BOP ANALYSIS
The Balance of Payments (BOP) is a statement that chronicles all monetary transfers
conducted between inhabitants of a country and the rest of the globe at any particular time.
This argument encompasses all transfers made by individuals, businesses, and the
government, and aids in tracking the flow of funds across the economy. Both the current and
capital accounts are included in the balance of payments. The current account is made up of
a country's net goods and services trade, net earnings from cross-border investments, and net
transfer payments. The capital account includes a country's capital imports and exports, as
well as foreign aid.
(i) Last 10 years Trend Analysis : 2021
● The current account balance recorded a surplus of 0.9 per cent of GDP in 2020-21 as
against a deficit of 0.9 per cent in 2019-20 on the back of a sharp contraction in the trade
deficit to US$ 102.2 billion from US$ 157.5 billion in 2019-20.
● Net invisible receipts were lower in 2020-21 due to increase in net outgo of overseas
investment income payments and lower net private transfer receipts, even though net
services receipts were higher than a year ago.
● Net FDI inflows at US$ 44.0 billion in 2020-21 were higher than US$ 43.0 billion in
2019-20.
● Net FPI increased by US$ 36.1 billion in 2020-21 as compared to US$ 1.4 billion a year
ago.
● External commercial borrowings to India recorded inflow of US$ 0.2 billion as compared
with US$ 21.7 billion in 2019-20.
● In 2020-21, there was an accretion of US$ 87.3 billion to foreign exchange reserves (on a
BoP basis).
Last 10 years Trend Analysis : 2021
● India recorded a current account surplus of 3.1 per cent of GDP in H1of 2020-21 as
against a deficit of 1.6 per cent in H1 of 2019-20 on the back of a sharp contraction in the
trade deficit.
● Net invisible receipts were lower in H1 of 2020-21, mainly due to decline in net private
transfer receipts.
● Net FDI inflows at US$ 23.8 billion in H1of 2020-21 were higher than US$ 21.3 billion in
H1of 2019-20.
● Portfolio investment recorded a net inflow of US$ 7.6 billion in H1of 2020-21, almost at
the same level as a year ago.
● In H1 of 2020-21, there was an accretion of US$ 51.4 billion to the foreign exchange
reserves (on a BoP basis).
It can be observed that the Capital Account balance from the year 2010 to 2019 are positive
and is between 2 – 4%. From 2010 till 2012, Capital Account balance increased which is a
negative sign for the Indian Economy. This can be attributed to limited use of foreign
exchange reserves despite massive decline in net capital flows in these years. Since 2013 until
2019, the level of Capital Account fluctuates between the lowest of 1.6% to the highest of
4.39%. The declining trend from 2014 to 2016 and from 2017 to 2019 is a positive sign for
the economy. The current account balances including foreign investment, portfolio
investment and direct investment also decreased from the financial year 2009 – 2010. This
declining trend is a positive sign for the Indian economy. A major fall from 3.52% in 2017 to
2.02% in 2018 is due to the fall in imports that could have happened due to government
policies and make in India campaign. Population growth, demonstration effect, cyclic
fluctuations, globalization and inflation are the factors that cause disequilibrium in the
balance of payments.
(ii) RELATIONSHIP BETWEEN CAPITAL ACCOUNT AND CURRENT
ACCOUNT BALANCE
Current account which comprises the balance of trade and Invisibles (services, transfers
and income) can be a surplus or a deficit. But the Balance of Payments will always be zero.
That is, BOP cannot be a surplus or deficit. In a scenario where there is a current account
deficit, capital accounts are used to meet those deficits and vice-versa. As a result, the BOP
will always balance out.
All inflows of money into the nation shall be matched with an equivalent outflow of
money across all accounts. However, in practice keeping track of all the transactions might
not be possible. Therefore, errors and omissions are added in order to balance the BOP.
The relationship between current and capital accounts is as follows:
Current Account = Capital Account + Financial Account + Errors and Omissions
Or
Current Account + Capital Account + Financial Account + Errors and Omissions = 0
(ii)COMPARITIVE ANALYSIS REPORT ON CURRENT BOP OF INDIA, US,
BRAZIL, RUSSIA AND CHINA
India's trade deficit was revised lower to USD 20.88 billion in February of 2022, compared to
a preliminary estimate of USD 21.1 billion and a USD 13.12 billion a year earlier. Imports
jumped 36.07 percent year-on-year to USD 55.45 billion mostly due to increase in purchases
of petroleum, crude and products (69.19%); and coal, coke and briquettes (116.99%).
