Balance of Payment Analysis

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What Is BOP ?

The balance of payments accounts are those that record all transactions between the residents of a country and residents of all foreign nations.

The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers.

It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

Balance of payments is one of the major indicators of a country's

status in international trade

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BOP Consists of
The Current Account The Capital Account Official Reserves Account Errors and Omissions

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Current Account

Includes all imports and exports of goods

and services.

Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit.

If the credits exceed the debits, then a

country is running a trade surplus.

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Current Account
1. 2.

Export & Import of Merchandise & Services

Income Account (The income account accounts mostly for investment income from dividends and interest on credit and payments on foreign taxes.) 3. Transfer payment (Grants received / given, Pvt. Transfer)

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Capital Account
Foreign Investment(FDI, FII) 2. Banking Capital (NRI Deposits) 3. Short term credit 4. External Commercial Borrowings(ECB)
1.

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Capital Account
If foreign ownership of domestic financial assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a capital account surplus. On the other hand, if domestic ownership of foreign financial assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a capital account deficit.

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Official International Reserves

The official international reserve account records the change in stock of official international reserve assets (also known as foreign exchange reserves) at the country's monetary authority .

Official reserves assets include gold reserves, foreign currencies, SDRs, reserve positions in the IMF. {Special Drawing Rights (SDRs) are potential claims on the freely usable currencies of IMF members.}
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Net errors and omissions

This is the last component of the balance of payments and principally exists to correct any possible errors made in accounting for the three other accounts. They are often referred to as "balancing items".

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Major Highlights of BOP during April-March 2011-12

During the financial year 2011-12, while growth in exports decelerated sharply to 23.6 per cent (37.5 per cent in 2010-11), imports grew by 31.1 per cent as compared with 26.7 per cent in the previous year, mainly reflecting higher imports of gold & silver. Imports of oil, which grew by 46.9 per cent, and of precious metals which grew by 49.4 per cent, together contributed nearly 45 per cent of total imports during the year. Especially, international price of the Indian basket of crude oil increased from US$ 85.1 per barrel in 2010-11 to US$ 111.9 per barrel in 2011-12. Consequently, the trade deficit widened to US$ 189.7 billion in 2011-12 from US$ 130.4 billion in 2010-11.

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During the year, CAD widened to the highest ever level both in absolute terms and as a proportion of GDP. The CAD at US$ 78.2 billion was 4.2 per cent of GDP in 2011-12 as compared with US$ 46.0 billion or 2.7 per cent of GDP during the previous year. The rise in CAD-GDP ratio was also resulted from slower GDP growth and its contraction in dollar terms due to depreciation of rupee. FDI inflows and NRI deposits, in net terms, were higher at US$ 22.1 billion and US$ 11.9 billion, respectively, while portfolio net flows slowed down to US$ 16.6 billion in 2011-12.

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Major Highlights of BOP during April-March 2010-11

During the year as a whole i.e. April-March 2010-11, despite improvement in net invisibles surplus, higher trade deficit led to increase in absolute size of current account deficit. However, as a proportion of GDP, CAD was marginally lower than the preceding year. In absolute terms, on BoP basis, the trade deficit widened to US$ 130.5 billion (7.5 per cent of GDP) during 2010-11 from US$ 118.4 billion (8.6 per cent of GDP) a year ago. Net invisibles earnings increased to US$ 86.2 billion from US$ 80.0 billion last year. The CAD at US$ 44.3 billion works out to 2.6 per cent of GDP during 2010-11 as compared to US$ 38.4 billion (2.8 per cent of GDP) a year ago.
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Net capital inflows increased to US$ 59.7 billion mainly driven by external assistance, short-term trade credits, ECBs and banking capital. Although net capital inflows were higher, accretion to foreign exchange reserves during 2010-11 was marginally lower as a larger share of increased flows was absorbed by the widened current account deficit.

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Major Highlights of BOP during April-March 2009-10

On a BoP basis, the trade deficit decreased marginally to US$ 117.3 billion (8.9 per cent of GDP) during 2009-10 from US$ 118.7 billion (9.8 per cent of GDP) a year ago. The current account deficit was higher at US$ 38.4 billion (2.9 per cent of GDP) during 2009-10, as compared with US$ 28.7 billion (2.4 per cent of GDP) during 2008-09, mainly due to lower net invisibles surplus. The surplus in the capital account increased sharply to US$ 53.6 billion (4.1 per cent of GDP) during the year from US$ 7.3 billion (0.6 per cent of GDP) a year ago.

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As the surplus in the capital account exceeded the current account deficit, there was a net accretion to foreign exchange reserves of US$ 13.4 billion during 2009-10 (as against a drawdown of reserves of US$ 20.1 billion during 2008-09).

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Thank You

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