Eco Project

INDEX

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ACKNOWLEDGEMENT OBJECTIVES OF BOP SCOPE OF BOP MEANING AND DEFINITIONS OF BOP APPLICATIONS OF BOP ANALYSIS AND COMPARISON OF BOP OF INDIA WITH ITS NEIGHBOURING COUNTRIES VIEWS CONCLUSION BIBLIOGRAPHY

OBJECTIVES 

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To study and compare the components of BOP of India with respect to its neighboring countries. To find how BOP affect exchange rate. To find the various factors that cause disequilibrium. To suggest views to attain BOP equilibrium in India.

SCOPE OF BOP The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP 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. 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.

MEANING AND DEFINITION OF BOP

A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residen ts and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and internat ional investment position (IIP) together constitute its set of international accounts.

APPLICATIONS OF BOP 

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The use of the IIP and BOP financial account to analyze vulnerability to external shocks in a world of increasingly mobile financial flows. The role of timely and comprehensive balance of payments statistics: market expectations and uncertainties in fundamentals. The current account balance as an indicator of excess or under-spending. Temporary and cyclical deficit /surpluses on the current account, and their impact on inflation and country’s terms of trade. The use of BOP data for an understanding the movements in the exchange rate through analysis of the supply and demand of foreign currencies driven by the trends in the BOP components. The role of BOP data in the money market operations of central banks. Changes in the net foreign assets of the central bank as important explanatory variables of changes in the liquidity requirement in the money market. Trends in the financial account in response to financial market conditions and economic developments for understanding the link between a change in interest rate conditions and the amount, direction, and structure of external financial flows. Statistics on international banking flows and stocks may be useful to understand issues in the globalization of international banking and to help focus on the soundness of the domestic banking system. The use of IIP data as an alternative way of assessing an economy's relations with the rest of the world.

BOP OF INDIA

The balance of payments position during the First Plan period was quite satisfactory as the country experienced a deficit in its current account only to the extent of Rs. 42.3 crore. In this period, the inflow of foreign capital was only Rs. 13.6 crore and the foreign exchange reserve was about Rs. 127 crore. During the Fifth Plan period, due to the applicability of two factors like hike in oil prices arid increase in the value of exports due to promotional measures, although A surplus in TRADE BALANCE was attained in 1976-77 (Rs. 316 crore) but the plan experienced an increasing trend in trade deficit to the extent of Rs. 3,179 crore. But due to higher entry of net invisibles, the Fifth Plan ended with surplus of Rs. 3,082 crore. The balance of payments position has recorded a total change since 1979-80. India started to record a heavy deficit in its balance of payments since 1979- 80. Table 7.6 shows the growing deficit in TRADE balance along with the growing deficit in its balance of payments position during the Sixth to Tenth Plan.

Thus the table reveals that due to the mounting deficit in TRADE BALANCE, i.e., from Rs. 5,967 crore in 1980-81 to Rs. 6,721 crore in 1984-85, India maintained a huge deficit in its balance of payments to the extent of Rs. 11,384 crore during the Sixth Plan period. Again due to a persistent growing deficit in TRADE BALANCE the cumulative deficits in the balance of payment during the Seventh Plan rose further to Rs. 38,313 crores, showing the annual average deficit of Rs. 7,662 crore.

INDIA AND ITS NEIGHBOURS

INDIA AND CHINA China –India relations, also called Sino-Indian relations or Indo-China relations, refers to the bilateral relationship between the People's Republic of China (PRC) and the Republic of India. Historically, India and China have had relations for more than 2,000 years, but the modern relationship began in 1950 when India was among the first countries to end formal ties with the Republic of China (Taiwan) and recognize the PRC as the legitimate government of Mainland China. China and India are the two most populous countries and fastest growing major economies in the world.

