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Term Paper

International Financial Management

TOPIC

Balance of Payment

of

INDIA

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BALANCE OF PAYMENT

INDIA

Shrinking foreign trade

INDIAs trade deficit during the first nine months of fiscal 2009-10 on a balance of payments

(BoP) basis was lower at US$ 89.51 bn compared with US$ 98.44 bn during the same period infiscal 2008-09. The trade deficit on a BoP basis in Q3 (US$ 30.72 billion) was, however, less

than that in Q3 of 2008-09 (US$ 34.04 billion). This is revealed in e report (India's Balance of

Payments Developments during the first quarter (October-December) of 2009-10) of the

countrys central banking authority Reserve Bank of India

The key features of Indias BoP that emerged in Q3 of fiscal 2009-10 were:

(i) Exports recorded a growth of 13.2 per cent during Q3 of 2009-10 over the corresponding

quarter of the previous year, after consecutive declines in the last four quarters.

(ii) Imports registered a growth of 2.6 per cent in Q3 of 2009-10 after recording consecutive

declines in the last three quarters.

(iii) Private transfer receipts remained robust during Q3 of 2009-10.

(iv)Despite low trade deficit, the current account deficit was higher at US$ 12.0 billion

during Q3 of 2009-10 mainly due to lower invisibles surplus.

(v) The current account deficit during April-December 2009 was higher at US$ 30.3 billion

as compared to US$ 27.5 billion during April-December 2008.

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(vi)Surplus in capital account increased sharply to US$ 43.2 billion during April-December

2009 (US$ 5.8 billion during April-December 2008) mainly on account of large

inflows under FDI, Portfolio investment, NRI deposits and commercial loans.

(vii) As the surplus in capital account exceeded the current account deficit, there was a net

accretion to foreign exchange reserves of US$ 11.3 billion during April-December

2009 (as against a drawdown of US$ 20.4 billion during April-December 2008).

Major Items of India's Balance of Payments

(US$ million)

(2007-08)

(PR)

(2008-

09) (P)

April-December (2008-

09) (PR)

April-December (2009-

10) (P)

Exports 166163 175184 150520 124473

Imports 257789 294587 248967 213988

Trade Balance -91626 -119403 -98446 -89515

Invisibles, net 74592 89587 70931 59185

Current Account

Balance

-17034 -29817 -27516 -30330

Capital Account* 109198 9737 7136 41630

Change inReserves#

-92164 20080 20380 -11330

(+ indicates increase, - indicates decrease)

Including errors & omissions; # On BoP basis excluding valuation; P: Preliminary, PR: Partially

revised. R: revised

SOURCE: Reserve Bank of India Report

Invisibles

The decline in invisibles receipts, which started in the Q4 of 2008-09, continued during Q3 of

2009-10. Invisibles receipts registered a decline of 3.1 per cent during the quarter (as against an

increase of 5.4 per cent in Q3 of 2008-09) mainly on account of decline in business,

communication and financial services, and investment income receipts. Although, software

exports recorded a robust growth of 15.3 per cent, services exports as a whole witnessed a

decline of 12.3 per cent during the quarter as against an increase of 11.8 per cent during the

corresponding quarter of 2008-09.

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Invisible receipts recorded a decline of 7.7 per cent during April-December 2009, as compared

with an increase of 22.2 per cent in the corresponding period of the previous year, mainly due to

the lower receipts under almost all components of services coupled with lower investment

income receipts.

Invisibles Payments

Invisibles payments recorded a growth of 12.9 per cent during Q3 of 2009-10, as compared with

a low growth of 2.4 per cent in Q3 of 2008-09, mainly led by increase in payments under almost

all components of services.

Invisibles payments witnessed a positive growth of 3.7 per cent in April-December 2009 (10.4

per cent in April-December 2008) mainly supported by higher business, communication andfinancial services, and increase in payments under investment income account.

Invisibles Balance

Size of invisibles surplus in Q3 of 2009-10 was, however, lower than Q3 of preceding year.

Therefore, despite low trade deficit, the current account deficit was higher at US$ 12.0 billion in

Q3 of 2009-10 (US$ 11.7 billion in Q3 of 2008-09).

