Strong Balance of Payments

• 11 Aug 2020

Why in News

According to the Ministry of Commerce and Industry, India’s Balance of Payments (BoP) in 2020-21 is going to be very strong.

Key Points

• Strong BoP: The BoP is going to be strong on the back of significant improvement in exports and a fall in imports.
  
  • The exports in July 2020 is at about 91% export level of July 2019 figures.
  • Imports are still at about 70-71% level as of July 2019.
• Trade Surplus in June 2020: India’s trade has turned surplus for the first time in 18 years as imports dropped by 47.59% in June 2020 as compared to June 2019.
  
  • The country posted a trade surplus of USD 0.79 billion in June 2020.
• Domestic Manufacturing Being Boosted: The government is taking steps to support and promote domestic manufacturing and industry.
  
  • It has increased curbs on imports of products and parts, especially from China, as part of its ‘Atmanirbhar' Initiative.
  • The government also reviewed all Free-Trade Agreements (FTA) done between 2009 and 2011 and found most of them to be asymmetrical.
    
    • FTAs done earlier have permitted foreign goods to come easily into the country. But Indian goods have not been allowed reciprocal entry.
    • E.g. European countries have opposed technical standards imposed by India on import of tyres, even as they have restricted export of tyres from India.
• Change in Mode of Manufacturing: The government has also asked firms investing in the country to stop having an “assembly workshop” approach that has typically characterised Indian manufacturing.

Balance of Payment

• Definition:
  
  • Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
  • It indicates whether the country has a surplus or a deficit on trade.
    
    • When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
• Purposes of calculation of BoP:
  
  • Reveals the financial and economic status of a country.
  • Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
  • Helps the Government to decide on fiscal and trade policies.
  • Provides important information to analyze and understand the economic dealings of a country with other countries.
• Components of BoP:
  
  • For preparing BoP accounts, economic transactions between a country and rest of the world are grouped under - Current account, Capital account and Errors and Omissions. It also shows changes in Foreign Exchange Reserves.
  • Current Account: It shows export and import of visibles (also called merchandise or goods - represent trade balance) and invisibles (also called non-merchandise).
    
    • Invisibles include services, transfers and income.
  • Capital Account: It shows a capital expenditure and income for a country.
    
    • It gives a summary of the net flow of both private and public investment into an economy.
    • External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a part of capital account.
  • Errors and Omissions: Sometimes the balance of payment does not balance. This imbalance is shown in the BoP as errors and omissions. It reflects the country’s inability to record all international transactions accurately.
  • Changes in Foreign Exchange Reserves: Movements in the reserves comprises changes in the foreign currency assets held by the Reserve Bank of India (RBI) and also in Special Drawing Rights (SDR) balances.
  • Overall the BoP account can be a surplus or a deficit. If there is a deficit then it can be bridged by taking money from the Foreign Exchange (Forex) Account.
    
    • If the reserves in the forex account are falling short then this scenario is referred to as BoP crisis.

Source: TH