BOP OF CHINA Both foreign trade and international financing in China are state monopolies, with policies and transactions administered by the People's Bank of China (PBC). Among its various functions, the PBC sets exchange rates for FOREIGN CURRENCIES. The PBC releases FOREIGN EXCHANGE to the Bank of China, which plays a major payments role through its branches in Hong Kong, Singapore, and other overseas financial centers. The government has, overall, maintained a record of financial stability, linked to a policy of stringent controls over its international transactions. Adhering generally to a principle of self- reliance, it has resorted to the use of commercial credit at certain junctures but until the 1970s avoided falling into long-term indebtedness as a means of financing major development goals. In the period 1958 –60, the Great Leap Forward and the succeeding years of economic crisis caused a sharp deterioration in China's international payments position. In 1960, large negative clearing account balances with Communist countries (-$625 million) were even more than the foreign exchange reserves of $415 million. By the end of 1964, however, the negative balance with Socialist nations had been reduced to $55 million, and China's net international financial resources stood at a surplus of $345 million, owing to monetary gold holdings of $215 million and foreign exchange balances from trade with non-Communist countries amounting to $185 million. By 1965, the Chinese had completely cleared their long-term debt to the former USSR, and by 1968, China had redeemed all national bonds and was free of all long-term external and internal debts. Publication of official balance-ofpayments statistics was discontinued during the Cultural Revolution and not resumed until September 1985. According to Western analyses, the period 1978 –81 saw a continuing surplus in current accounts, as rising levels of imports were generally matched or exceeded by increases in exports over the same period. In addition, transfers of an estimated $1.1 billion in 1978 and $1 billion in 1980, derived from increased earnings in tourism, shipping,

and remittances from Hong Kong and other sources, resulted in overall current accounts surpluses of $900 million and $1.2 billion in 1978 and 1980, respectively. China's drive to industrialize under the Four Modernizations policy resulted in an unprecedented deficit on capital accounts of $1.1 billion in 1978. The subsequent unilateral decisions to cancel $2.6 billion in contracts with Japan (1979) and $2 billion with Japan and Western nations (1981) were interpreted by some observers as an indication of acute cash-flow problems and a reordering of investment priorities at the highest levels. The trade account was helped by the slow but steady devaluation that occurred after China went to a managed float exchange rate system in January 1991. Tourism receipts and visitor figures also continued to grow, passing pre-Tiananmen levels. Foreign investment boomed in the 1990s, with a total of nearly $45 billion committed in 1998 alone. Approximately half of China's loans came from the Asian Development Bank, the World Bank, and Japan; external debt reached $159 billion in 1998. A usually positive current account balance stockpiled China's reserves. In 1998, China had some $147 billion in official reserves, but state industries had accumulated a huge amount of what was called triangular debt with the state banks and other lending agencies. Government infrastructure and industrial projects received funding for goods that could not be sold domestically in 1999 due to lower demand, losing money for each party involved. In effect, external trade plays a secondary role in China's economy because of normally high, unsatisfied domestic demand. Agreements with the WTO threaten to increase China's dependence on foreign trade. China's external debt stood at $149.4 billion in 2002. The US Central Intelligence Agency (CIA) reports that in 2002 the purchasing power parity of China's exports was $312.8 billion while imports totaled $268.6 billion resulting in a trade surplus of $44.2 billion. The International Monetary Fund (IMF) reports that in 2001 China had exports of goods totaling $266 billion and imports totaling $232 billion. The services credit totaled $33.3 billion and debit $39.3 billion. The following table summarizes China's balance of payments as reported by the IMF for 2001 in millions of US DOLLARS.

China Current Account 17,401 Balance on goods 34,017 Balance on services -5,933 Balance on income -19,175 Current transfers 8,492 Capital Account

-54

Financial Account 34,832 Direct investment abroad -6,884 Direct investment in China

44,241

Portfolio investment assets

-20,654

Portfolio investment liabilities

1,249

Other investment assets 20,813 Other investment liabilities

-3,933

NET Errors and Omissions -4,732 Reserves and Related Items

-47,447

COMPARISON BETWEEN BOP OF INDIA AND CHINA The trends of India’s and China’s exports have been s hown in Figure 1. It shows that the total value of exports has increased during 1981-2014 in both the countries. In India, the value of total exports has also shown a rise from 8437.35 US million dollars in 1980 to 294993 US million dollars in 2014. The value of China’s total exports has increased from 21125 US million dollars in 1980 to 2170185 US million dollars in 2014. China’s exports growth has been tremendous as compared to India. The productivity, lower wages and exploitation of economies of scale were the reasons for higher exports in China. The trends of India’s and China’s imports have bee n exhibited in Figure 2. During 1981-2014, total value of imports has increased in both th e countries. China’s imports of goods & services have grown from 16876 US million dollars in 1980 to 1,428,434 US million dollars in 2014 while India’s imports of goods & services have surged from 14148 US million dollars in 1981 to 440,470 million dollars in 2012 at constant prices 2005.China’s imports growth of goods & services has also been found greater as compared to India. Both India and China were allowed more imports flexible and liberal access to import requirements for actual users, consistent with the aim of strengthening and diversifying the production base of the economy. The trends of India’s and China’s balance of payments cur rent account have been exhibited in Figure 3. During 1981-2014 balance of payments current account for India showed a negative trend all over the period. But, for China, the balance of payments current account showed a favourable trend throughout the period. The reason for current account deficit in India was due to several unfavourable factors such as deceleration in the growth of domestic oil production, bunching of repayment obligations to the IMF and other sources, limited availability of concessional assistance and a rise in debt service payments on external debt. The reason for higher favourable current account for China was from its invisible receipts.