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during

April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this

level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009

as against 72.0 per cent during April-December 2008.

Current Account Deficit

Net invisibles (invisibles receipts minus invisibles payments) stood at US$ 59.2 billion during

April-December 2009 as compared with US$ 70.9 billion during April-December 2008. At this

level, the invisibles surplus financed 66.1 per cent of trade deficit during April-December 2009

as against 72.0 per cent during April-December 2008.

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Net capital flows at US$ 43.2 billion in April-December 2009 was much higher as compared

with US$ 5.8 billion in April-December 2008 mainly due to larger inflows under FDI, portfolio

investments and NRI deposits

Due to lower outward FDI, the net FDI (inward FDI minus outward FDI) was higher at US$ 16.5

billion in April-December 2009 as compared with US$ 14.3 billion in April-December 2008.

Portfolio investment witnessed large net inflows of US$ 23.6 billion during April-December

2009 as against a net outflow of US$ 11.3 billion in April-December 2008 due to large net FII

inflows of US$ 20.5 billion.

Net external commercial borrowings (ECBs) inflow slowed down to US$ 2.3 billion in April-

December 2009 (US$ 6.9 billion in April-December 2008) mainly due to increased repayments.

The increase in foreign exchange reserves on BoP basis (i.e., excluding valuation) was US$ 11.3

billion in April-December 2009 (as against a sharp decline in reserves of US$ 20.4 billion in

April-December 2008). [A Press Release on the Sources of Variation in Foreign Exchange

Reserves is separately issued]

The gross disbursements of short-term trade credit was US$ 10.1 billion during Q1 of 2009-10

almost same in Q1 of 2008-09. The repayments of short-term trade credits, however, were very

high at US$ 13.2 billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a result, there

were net outflows of US$ 3.1 billion under short-term trade credit during Q1 of 2009-10 (inflows

of US$ 2.4 billion in Q1 of 2008-09)

Banking capital mainly consists of foreign assets and liabilities of commercial banks. NRI

deposits constitute major part of the foreign liabilities. Banking capital (net), including NRI

deposits, were negative at US$ 3.4 billion during Q1 of 2009-10 as against a positive net inflow

of US$ 2.7 billion during Q1 of 2008-09. Among the components of banking capital, NRI

deposits witnessed higher inflows of US$ 1.8 billion in Q1 of 2009-10 (net inflows of US$ 0.8

billion in Q1 of 2008-09) reflecting the positive impact of the revisions in the ceiling interest rate

on NRI deposits.

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Other capital includes leads and lags in exports, funds held abroad, advances received pending

for issue of shares under FDI and other capital not included elsewhere (n.i.e.). Other capital

recorded net outflows of US$ 1.6 billion in Q1 of 2009-10.

Balance of Payments (BoP)

Merchandise Trade

Exports

On a BoP basis, Indias merchandise exports posted a decline of 17.3 per cent in April-December

2009 (as against a high growth of 27.5 per cent in the corresponding period of the previous year).

INDIA's cumulative value of exports for the first 11 months of fiscal 2009-10 (April-2009 to

February-2010) stood at US $ 152983 million (Rs 727345 crore) as against US $ 172379 million

(Rs. 774585 crore) registering a negative growth of 11.3 per cent in Dollar terms and 6.1 per cent

in Rupee terms over the same period last year. Country's cumulative value of imports for the

period April, 2009- February, 2010 was US $ 248401 million (Rs. 1180124 crore) as against US

$ 287099 million (Rs. 1289412 crore) registering a negative growth of 13.5 per cent in Dollar

terms and 8.5 per cent in Rupee terms over the same period last year.

Oil imports during this 11-month period were valued at US$ 73230 million which was 18.2 per

cent lower than the oil imports of US $ 89492 million in the corresponding period last year. Non-

oil imports during April, 2009- February, 2010 were valued at US$ 175171 million which was

11.4 per cent lower than the level of such imports valued at US$ 197607 million in April 2008-

February, 2009.

