving foreign exchange.

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India current account surplus has been low as compare to china and Russia because
India is in the stage of industrial development requiring foreign capital.
Balance of payment deficit is underestimating it due to capital flight
As a policy India should try to accelerate export particularly manufacturing items
which have a significance effect on balance of goods traded
Prediction for Indias BOP A/C :
The problem India is facing is a large current A/C deficit. It needs inflows of financial
resources to cover the current account Deficit. Since India is in stage of developing
capital needed country, it will continue to face current a/c deficit & fiscal deficit to
finance its development project. As far as BOP A/C is concerned it will have to in
surplus in order to finance current a/c deficit, otherwise, bop crisis will emerge
Whether BOP A/C will be in surplus will depend upon external as well as internal
factor. Presently it will depend on the length of the global financial crisis and the
strength of the policy response.

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CHAPTER: 4
ANNEXURE

4.1 BIBLIOGRAPHY:

http://www.academia.edu/5820595/STUDY_OF_BALANCE_OF_PAYMENT_IN

_INDIAN_PERSPECTIVE
http://indiabudget.nic.in/budget2014-2015/es2013-14/echap-06.pdf
http://www.yourarticlelibrary.com/macro-economics/balance-of-

payment/balance-of-payments-position-of-india/63028/
http://articles.economictimes.indiatimes.com/2014-07-

09/news/51248357_1_economic-survey-gdp-growth-bop-position
http://economictimes.indiatimes.com/news/economy/finance/indias-balance-ofpayments-surplus-for-third-straight-quarter/articleshow/41437692.cms

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