Conclusion Balance of trade is the major component infusing the balance of payments. The balance of payments position became deficit for India. This was an unhealthy sign. This unfavourable balance of payments position retarded the growth rate of Indian economy. But, on the other hand, China registered a favourable balance of trade that helped to promote the rate of economy growth at a higher level. This helped China to boost the country’s image in the international arena. India and China have almost no commonalities in terms of history, culture, religion, language and political institutions. Although their conspicuous diversities make a comparison difficult, attempt to relate the political economy and ensuring performance of these countries is un avoidable and necessary for global reach.

INDIA AND PAKISTAN Relations between India and Pakistan have been complex due to a number of historical and political events. Relations between the two states have been defined by the violent partition of British India in 1947, the Kashmir conflict and the numerous military conflicts fought between the two nations. Consequently, their relationship has been plagued by hostility and suspicion. The two South Asian countries somewhat overlap in areas of linguistics, demographics, geography, and economics. After the dissolution of the British Raj in 1947, two new sovereign nations were formed —the Dominion of India and the Dominion of Pakistan. The subsequent partition of the former British India displaced up to 12.5 million people, with estimates of loss of life varying from several hundred thousand to 1 million. India emerged as a secular nation with a Hindu majority population and a large Muslim minority, while Pakistan emerged also as a secular nation an overwhelming Muslim majority population; later becoming an Islamic republic although its constitution guarantees freedom of religion to people of all faiths.

BOP OF PAKISTAN Pakistan, since independence, has been experiencing deficit (un-favourable) in its balance of payment except the following five years i. e., 1950-51, 1954-55, 1955-56, 1958-59, and 195960. In 1965-66, the balance of payment was highly deficit due to war against India. According to the Economic Survey of Pakistan 2010-11, imports of Pakistan are $ 32.3 billion and its exports are $ 24 billion. It is showing a deficit of $ 8.3 billion. Above situation is showing that Pakistan faces a continuous deficit in its balance of payment

COMPARISON BETWEEN BOP OF INDIA AND PAKISTAN GDP (Nominal) of India and Pakistan is $2050 billion and $250 billion respectively in 2014. On PPP basis, GDP of India and Pakistan is $7,376 billion and $882 billion respectively. India is 9th largest of the world in nominal method and 3rd largest economy in ppp method. Nominal ranking of Pakistan is 43 and PPP ranking is 26. India's economically largest states Maharashtra has GDP ($289 billion) greater than Pakistan. According to CIA Facebook sector wise GDP composition of India in 2014 are as follows : Agriculture (17.9%), Industry (24.2%) and Services (57.9%). Sector wise GDP composition of Pakistan in 2014 are : Agriculture (25.1%), Industry (21.3%) and Services (53.6%). GDP of India is 8.19 and 8.36 times more than Pakistan at nominal and ppp terms, respectively. India crossed $1 trillion mark in 2007 and $2 trillion mark in 2014. While Pakistan have yet to cross $1 trillion mark. In 1980, size of economy of India and Pakistan was $181 and $31, respectively. GDP of Pakistan at ppp terms is 3.53 times more than compare to nominal basis. This ratio for India is 3.60. Both country has been neck-to-neck in gdp per capita terms. Till 2006 in nominal basis and till 2008 in ppp basis, per capita income of pakistan was more than India. In 2014, GDP per capita of India is more than Pakistan in both terms. Per capita Income of India is $1627 and $5855 in nominal and ppp terms, respectively. Per capita Income of Pakistan in nominal and ppp terms is $1343 and $4736, respectively. World rank of India is 145 (nominal) and 125 (PPP). World rank of Pakistan is 152 (nominal) and 134 (PPP).Out of 33 Indian states/UTs, 24 states/UTs are more richer than Pakistan. Growth rate of Pakistan is estimated at 4.14% in 2014. India's growth rate is estimated at 7.17% in 2014. During period 1980-2014, Average GDP growth of Pakistan was 5.02% compare to India's 6.23% in same period. Conclusion Pakistan scores high on income and consumption growth, poverty reduction and integration with the world economy. India has done very well in developing its human resource base and excelled in the field of science and technology. Both countries face a set of common problems -the inherited legacy of a control mind-set among the government and rent-seeking private sector, widespread corruption, poor fiscal management, weak financial system and congested and overcrowded urban services. But there is an important and perceptible positive shift in most of the indicators of India since 1991. Export growth rates have almost doubled, GDP growth is averaging 6 to 7 percent in recent years, current account deficit is down and foreign capital flows for investment have risen several fold. The edge that Pakistan has gained over India in most of these indicators until 1990 is fast eroding. Pakistan, on the other h and, has

made greater progress in privatization of state owned enterprises and in attracting foreign investors to expand power generating capacity in the country.