EXPORTS & IMPORTS (April-February, FY 2009-10)

In $

Million

In Rs Crore

Exports including re-exports

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2008-09 172379 774585

2009-10 152983 727345

Growth 2009-10/2008-2009 (percent) -11.3 -6.1

Imports

2008-09 287099 1289412

2009-10 248401 1180124Growth 2009-10/2008-2009 (percent) -13.5 -8.5

Trade Balance

2008-09 -114721 -514827

2009-10 -95418 -452779

Figures for 2008-09 are the latest revised whereas figures for 2009-10 are

provisional

The trade deficit for April 2009- February, 2010 was estimated at US $ 95418 million which was

lower than the deficit of US $ 114721 million during April 2008 -February, 2009.

Source: Federal Ministry of Commerce, Government of India

Imports

Import payments, on a BoP basis, also remained lower recording a decline of 14.0 per cent

during April-December 2009 as compared with a high growth of 35.6 per cent in the

corresponding period of the previous year.

According to the DGCI&S data, exports declined by 17.3 per cent, and imports growth was

negative at 22.0 per cent led by the decline in both oil imports (a decline of 29.7 per cent) and

non-oil imports (a decline of 18.4 per cent) during April-December 2009.

On a BoP basis, the merchandise trade deficit decreased to US$ 89.5 billion during April-

December 2009 from US$ 98.4 billion in April-December 2008 mainly on account of both lower

oil and non-oil import payments

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Inflows & Outflows from NRI Deposits and Local Withdrawals

(In $ million)

Inflows Outflows Local

Withdrawals

2006-07 (R) 19914 15593 13208

2007-08 (PR) 29401 29222 18919

2008-09 (P) 37,089 32,799 20,617

2008-09 (Q1) (PR) 9063 8249 5157

2009-10 (Q1) (P) 11172 9354 5568

P: Preliminary, PR: Partially revised. R: revised

SOURCE: Reserve Bank of India reportIndia's Balance of Payments

Developments during the First Quarter (April-June 2009) of 2009-10

Variation in Reserves

During April-December 2009, there was an accretion to foreign exchange reserves mainly on

account of valuation gains. Also, inflows under foreign investments, Non-Resident Indian

deposits and short-term trade credits have contributed significantly to the increase in foreign

exchange reserves during April-December 2009.

On balance of payments basis (i.e., excluding valuation effects), the foreign exchange reserves

increased by US$ 11,300 million during April-December 2009 as against a decline of US$

20,380 million during April-December 2008. The valuation gains, reflecting the depreciation of

the US dollar against the major currencies, accounted for US$ 20,185 million during April-

December 2009 as compared with a valuation loss of US$ 33,375 million during April-

December 2008. Accordingly, valuation gains during April-December 2009 accounted for 64.1

per cent of the total increase in foreign exchange reserves.

KEY INDICATORS OF INDIA'S BALANCE OF PAYMENTS

2007-

08

2008-09 2008-09 (Q1)

(PR)

2009-10 (Q1)

(P)

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Merchandize Trade

Exports ($ on BoP basis) Growth Rate

(percent)

28.9 5.4 43 -21

Imports ($ on BoP basis) Growth Rate

(percent)

35.2 14.3 42.9 -19.6

Crude Oil Prices, Per Barrel (Indian

Basket)

79.2 82.4 118.8 63.9

Trade Balance ($ billion) -91.6 -119.4 -31.4 -26

Invisibles

Net Invisibles ($ Billion) 74.6 89.6 22.4 20.2

Net Invisibles Surplus/Trade Deficit

(Percent)

81.4 75 71.3 77.7

Invisible Receipts/Current Receipts

(Percent)

47.2 48.1 44.2 49.9

Services Receipts/Current Receipts

(Percent)

28.6 30 26.2 28.9

Private Transfers/Current Receipts

(Percent)

13.8 13.7 13.8 17.2

Current Account

Current Receipts ($ Billion) 314.8 337.7 88.1 77.5

Current Payments ($ Billion) 331.8 367.6 97.1 83.3

Current Account Balance ($ Billion) -17 -29.8 -9 -5.8

Capital Account

Gross Capital Inflows ($ Billion) 433 302.5 90.9 78.5

Gross Capital Outflows ($ Billion) 325 293.3 79.7 71.8Net Capital Flows ($ Billion) 108 9.1 11.1 6.7

