India’s Balance of Payment Position

The account book of the Balance of Payments comprises four accounts viz. Current Account, Capital Account, Errors and Omissions, and Change in Foreign Exchange Reserves.

Current Account

Under current account of the BoP, transactions are classified into merchandise (exports and imports) and invisibles. Invisible transactions are further classified into three categories.

1. Services comprising travel, transportation, insurance, government not included elsewhere (GNIE), and miscellaneous. Miscellaneous services include communication, construction, financial, software, news agency, royalties, management, and business services.
2. The second component of invisibles is income.
3. Transfers (grants, gifts, remittances, etc.) which do not have any quid pro quo form the third category of invisibles.

They have been defined as follows:

• Travel’ represents all expenditure by foreign tourists in India on the receipts side and all expenditure by Indian tourists abroad on payments side. Travel receipts largely depend on the arrival of foreign tourists in India during a given time period.
• Transportation’ records receipts and payments on account of the carriage of goods and natural persons as well as other distributive services (such as port charges, bunker fuel, stevedoring, cabotage, warehousing) performed on merchandise trade.
• Insurance’ consists of insurance on exports/imports, premium on life and non-life policies and reinsurance premium from foreign insurance companies.
• ‘Government not included elsewhere (GNIE)’ represent remittances towards maintenance of foreign embassies, diplomatic missions and international/ regional institutions, while payments record the remittances on account of maintenance of embassies and diplomatic missions abroad.
• ‘Miscellaneous Services’ encompass communication services, construction services, financial services, software services, news agency services, royalties, copyright and license fees and business services.
• ‘Investment Income’ represents the servicing of capital transactions (both debt and non-debt). These transactions are in the form of interest, dividend, and profit for servicing of capital transactions. Interest payments represent servicing of debt liabilities, while the dividend and profit payments reflect the servicing of non-debt (foreign direct investment and portfolio investment) liabilities. Investment income payments move in tandem with India’s external liabilities, while investment income receipts get linked to India’s external assets including foreign exchange reserves. In accordance with the Balance of Payment Manual, Fifth Edition, ‘compensation of employees’ has been shown under the head, “income” with effect from 1997-98.
• ‘Transfers’ represent one-sided transactions, i.e., transactions that do not have any quid pro quo, such as grants, gifts and migrants’ transfers by way of remittances for family maintenance, repatriation of savings and transfer of financial and real resources linked to change in resident status of migrants. Official transfer receipts record grants, donations and other assistance received by the Government from bilateral and multilateral institutions. Similar transfers by Indian Government to other countries are recorded under official transfer payments.

India’s Capital Account

Under capital account, capital inflows can be classified by instrument (debt or equity) and maturity (short or long-term). The main components of capital account include foreign investment, loans, and banking capital. Foreign investment comprising foreign direct investment (FDI) and portfolio investment consisting of Foreign Institutional Investor (FIIs) investment and American depository receipts /global depository receipts (ADRs/GDRs) represents non-debt liabilities. Loans (external assistance, external commercial borrowings [ECB], and trade credit) and banking capital including non-resident Indian (NRI) deposits are debt liabilities.

Overview of the India’s BoP position

After the global financial crises in 2008, most of the emerging economies like India were faced shocks form the policies of the advanced countries. The situation got amplified with the low external demand and increased the domestic demand with large scale dependence on oil imports. This had led to the widening of CAD during 2011-12 and it countered till the first quarter of the 2013-14. The policy measures adopted by the government in 2013-14 along with increased financing through capital flows helped to reserve accretion. This has continued in the fiscal year of 2014-15. The overall BoP during 2014-15 showed an improvement over the 2013-14. The lower current account deficit (which is 1.3% of GDP in 2014-15) is on account of contraction in trade deficit and surplus of invisibles along with sizeable increase in the net capital flows has enable the country to build-up of reserves. The higher capital inflows were in access of the financing requirement of the CAD. At the end of March 2015, the level of foreign exchange reserves was US$ 341.6 billion. The moderation of trade deficit was mainly due to the fall of global prices of crude petroleum. Considering the situation, the government had decontrolled the prices of high speed diesel in October 2014 and lifted the restrictions on gold imports in November 2014. Other observations on current account are: Service sector is dominated by software exports;high net transfers are mainly due to surplus in remittances.

The net invisibles work as cushion to neutralize the Trade deficit of the country. We should note here that from 1951 till 1990-91, the Net Invisibles of the country was always positive. It was for the first time in 1990-91, that the Net invisibles of the country went to a negative zone with a deficit of Rs. 433 Crore. In 1990-91, there was a large net outflow of the investments from the country, and the total BoP of the country went to Rs. 17367 Crore. This was the nadir of the Balance of Payments problem in India. It was followed by Economic Liberalization and the BoP corrected for a few years.