INDIA AND SRILANKA India-Sri Lanka relations have generally been friendly, but were controversially affected by the Sri Lankan Civil War and by the failure of Indian intervention during the war. India is the only neighbour of Sri Lanka, separated by the Palk Strait; both nations occupy a strategic position in South Asia and have sought to build a common security umbrella in the Indian Ocean.[1] Historically and culturally, the two nations have been considerably close, with 70% of Sri Lankans continuing to follow Theravada Buddhism to this day.

BOP OF SRILANKA Sri Lanka recorded a trade deficit of 828 USD Million in March of 2017 compared to 617 USD Million gap a year ago. Exports rose 9.8 percent to 1042 USD Million and imports went up 19.4 percent to 1,869 USD Million. Balance of Trade in Sri Lanka averaged -484.62 USD Million from 2003 until 2017, reaching an all time high of -50.10 USD Million in May of 2003 and a record low of -1100.70 USD Million in November of 2011. Sri Lanka exports mostly textiles and garments (40% of total exports) and tea (17%). Others include: spices, gems, coconut products, rubber and fish. Main export partners are United States, United Kingdom, Germany, Belgium and Italy. Sri Lanka imports petroleum, textile fabrics, foodstuffes and machinery and transportation equipment. Main import partners are India, China, Iran and Singapore.

COMPARISON BETWEEN BOP OF INDIA AND SRI LANKA India is developing into an open-market economy, yet traces of its past autarkic policies remain. Economic liberalization measures, including industrial deregulation, privatization of stateowned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and served to accelerate the country's growth, which averaged under 7% per year from 1997 to 2011. Sri Lanka continues to experience strong economic growth following the end of the 26-year conflict with the Liberation Tigers of Tamil Eelam. The government has been pursuing largescale reconstruction and development projects in its efforts to spur growth in war-torn and disadvantaged areas, develop small and medium enterprises and increase agricultural productivity. The government's high debt payments and bloated civil service have contributed to historically high budget deficits, but fiscal consolidation efforts and strong GDP growth in recent years have helped bring down the government's fiscal deficit.

Conclusion India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Slightly less than half of the work force is in agriculture, but, services are the major source of economic growth, accounting for nearly two-thirds of India's output with less than one-third of its labor force. The 2008-09 global financial crisis and recession exposed Sri Lanka's economic vulnerabilities and nearly caused a balance of payments crisis. Agriculture slowed due to a drought and weak global demand affected exports and trade. In early 2012, Sri Lanka floated the rupee, resulting in a sharp depreciation, and took steps to curb imports. A large trade deficit remains a concern, but strong remittances from Sri Lankan workers abroad help offset the trade deficit. Government debt of about 80% of GDP remains among the highest in emerging markets.

OPINIONS ON BOP OF INDIA In 2013 India was close to macroeconomic crisis with double digit inflation, very high current account deficit (CAD), falling rupee, negative feelers from FED regarding quantitative easing etc. The condition was so bad that India was grouped in Famous Fragile Five along with countries like Turkey, Indonesia etc and was at the top of the Macroeconomic Vulnerability Index. The CAD was as high as 4.7%of GDP (it came down to 1.7% GDP in 2013-2014), since then the macroeconomic condition has vastly improved with the surging foreign capital inflows largely due to steps taken by the GOI and RBI. Although the condition of CAD was improving on one hand, on the other, we had moderating capital inflows even after RBI provided ‘Special Swap Window’. To reduce the current account deficit rules like 80:20 for gold imports, which mandated that the importers of the gold need to export 20% of the gold imported as the final product, were introduced (presently the rule is scrapped since November 2014). Additionally, in last 18 months the price of crude oil has reduced from as high as $120 per barrel to below $50 per barrel. This has greatly helped in reducing India’s import bill. The merchandise trade deficit (US$ 31.7 billion during Q4 2014-15) contracted sharply on a q-oq basis on account of a larger decline in merchandise imports (13.4 per cent) than in merchandise exports (10.4 per cent); however, in terms of y-o-y changes, the trade deficit in Q4 2014-15 widened marginally as exports registered a larger decline (15.4 per cent), than imports (10.4 per cent). Export growth in US $ terms improved from negative 0.5% to 7.4% in Q1 2014-15, declined to 1.8% in Q2.

