BALANCE OF PAYMENTS

A RECORD OF ALL IN AND AOUTFLOWS IN A COUNTRY ARISING FROM

ECONOMIC ACTIVITY IN THE DOMESTIC AND FOREIGN SECTORS DURING A
VIGEN TIME PERIOD. The Balance of Payments (BOP) consists of the CURRENT
ACCOUNT and the CAPITAL ACCOUNT.

Current Account:
Shows all the money flows to and from a country arising from exports and imports or
Goods and Services, plus transfers of income and other net transfers.

If X > M, SURPLUS in Current Account

If X < M, DEFICIT in Current Account

Capital Account:
Records international borrow, lending, investment, and other transactions. Shows how
capital transfers flow to and from other countries.
A current account deficit means that there must be a net inflow in capital account.

CURRENT ACCOUNT CAPITAL ACCOUNT

EXPORTS: produce INFLOWS = CREDIT. Investment Abroad
IMPORTS: produce OUTFLOWS = DEBIT. Investment from Abroad
Change in Official Reserves
NET VISIBLE TRADE: Services Sold abroad
NET TRANSFERS: Foreign Aid Payments.
 CURRENT ACCOUNT
Trade Balance:
Show the sum of visible export revenue minus the sum of visible Import expenditure.

A negative value is a Trade Deficit. (+ M) Imports are more than Exports

A positive value is a Trade Surplus (+X) Exports are more than Imports

INVISIBLE BALANCE: (Intangible goods)

Net flows in Services: (TOURISM, PROFESSIONAL SERVICES, TRANSPORT, etc.)

Net Flows in Income: (Wages, Returns of Investment, Profits of Firms, Interest payment)

Net transfers: (Subsidies from other Governments to locals, Transfers from donations
and remittances (presents, gifts to families, prizes, etc.), and Government transfers
(received and sent)...

CURRENT ACCOUNT BALANCE:

Is the sum of visible and invisible trade balances. If credit is more than debit, then there
is surplus in current account. If debits are more than credits, there is a deficit in current
account.
 CAPITAL ACCOUNT (K)
If Capital Account is positive (+), assets of the country decrease.

If Capital Account is negative (-), assets of the country increase.

Direct Investment: A foreign firm building a plant or buying an existing factory in local
economy is FDI (Foreign Direct Investment). Credit in K account.
E.g.: if a foreigner buys land for raising cattle in local country, the capital account of the
local economy increases, due to the decrease of the asset: land.

Portfolio Investment: Buying stocks, shares, bills or bonds abroad or foreigners buying
local bonds, stocks, shares, bills, bonds, etc…
E.g. if a person buys bonds from a foreign country: The capital account of the local
economy decreases, but the assets increase (due to the bonds now in property of the
local citizen.)

Other financial flows: Savings Abroad. (Outflow of foreign currency $). Loans to
foreigners mean that K account is decreasing but there is an asset that is going to be
recovered in the future.

Foreign Reserves: are the foreign currency deposits held by Central Banks and
monetary authorities. These are assets of the central banks which are held in
different reserve currencies, such as the dollar, euro and yen, and which are
used to back its liabilities. E.g. the local currency issued.

Balancing item (or statistical error)

Parallel Markets
Illegal trade (not reported flow of capital, illegal trade, smuggling, etc.)

CAPITAL ACCOUNT BALANCE:

The sum of all investment and financial flows to and from a country during a time period.

A + Value shows a K account Surplus

A – Value shows a K account Deficit.

NOTE THAT BALANCE OF PAYMENTS SHUOULD BE ALWAYS IN EQUILIBRIUM:

BOP = 0
A deficit in Current Account has to be covered by a Surplus in the K account.
 INDIA’s trade deficit during the first nine months of fiscal 2009-10 on a balance of payments
(BoP) basis was lower at US$ 89.51 bn compared with US$ 98.44 bn during the same period
in fiscal 2008-09. The trade deficit on a BoP basis in Q3 (US$ 30.72 billion) was, however,
less than that in Q3 of 2008-09 (US$ 34.04 billion). This is revealed in e report (India's
Balance of Payments Developments during the first quarter (October-December) of
2009-10) of the country’s central banking authority Reserve Bank of India (RBI).

The key features of India’s BoP that emerged in Q3 of fiscal 2009-10 were:(i) Exports
recorded a growth of 13.2 per cent during Q3 of 2009-10 over the corresponding quarter of
the previous year, after consecutive declines in the last four quarters.(ii) Imports registered a
growth of 2.6 per cent in Q3 of 2009-10 after recording consecutive declines in the last three
quarters.(iii) Private transfer receipts remained robust during Q3 of 2009-10.(iv) Despite low
trade deficit, the current account deficit was higher at US$ 12.0 billion during Q3 of 2009-10
mainly due to lower invisibles surplus.(v) The current account deficit during April-December
2009 was higher at US$ 30.3 billion as compared to US$ 27.5 billion during April-December
2008.(vi) Surplus in capital account increased sharply to US$ 43.2 billion during April-
December 2009 (US$ 5.8 billion during April-December 2008) mainly on account of large
inflows under FDI, Portfolio investment, NRI deposits and commercial loans.(vii) As the
surplus in capital account exceeded the current account deficit, there was a net accretion to
foreign exchange reserves of US$ 11.3 billion during April-December 2009 (as against a
drawdown of US$ 20.4 billion during April-December 2008).

