ANALYZE EXPORTS AND IMPORTS FOR INDIAN ECONOMY

AND DEFICIT OR SURPLUS IN BALANCE OF PAYMENTS

KIRAN KUMARVIJAY KUMAR

JOSEPH KIRAN KUMAR Ch

AMIT JAISWAL

INTRODUCTION• “The balance of payments is merely a way

of listing receipts and payments in international transactions for a nation. It shows the nation’s trading positions variations in its net position as a foreign lender or borrower and variations in its official reserve holding.”

Structure of Balance of Payments Accounts

• The balance of payments account of a nation is assembled on the doctrine of double entry book keeping. Every transaction is entered on the credit and debit side of the Income Statement and assets and liabilities on the balance sheet.

Principles

If a payment is received from overseas account, it is a credit transaction.

While if payment made to overseas account it is a debit transaction.

The chief items presented on the credit side (plus) are exports of goods and services, transferred receipts in the form of gifts, subscription etc from overseas account, borrowings from overseas account investments by overseas account in the nation and official sale of reserve assets incorporating gold to overseas account and abroad agencies.

The principal items on the debit side (minus) are imports of goods and services, unrequited payments to overseas account as gifts, subscriptions etc, lending to overseas account investments by residents to overseas account and official purchase of reserve assets or gold from overseas account and overseas agencies.

These credits and debits are presented vertically in the balance of payments sheet of a nation as per the principle of double entry book keeping.

Horizontally they are classified under three categories: the current account, the capital account and the official settlements accounts or the official reserve assets account.

Balance of Payments AccountReceipts

Credits (plus)Payments

Debits (minus)

Current Account

Exports Imports

Merchandise Merchandise

Services Services

Unrequited or Transfers Unrequited or Transfers

Capital Account

Borrowings from Overseas Account Lending to Overseas Account

Direct Investments by Overseas Account Direct Investments in Overseas Account

Official Settlements Account

Enhancement in Overseas Official Holdings Enhancement in Official Reserve of Gold and Overseas Currencies

Current Account

• The current account of a nation incorporates all transactions associating to business in merchandise and services and unrequited transfers.

• Service transactions comprise of costs of travel and transportation, insurance, earnings and imbursements of overseas investments etc.

 • Transfer payments associate to gifts, subscriptions, overseas aid, remittance

made by private etc. received from overseas individuals’ account and government to overseas individuals.

 • In current account goods exports and imports are the most significant items.

Merchandise exports are presented as the plus item and are computed free on board which means that cost of transportation, insurance etc. are eliminated.

 • On the right side imports are presented as a minus item and are computed

based on costs, insurance and freight and are incorporated.

• An actual balance sheet will typically have numerous sub headings under the principal divisions. For example, entries under Current account might include:

• Trade – buying and selling of goods and services• Exports – a credit entry• Imports – a debit entry• Trade balance – the sum of Exports and Imports

• Factor income – repayments and dividends from loans and investments• Factor earnings – a credit entry• Factor payments – a debit entry

• Factor income balance – the sum of earnings and payments

The Capital Account

The capital account of a nation integrates its transactions in financial assets in the form of short term and long term lending and borrowings and private and official investments.

In other terminology, the capital account shows overseas flow of loans and investments and represents a variation in the nation’s overseas assets and liabilities.

Long term capital transactions associate to overseas capital shifts with maturity of one year or more and integrate direct investments like construction of overseas plant portfolio investment like the purchase of overseas bonds and inventories and overseas loans.

Alternatively short term overseas capital transactions are for a period ranging among three months and less than one year.

The Official Statements Account

• The official settlements account or official reserve account is actually a part of the capital account.

• However the U.K and U.S balance of payments records depicts as a break up account.

• The official statement accounts evaluate the variation in a nation’s official reserve assets during the year.

 • The official reserve assets of a nation comprise of its gold

inventories, belongings of its exchangeable overseas currencies and its net position in the IMF.

 • It depicts the transactions in a nation’s net official reserve assets.

Causes of BOP imbalances

• There are conflicting views as to the primary cause of BOP imbalances, with much attention on the US which currently has by far the biggest deficit. The conventional view is that current account factors are the primary cause- these include the exchange rate, the government's fiscal deficit, business competitiveness, and private behavior such as the willingness of consumers to go into debt to finance extra consumption.

Balance of payments crisis

• A BOP crisis, also called a currency crisis, occurs when a nation is unable to pay for essential imports and/or service its debt repayments. Typically, this is accompanied by a rapid decline in the value of the affected nation's currency. Crises are generally preceded by large capital inflows, which are associated at first with rapid economic growth. However a point is reached where overseas investors become concerned about the level of debt their inbound capital is generating, and decide to pull out their funds. The resulting outbound capital flows are associated with a rapid drop in the value of the affected nation's currency.

BALANCING MECHANISMS

• Rebalancing by changing the exchange rate

• Rebalancing by adjusting internal prices and demand

Exports• India's chief exports include computer software,

agricultural products (cashews, coffee), cotton textiles and clothing (ready-made garments, cotton yarn and textiles), gems and jewellery, cut diamonds, handicrafts, iron ore, jute products, leather goods, shrimp, tea, and tobacco. The country also exports industrial goods, such as appliances, electronic products, transport equipment, light machinery as well as chemical and engineering products. India imports rough diamonds, cuts them, and exports the finished gems. India's main exports in 2005 included USA 16.7%, UAE 8.5%, China 6.6%, Singapore 5.3%, UK 4.9%, Hong Kong 4.4%. India's services contributed about 35% of the total exports as of 2010-11

Imports•

Capital goods and fuel, each account for about a quarter of Indian imports. Other imports of India include edible oils, fertilizer, food grains, iron and steel, industrial machinery, professional instruments and transportation equipment. Chemicals, precious and semi-precious stones and non-ferrous metals are the other major imports. India's main import partners included China 7.3%, US 5.6%, Switzerland 4.7%.

Deficits• The value of India's imports is greater than the

value of its exports. India uses foreign loans to finance the extra imports. With exports and earnings on the invisibles account improving, the trade deficit in 2000/01 narrowed to $5.73 billion from $12.9 billion in the year-ago period. Current account deficit was about US$ 3.7 billion or about 1.4 percent of GDP in 1996-97, down from 3.2 percent in 1990-91.

 Effect of Imports, Exports, and GDP

• GDP=C + I + G + (Ex - Im). • If net exports are positive, the nation's GDP

increases. If they are negative, GDP decreases.• All nations want their GDP to be higher rather

than lower, so all nations want their net exports to be positive.

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