Trends in Indias balance of payments.

The reserve bank of India defines the balance of payments of a country as a systematic record of all the 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 from the capital transferred to non-residents or foreigners.

It is an economic parameter rejecting the countries international financial position as well as its position of the external sector.

Meaning
The term balance of payments is used to systems of accounts relating to a countrys international economic transaction. Balance of payments is used to express the relationship between the effective demand for and supply of a countrys currency.

Interpretation of balance of payments

A deficit in the balance of payments suggests that demand for the countrys currency is less than its supply in its foreign exchange market. Similarly BOP implies that the demand is in excess of supply. A country's balance of payments is said to be in surplus by a certain amount if sources of funds exceed uses of funds by that amount.

Classification of Indias BOP

BOP on Current Account BOP on Capital Account

a) Merchandise or Visible trade, i.e, imports and exports. b) Invisible Items, i.e, payments and receipts for services. c) Unilateral transfers such as donations. Indicates surplus /deficit in the BOP.

Reflects international financial status, i.e, strength or weakness of external debt position.

Indias problem of BOP deficit

Since the inception of planning era in 1951, India has been facing the problem of BOP deficit. (i) Trade deficit. (ii) Current account deficit.

Indias BOP Deficit

Period First Plan (1951-1956) Second Plan(1956 1961) Third Plan (1961 1966) Annual Plan (1966 1969) Fourth Plan ( 1969 1974) Fifth Plan (1974-1979) 1979-1980 Sixth Plan (1980 1985) Trade Deficit (Rs. Cr) 542 2333 2382 2067 1564 3179 3374 30456 Current A/C Deficit (Rs. Cr) 42 1725 1951 2015 - 100 3082 234 11384

Seventh Plan (1985 1990) 1990-1991

2000- 2001 2007 - 2010

54204 31906
56737 362096

41041 13865
11598 70357

Example of Seventh Plan (1985-1990)

Rising High BOP deficit and consequent borrowing endangered the countrys reputation and credit worthiness. Such a loss of confidence may result into liquidity crunch as foreigners will be reluctant to give commercial credit.

This was experienced in early nineties. The situation is now better but not completely out of trouble.