India’s Balance of Payment Trend of Past 10 Years
CURRENT CAPITAL
CURRENT CAPITAL OVERALL
ACCOUNT ACCOUNT OVERALL
ACCOUNT ACCOUNT BALANCE -
YEAR BALANCE - BALANCE - BALANCE
BALANCE BALANCE % of GDP
% of GDP % of GDP ($ billions)
($ billions) ($ billions) ($ billions)
($ billions) ($ billions)
2012 -88.2 -4.82% 89.3 4.88% 3.8 0.21%
2013 -32.3 -1.67% 48.8 2.58% 15.5 0.86%
2014 -26.9 -1.31% 89.3 4.39% 61.4 3.03%
2015 -22.2 -1.04% 41.1 1.94% 17.9 0.84%
2016 -14.4 -0.63% 36.4 1.59% 21.6 0.94%
2017 -48.7 -1.84% 91.4 3.45% 43.6 1.64%
2018 -57.3 -2.11% 54.4 2.02% -3.3 -0.11%
2019 -24.7 -0.85% 83.2 2.89% 59.5 2.08%
2020
2021
For the 2018-19, the positive capital account could not cover up for the current account
deficit and hence the overall deficit in BOP was to the tune of 202 billion. This amount is
balanced out through foreign exchange reserves. Over the last decade (barring one
year), the capital account was able to balance out the negative current account.
The current account deficit for 2018-19 was ₹ 4,002 billion which is a substantial
increase over 2017-18, when it was ₹ 3,141 billion. However, there is a fall in the value
of capital account in 2018-19 (₹ 3,834 billion) compared to that of 2017-18 ( ₹ 5,891
billion) resulting in capital account not being able to cover up current account’s deficit
leading to negative BOP.
The last time there was a deficit in BoP was in 2011-12, when it was ₹ 685 billion. During
that year, the current account deficit grew substantially, while the corresponding
growth in capital account was not to that extent. The current account takes into
consideration the trade of both the tangible commodities/goods and the services along
with transfers and earnings.
While the net value of the current account has been varying over the last decade, it has
always been in the negative. This implies that the value of imports exceeded that of the
exports.
A closer look at current account numbers reveal that the net transfers have remained
positive over the years, while net income and net trade values were always in the
negative and thereby contributing to current account deficit.
RELATIOSHIP BETWEEN CURRENT ACCOUNT AND CAPITAL ACCOUNT
The current and capital accounts are two components of a nation's balance of
payments.
The current account is the difference between a country's savings and
investments.
A country's capital account records the net change of assets and liabilities during a
certain period of time.
COMPARATIVE ANAYLSIS BOP BETWEEN COUNTRIES
INDIA USA CHINA RUSSIA BRAZIL
CURRENT CURRENT CURRENT CURRENT CURRENT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
YEAR BALANCE BALANCE BALANCE BALANCE BALANCE
- % of - % of - % of - % of - % of
GDP ($ GDP ($ GDP ($ GDP ($ GDP ($
billions) billions) billions) billions) billions)
2010 -2.91% -2.88% 3.91% 4.42% -3.58%
2011 -4.30% -2.92% 1.8% 4.75% -2.91%
2012 -4.82% -2.58% 2.52% 3.23% -3.4%
2013 -1.67% -2.01% 1.55% 1.46% -3.23%
2014 -1.31% -2.1% 2.25% 2.79% -4.13%
2015 -1.04% -2.23% 2.75% 4.97% -3.02%
2016 -0.63% -2.11% 1.8% 1.92% -1.35%
2017 -1.84% -1.87% 1.58% 2.04% -0.73%
2018 -2.11% -2.18% 0.18% 6.93% -2.2%
2019 -0.85% -2.24% 0.98% 3.84% -2.77%
AVERAGE -2.15% -2.31% 1.93% 3.63% -2.73%
India’s main imports include petroleum products, jewelry and machineries and exports
labour extensive products. Though India produces goods in large numbers, it is
insufficient to sustain its population. Therefore, India has no other option, but to import.