Major Items of India's Balance of Payments

(US$ million)

April-December April-December
(2007-08) (PR) (2008-09) (P)
(2008-09) (PR) (2009-10) (P)

Exports 166163 175184 150520 124473

Imports 257789 294587 248967 213988

Trade Balance -91626 -119403 -98446 -89515

Invisibles, net 74592 89587 70931 59185

Current Account
-17034 -29817 -27516 -30330
Balance

Capital Account* 109198 9737 7136 41630

Change in
Reserves#
(+ indicates -92164 20080 20380 -11330
increase;- indicates
decrease)
Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR: Partially revised. R: revised

SOURCE: Reserve Bank of India Report

The decline in invisibles receipts, which started in the Q4 of 2008-09, continued during Q3 of
2009-10. Invisibles receipts registered a decline of 3.1 per cent during the quarter (as against
an increase of 5.4 per cent in Q3 of 2008-09) mainly on account of decline in business,
communication and financial services, and investment income receipts. Although, software
exports recorded a robust growth of 15.3 per cent, services exports as a whole witnessed a
decline of 12.3 per cent during the quarter as against an increase of 11.8 per cent during the
corresponding quarter of 2008-09.

Invisible receipts recorded a decline of 7.7 per cent during April-December 2009, as compared
with an increase of 22.2 per cent in the corresponding period of the previous year, mainly due
to the lower receipts under almost all components of services coupled with lower investment
income receipts.

Invisibles Payments

Invisibles payments recorded a growth of 12.9 per cent during Q3 of 2009-10, as compared
with a low growth of 2.4 per cent in Q3 of 2008-09, mainly led by increase in payments under
almost all components of services.

Invisibles payments witnessed a positive growth of 3.7 per cent in April-December 2009 (10.4
per cent in April-December 2008) mainly supported by higher business, communication and
financial services, and increase in payments under investment income account.

Invisibles Balance

Size of invisibles surplus in Q3 of 2009-10 was, however, lower than Q3 of preceding year.
Therefore, despite low trade deficit, the current account deficit was higher at US$ 12.0 billion
in Q3 of 2009-10 (US$ 11.7 billion in Q3 of 2008-09).

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during
April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this
level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009
as against 72.0 per cent during April-December 2008.

Current Account Deficit

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during
April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this
level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009
as against 72.0 per cent during April-December 2008.

Net capital flows at US$ 43.2 billion in April-December 2009 was much higher as compared
with US$ 5.8 billion in April-December 2008 mainly due to larger inflows under FDI, portfolio
investments and NRI deposits

Due to lower outward FDI, the net FDI (inward FDI minus outward FDI) was higher at US$
16.5 billion in April-December 2009 as compared with US$ 14.3 billion in April-December
2008.

Portfolio investment witnessed large net inflows of US$ 23.6 billion during April-December
2009 as against a net outflow of US$ 11.3 billion in April-December 2008 due to large net FII
inflows of US$ 20.5 billion.

Net external commercial borrowings (ECBs) inflow slowed down to US$ 2.3 billion in April-
December 2009 (US$ 6.9 billion in April-December 2008) mainly due to increased
repayments.
The increase in foreign exchange reserves on BoP basis (i.e., excluding valuation) was US$
11.3 billion in April-December 2009 (as against a sharp decline in reserves of US$ 20.4 billion
in April-December 2008). [A Press Release on the Sources of Variation in Foreign Exchange
Reserves is separately issued].

The gross disbursements of short-term trade credit was US$ 10.1 billion during Q1 of 2009-10
almost same in Q1 of 2008-09. The repayments of short-term trade credits, however, were
very high at US$ 13.2 billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a result,
there were net outflows of US$ 3.1 billion under short-term trade credit during Q1 of 2009-10
(inflows of US$ 2.4 billion in Q1 of 2008-09)

Banking capital mainly consists of foreign assets and liabilities of commercial banks. NRI
deposits constitute major part of the foreign liabilities. Banking capital (net), including NRI
deposits, were negative at US$ 3.4 billion during Q1 of 2009-10 as against a positive net
inflow of US$ 2.7 billion during Q1 of 2008-09. Among the components of banking capital, NRI
deposits witnessed higher inflows of US$ 1.8 billion in Q1 of 2009-10 (net inflows of US$ 0.8
billion in Q1 of 2008-09) reflecting the positive impact of the revisions in the ceiling interest
rate on NRI deposits.

Other capital includes leads and lags in exports, funds held abroad, advances received
pending for issue of shares under FDI and other capital not included elsewhere (n.i.e.). Other
capital recorded net outflows of US$ 1.6 billion in Q1 of 2009-10.