Meanwhile, exports rose by a softer 25 percent to USD 34.57 billion, mainly driven by sales
of petroleum products (88.14%) and engineering goods (32.04%). On the downside, sales fell
for oil meals (-69.47%); and iron ore (-56.32%). During the April-February period, the trade
gap widened to USD 175.75 billion, compared to USD 88.99 billion in the same period a year
earlier.
China’s trade surplus widened to USD 115.95 billion in January – February 2022 combined
from USD 97.05 billion in the same month a year earlier, easily beating market forecasts of
USD 99.5 billion. Export extended their double-digit growth, increasing by 16.3 percent from
a year earlier, while imports rose at a softer 15.5 percent. Data for January and February are
combined to smooth out the impact of the Lunar New Year holiday, which can fall in either
month. This year, the week-long holiday started on January 31st. China's trade surplus with
the US stood at USD 59.77 billion in the first two months of the year, amid reports that the
Biden administration is mulling a new China tariff investigation. In 2021, China's trade
surplus notched a record high of USD 676.4 billion, with exports and imports growing by
29.9% and 30.1%, respectively. China’s trade surplus with the US in 2021 was at USD
396.58 billion, a jump of 25% from 2020.
Brazil recorded a trade surplus of $4 billion in February of 2022 from a $1.8 billion surplus in
the corresponding month of the previous and compared with market expectations of a $3.55
billion surplus. Exports jumped 32.6 percent to $22.9 billion amid higher sales of agricultural
products (114.2 percent) and manufactured products (29.0 percent). Among major trading
partners, shipments advanced to China, Hong Kong and Macau, the EU, the US, and
Argentina. Meanwhile, imports rose 22.9 percent to $18.8 billion, led by purchases of mining
products (142.3 percent) and manufactured products (19.3 percent). Imports went up mainly
from China, Hong Kong and Macau, the US and the EU
Russia's trade surplus widened to USD 21.17 billion in January of 2022, before the invasion
of its neighbor Ukraine and West sanctions, from USD 9.03 billion in the corresponding
month of the previous year. Exports surged 72 percent from a year earlier to USD 45.93
billion, boosted by sales to non-CIS (76.9 percent) and CIS countries (41.3 percent).
Meanwhile, imports rose at a slower 40.1 percent to a 6-month low of USD 24.75 billion, on
the back of purchases from non-CIS (40.6 percent) and CIS countries (36.3 percent). Several
global brands and major companies from sectors ranging from technology to automotive and
energy suspended their operations in Russia in response to the "special military operation" in
its neighbor on February 24th. In March, Russia hit back at western sanctions by imposing an
export ban on more than 200 products including telecoms, medical, vehicle, agricultural, and
electrical equipment, until the end of 2022
CAD ANALYSIS
CURRENT ACCOUNT DEFICIT:
Current Account Deficit also known as CAD is used to measure the flow of goods, service
and investments which comes into the country and which goes out of the country. It is a
measurement of a country's trade where the value of the goods and services it imports exceeds
the value of the products it exports.
India’s current account deficit narrowed when compared to last year for the same period i.e.,
the December quarter. It has come to $1.4 billion, which is 0.2percent of GDP and it was 2.7
per cent in the corresponding quarter a year ago and 0.9 per cent in the previous quarter.
Calculation of Current Account Deficit:
The current account on the balance of payments measures the inflow and outflow of goods,
services, investment incomes and transfer payments.
X = Exports of goods and services
M = Imports of goods and services
NY = Net income abroad
NCT = Net current transfers
The formula is: CAB = (X – M) + NY + NCT
We can call a country is in deficit if it values of goods and services in import exceeds the
value of goods and services in export. Further we will be knowing what this are in details. To
know about Current account deficit lets know what current account and its transactions are
Current account Transaction:
Current account requires foreign currency to execute its transactions for example payments
connected with foreign trade that is import and export which is the biggest component of
current account. Interest on loans given to other countries or taken from other countries is
also part of current account. Some transactions which net income from investments in other
countries remittances for living expenses of parent spouse and children and residing abroad
also comes under current account transactions. Even expenses in connection with foreign
travel, foreign education and medical comes under current account transitions.
HOW CAD IS FINANCED
How CAD is financed:
Current account deficit is financed by any one from two major types of account called as
capital account or financial account. Where the loans which are lend to other country or loan
borrowed from other country for investment purpose is considered under financial account.