Net FDI/Net Capital Flows (Percent) 14.3 191.3 80.5 101.4

Net Portfolio Investment/Net capital Flows

(Percent)

27.4 -153.4 -37.8 122.7

Net ECBs/Net capital Flows (Percent) 21 89.2 13.2 -5.3

Reserves

Import Cover of Reserves (In months) 14.4 10.3 13.3 11.4

Outstanding Reserves as at end period ($

Billion)

309.7 252 312.1 265.1

SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First

Quarter (April-June 2009) of 2009-10

India's Merchandize Trade (2003-04 to 2008-09 )

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Year Exports Growth

(Percent)

Imports Growth

(Percent)

2003-04 63.8 - 78.1 -

2004-05 83.5 30.8 111.5 42.7

2005-06 103.1 23.4 149.2 33.8

2006-07 126.3 22.5 185.6 24.4

2007-08 162.9 29 251.4 35.5

2008-09 (April-March) - 5.4 - 14.3

SOURCE: Federal Ministry of Commerce, Government of India

Gross Capital Inflows and Outflows (In $ Million)

HEADS Gross Inflows Gross Out flows

April-March April-March

2008-09

P

2008-09

(Q1) (PR)

2009-10

(Q1) (P)

2008-09

P

2008-09

(Q1) (PR)

2009-10

(Q1) (P)

Foreign Direct Investment 36258 12137 9612 18762 3170 2779

Portfolio Investment 128651 40764 38625 142685 44975 30357

External Assistance 5,042 909 821 2,404 558 737

External Commercial

Borrowings

15,382 2760 2092 7,224 1293 2448

NRI Deposits 37,089 9063 11172 32,799 8249 9354

Banking capital excluding

NR Deposits

27,909 12889 4405 35596 11007 9588

Short-term trade Credits 39,734 10176 10126 45529 7779 13211

Rupee Debt Service 0 0 0 101 30 23

Other Capital 12,391 2176 1636 8210 2678 3256

TOTAL 302,456 90784 78489 293310 79739 71753

R: Revised; P: Preliminary; PR: Partially Revised

SOURCE: Reserve Bank of India report India's Balance of Payments Developments during the First

Quarter (April-June 2009) of 2009-10

Business Services (In $ Million)

Item Receipts Payments

April-March April-March

2008-

09 P

2007-08

PR

2006-07 R 2008-

09 P

2007-08

PR

2006-07 R

Trade Related 2,008 2233 1325 1,642 2285 1801

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Business & Management

Consultancy

4,847 4433 4476 3,512 3653 3484

Architectural, Engineering

& other Technical

1,759 3144 3457 3,106 3173 3025

Maintenance of Offices 2,980 2861 2638 3,283 3,496 4,032

Others 4,657 4100 2648 3,726 4,108 3,522

TOTAL 16,251 16771 14544 15,269 16715 15866

R: Revised; P: Preliminary;

PR: Partially Revised

SOURCE: Reserve Bank of India Report on Balance of Payment, December 2008

Until few years ago, our trade deficit used to be equal to our oil imports; this is no longer

true. Trade deficit is reduced considerably by the invisibles mainly software services and

remittances. FDI & FII flows fund our current account deficit.

The major advantage China has over India is her strong trade and current account

surpluses year after year. That's how China has accumulated vast forex reserves over

years which gave her the financial strength to undertake mega infrastructure investments

year after year while our trade and current account deficits restrict us from confidently

planning and implementing such mega infrastructure investments.

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Highlights of Indias International Trade

Indias merchandise Trade Turnover increased from INR 7.6 lac cr in 2001- 02 to INR

32.22 lac cr in 2008 09

Indias exports increased from INR 3.88 lac cr in 2001- 03 to 15.45 lac cr in 2008 09

Indias Imports increased from INR 3.72 Lac cr in 2001- 03 to INR 16.77 lac cr in 2008 09

