Strong Balance of Payments
- 11 Aug 2020
- 5 min read
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.
- 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
- 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.
- 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.