Another popular and more important way of financing current account deficit is through
capital account transactions. In Capital account there are three major capital ac count
transactions such as
· Foreign Direct Investment (FDI)
· Foreign Indirect Investments (FII)
· Remittances
(ii)Does the impact of unauthorized import or exports influence the variation of CAD?
Unauthorized trades are those trade which are not included in the trade balance and it is
illegal where government will not give permission or documentation is also don e in
unauthorized and illegal. In India so many products are imported without billing and that can
be included in the unauthorized trade. The goods can be imported through different means of
transportation
Hence these unauthorized trades can impact the CAD as this may not impact directly but can
impact indirectly changing the market situation in the country which will eventually impact
the authorized trade and can increase the CAD.
Is it positive impact or negative impact? As it is unauthorized trade and hence there is no
proper information on how much is the unauthorized trade. However, it can impact in both
positive and negative way depending on the amount of trade, country from which it is coming
and how our trade is with that country in authorized market. The more unauthorized export
will impact the CAD negatively as the unauthorized export is not been deducted in current
account balance and it increase our trade deficit.
If we do more unauthorized import, then as this amount of trade is not included in the actual
trade which will not increase the import amount. Therefore, it has positive impact, this will
impact the market situation internally in the country which may be negative as in the first
place it is been unauthorized because it is not good for the country.
(iii)Relationship between CAD and retail consumer spending:
Activity of consumer spending will cause a deterioration in the current account. Higher
consumer spending will lead to higher spending on imports. This increases the outflow of
money from the economy which thereby increases the current account deficit. Since the trade
balance is a major part of the current account balance, negative value (Exports exceeding
Imports) will result in a current account deficit. Therefore, increased retail consumer spending
will increase the current account deficit.
By comparing rural and urban retail consumer spending, we can say that the proportion of
consumer spending is less in rural areas than in urban areas.
Urban: As most of the manufactured products would be costly, so we can assume most of the
imported goods are bought by the urban population, bearing in mind the cost of purchasing.
FISCAL DEFICIT
Fiscal deficit is a shortfall in the revenue of a government relative to its spending. A country
with a budget deficit spends beyond its means. A budget deficit is measured as a percentage
of the gross domestic product (GDP), or simply as the total dollars spent below income. For
this case, the revenue calculation only covers taxation and other profits, which lacks lent
capital to make up for the deficit.
A budget deficit is separate from revenue debt. The following is the gross debt accrued
during deficit spending years.
Analyze The Percentage Of Fiscal Deficit To Gdp For Last Five Year
2017-18 3.53
2018-19 3.39
2019-20 3.4
2020-21 9.3
2021-22 6.9
● From the downward trend of the graph, we can say that the NDA dispensation has
brought Fiscal Deficit figures down in the last five years. They broadly averted any big
slippage in the deficit since it came to power in 2014.
● The fiscal deficit is likely to be revised upwards from 3.4% in the upcoming Budget in
July 2019. Its aim is to take on the economic slowdown in the country. The move is
aimed at stepping up public expenditure in infrastructure, job creation, social and
farmers’ schemes etc.
● Thus, in a scenario where consumption, demand, investment and capital formation need
support, a fiscal deficit can be a secondary point. The revision in the fiscal deficit would
be well-controlled.
FISCAL DEFICIT COMPARISON OF INDIA AND CHINA
● India’s fiscal deficit was at Rs 8.51 lakh crore in February-end touching 4.52% of GDP.
The receipts were sufficient to cover only 61% of expenditure.
● As a percentage of GDP, the fiscal deficit is 4.52% and the revenue deficit is 3.45%. The
figures mean fiscal deficit has crossed 134% of the government’s budget estimate. Last
year, the deficit stood at 120%, during the same period.
● In FY19, the total expenditure was Rs 21.9 lakh crore or 89% of the budget estimate.
Total expenditure comprised revenue expenditure of Rs 19.15 lakh crore, at 89% of the
budget estimate, and capital expenditure of Rs 2.73 lakh crore at 87% of the budget
estimate.
● China and India are the two emerging economies in the world. As of 2021, China and
India are the 2nd and 5th largest economies in the world, respectively, on a nominal basis.
On a PPP basis, China is at 1st, and India is at 3rd place. Both countries share 21% and
26% of the total global wealth in nominal and PPP terms, respectively. Among Asian
countries, China and India together contribute more than half of Asia's GDP.