On a cumulative basis, the overall BOP during 2014 -15 showed improvement over the preceding year. Lower CAD, on the back of contraction in trade deficit and marginal improvement in the net invisible earnings, along with a sizable increase in net financial flows enabled a large build-up of reserves. India’s trade deficit narrowed to US$ 144.2 billion in 201415 from US$ 147.6 billion in 2013-14. With modest increase in invisibles supported by some improvement in net services receipts, the CAD tracked the trade deficit and shrank to US$ 27.5 billion in 2014-15 (1.3 per cent of GDP) from US$ 32.4 billion (1.7 per cent of GDP) a year ago.

HOW BOP AFFECT EXCHANGE RATE

A change in a country's balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. The reverse is also true where a fluctuation in relative currency strength can alter the balance of payments. There are two different and interrelated markets at work: the market for all financial transactions on the international market (balance of payments) and the supply and demand for a specific currency (exchange rate). These conditions only exist under a free or floating exchange rate regime. The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.

VARIOUS FACTORS THAT CAUSE DISEQUILIBRIUM 1. Development Schemes: The main reason for adverse balance of payments in the developing countries is the huge investment in development schemes in these countries. The propensity to import of the developing countries increases for want of capital for industrialization. The exports, on the other hand, may not increase because these countries are traditionally primary producing countries. Moreover the volume of exports may fall because newly created domestic industries may need them. All this leads to structural changes in the balance of payment resulting in structural disequilibrium. 2. Price-Cost Structure: Changes in price-cost structure of export industries affect the volume of exports and create disequilibrium in the balance of payments. Increase in prices due to higher wages, higher cost of raw materials, etc. reduces exports and makes the balance of payments unfavorable.

3. Changes in FOREIGN EXCHANGE RATES: Changes in the rate of exchange is another cause of disequilibrium in the balance of payments. An increase in the external value of money makes imports cheaper and exports dearer; thus, imports increase and exports fall and balance of payments become unfavourable. Similarly, Areduction in the external value of money leads to a reduction in imports and an increase in exports.

4. Fall in Export Demand: There has been a considerable decline in (he export demand for the primary goods of the underdeveloped countries as a result of the large increase in the domestic production of foodstuffs raw materials and substitutes in the rich countries. Similarly, the advanced countries also find a fall in their export demand because of loss of colonial markets. However, the deficit in the balance of payment due to the fall in export demand is more persistent in the underdeveloped countries than in the advanced countries. 5. International Borrowing and Lending: International borrowing and lending is another reason for the disequilibrium in the balance of payments. The borrowing country tends to have unfavourable balance of payments, while the lending country tends to have favourable balance of payments. 6. Cyclical Fluctuations: Cyclical fluctuations cause cyclical disequilibrium in the balance of payments. During depression, the incomes of the people in foreign countries fall. As A result, the exports of these countries tend to decline which, in turn, produces disequilibrium in the home country's balance of payment.

MEASURES TO ATTAIN BOP EQUILIBRIUM IN INDIA 1.Trade Policy Measures: Expanding Exports and Restraining Imports: TRADE policy measures to improve the balance of payments refer to the measures adopted to promote exports and reduce imports. Exports may be encouraged by reducing or abolishing export duties and lowering the interest rate on credit used for FINANCINGexports. Exports are also encouraged by granting subsidies to manufacturers and exporters. On the other hand, imports may be reduced by imposing or raising tariffs (i.e., import duties) on imports of goods. Imports may also be restricted through imposing import quotas, introducing licenses for imports. Imports of some inessential items may be totally prohibited.

Method 2# Expenditure-Reducing Policies: The important way to reduce imports and thereby reduce deficit in balance of payments is to adopt monetary and fiscal policies that aim at reducing aggregate expenditure in the economy. The fall in aggregate expenditure or aggregate demand in the economy works to reduce imports and help in solving the balance of payments problem.

BIBLIOGRAPHY www.wikipedia.com www.investopeda.com www.imf.org www.scribd.com www.yourarticlelibrary.com www.nationsencyclopedia.com www.ahsankhaneco.blogspot.ae www.indexmundi.com www.economicsdiscussion.com www.nationmaster.com