Goods manufactured in USA are expensive due to high costs of living. Therefore, in
order to sustain the economy, USA imports more from developing countries than
produce it themselves. India is USA’s biggest trading partner. China and Russia had
current account surplus throughout the last decade as they export more goods than
imports. China’s major exports include machineries and equipment while Russia major
exports include crude petroleum and other oil products. Brazil’s main imports include
machinery, petroleum products and automobile.
CURRENT ACCOUNT DEFICIT
Current Account Deficit or CAD is the shortfall between the money flowing in on
exports, and the money flowing out on imports. Current Account Deficit (or Surplus)
measures the gap between the money received into and sent out of the country on the
trade of goods and services and also the transfer of money from domestically-owned
factors of production abroad. Current Account Deficit is slightly different from Balance
of Trade, which measures only the gap in earnings and expenditure on exports and
imports of goods and services. Whereas, the current account also factors in the
payments from domestic capital deployed overseas. For example, rental income from an
Indian owning a house in the UK would be computed in Current Account, but not in
Balance of Trade.
Factors
Overvalued exchange rate
Economic growth
Decline in competitiveness/export sector
Higher inflation
Recession in other countries
Borrowing money
Financial flows to finance current account deficit.
EFFECT OF UNAUTHORIZED IMPORTS AND EXPORTS
Unauthorized imports and exports have a major impact on the economy, especially the
current account, leaving a large accounting gap, which may lead to a substantial
increase in the current account deficit. Unauthorized activities can diversify funds from
legitimate company balance sheets and transfer cash to checking accounts. Fall into the
hands of criminals, forming an increasingly large illegal network. Illegal activities slow
down industrial growth by affecting producers and reducing income, thereby affecting
employment growth. The loss of government revenue will affect the cost of health care,
education, and public transportation. Consumers are the ultimate victims of
counterfeiting, smuggling and piracy because they pay high prices for substandard
products, which also increases their health and safety risks. Drugs, gold and cigarettes
are the main contraband in India. These networks threaten the stability of the
government and the prosperity of the economy. Most of the country’s income and
assets used to finance the future were stolen for personal gain, which limits the
company’s ability to make the necessary investments for a better future.
Relation between Current Account Deficit and Retail Consumer Spending
Reasons leading to current account deficit can also affect consumer spending
patterns. If current account deficit is a result of overvalued currency, imports will be
cheaper, and therefore there will be a higher quantity of imports. As a result, prices of
domestic produces will also reduce. This will increase the purchasing power parity of
consumers. Therefore, consumers can buy more with few rupee bills as products have
become cheap. If there is an increase in national income, people will tend to have more
disposable income to consume goods. If domestic producers cannot meet the domestic
demand, consumers will have to import goods from abroad. As a matter of fact, higher
economic growth is a result of higher consumer spending and vice-versa.
FISCAL DEFICIT
INDIA
FISCAL DEBT TO
YEAR DEFICIT GDP
(% of RATIO
GDP)
2010 -4.8% 65.6
2011 -5.91% 67.36
2012 -4.93% 66.65
2013 -4.48% 67.06
2014 -4.1% 66.58
2015 -3.87% 68.57
2016 -3.48% 68.9
2017 -3.46% 69.78
2018 -3.42% 69.8
2019 -3.77% 69.62
AVERAG
-4.22% 67.99
E
The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of
recovery over revenue receipts (including external grants) and non-debt capital receipts.
The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital
expenditure. Capital expenditure is incurred to create long-term assets such as factories,
buildings and other development.
A deficit is usually financed through borrowing from either the central bank of the
country or raising money from capital markets by issuing different instruments like
treasury bills and bonds.
FISCAL POSITION OF INDIA AND CHINA NOW
India’s trade deficit with China narrowed last calendar year as exports rose 16.15% to
$20.25 billion, led by iron and steel, aluminum and copper, while imports shrunk 10.87%
to $66.78 billion.
The country’s trade deficit with China fell to $45.91 billion from $56.95 billion in 2019,
officials said. Shipments to China crossed $20 billion for the first time even as exports of
mangoes, fish oil, grapes and tea declined.
The critical challenges to this would come from the increasing tendency towards the
government micromanaging the economy. The success of Indian vaccines and
vaccination policy is an example of how India could rise to the China challenge. Instead
of being worried about China, India should focus on creating acceptability for Indian
goods and services.