Share in world merchandise exports in 2008 was 1.04%

Major Trading Partners Top 5 Countries of Export

Rank Country Apr-Mar 2008 Apr-Mar 2009(P) %Growth %Shar

1 U ARAB EMTS 62,915.03 110,021.10 74.87 13.1

2 U S A 83,388.07 95,750.58 14.83 11.4

3 CHINA P RP 43,597.41 42,661.32 -2.15 5.08

4 SINGAPORE 29,662.23 37,746.56 27.25 4.49

5 HONG KONG 25,385.25 30,639.15 20.7 3.65

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Total 655,863.50 839,977.94 28.07 100

Top 5 Countries of Import

Indias BOP position in 2008-09 Due to the synchronized global recession, exports have declined since October 2008 for

eight successive months. Imports growth also witnessed a deceleration during October-

November 2008, before turning negative thereafter. The merchandise trade deficit

declined during 2009-10 (April-May) over the corresponding period of the previous year,

reflecting the sharper decline in the imports in relation to exports.

The lower trade deficit emanating from moderation in oil prices resulted in a turnaround

in the current account to a modest surplus during the fourth quarter of 2008-09, after

recording deficits for seven consecutive quarters.

For the year as a whole, net capital flows fell from US$ 108.0 billion in 2007-08 to US$

9.1 billion in 2008-09, while the current account deficit widened from 1.5 per cent of

GDP to 2.6 per cent of GDP during the same period.

Rank Country Apr-Mar 2008 Apr-Mar 2009(P) %Growth %Shar

1 CHINA P RP 109,116.11 144,114.78 32.07 10.75

2 U ARAB EMTS 54,233.20 94,768.04 74.74 7.07

3 SAUDI ARAB 78,110.31 89,654.59 14.78 6.69

4 U S A 84,625.13 83,537.24 -1.29 6.23

5 IRAN 43,945.93 55,806.96 26.99 4.16

Total 1,012,311.75 1,340,587.75 32.43 100

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Tax holiday extended for one more year for EOU

Focused Market Schemes to be extended to 26 new countries including 16 Latin

American & 10 in Asia-Ocenia

Duty free imports for capital goods in select industries like engineering, chemicals,

electronics, textiles, handicrafts etc.

Measures to make BOP favorable

Government sops for labor intensive goods like textiles, Handicrafts, gems & jwellery

Lower transactions costs

Speedy set up of Export oriented units & SEZ.

Lower transaction costs & reduced paper work

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Reference

http://www.indiaonestop.com/economy/balanceofpayments/economy-macro-balance

%20of%20payments.htm

http://www.managementparadise.com/forums/managerial-economics-eco/32932-balance-

payment-india-ppt.html

http://rbi.org.in/SCRIPTs/SDDS_ViewDetails.aspx?ID=5

http://www.rbi.org.in/scripts/NotificationUser.aspx

http://thinkahead.net.in/balance-of-payment-and-external-debt-of-india-in-2010.html

http://indianblogger.com/indias-balance-of-payments-part-ii/

http://www.siliconindia.com/shownews/Balance_of_Payment_deficit_rises_to_20_Billio

n_in_0809-nid-58746.html

http://www.economicshelp.org/blog/economics/balance-of-payments-disequilibrium/

http://www.indiaonestop.com/economy/balanceofpayments/economy-macro-balance%20of%20payments.htmhttp://www.indiaonestop.com/economy/balanceofpayments/economy-macro-balance%20of%20payments.htmhttp://www.managementparadise.com/forums/managerial-economics-eco/32932-balance-payment-india-ppt.htmlhttp://www.managementparadise.com/forums/managerial-economics-eco/32932-balance-payment-india-ppt.htmlhttp://rbi.org.in/SCRIPTs/SDDS_ViewDetails.aspx?ID=5http://www.rbi.org.in/scripts/NotificationUser.aspxhttp://thinkahead.net.in/balance-of-payment-and-external-debt-of-india-in-2010.htmlhttp://indianblogger.com/indias-balance-of-payments-part-ii/http://www.siliconindia.com/shownews/Balance_of_Payment_deficit_rises_to_20_Billion_in_0809-nid-58746.htmlhttp://www.siliconindia.com/shownews/Balance_of_Payment_deficit_rises_to_20_Billion_in_0809-nid-58746.htmlhttp://www.economicshelp.org/blog/economics/balance-of-payments-disequilibrium/