INTERNATIONAL BUSINESS Code: cp-105 unit – 2 mba I semster Compiled by: Dr. Rishi Sharma IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

Topic: BALANCE OF PAYMENTS IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

BALANCE OF PAYMENTS It is a double entry system of record of all transactions between the residents of a country and the rest of the world carried out in a specific period of time. It includes: All receipts of goods exported. All services rendered by the country. Capital received by residents of the country. Payment made by the residents due to good imported and services received from. Capital transferred to NRI/forigners. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

BALANCE OF TRADE & BALANCE OF PAYMENTS Balance of trade takes into account only the merchandise export and import of visible items. Intangible items like services (banking, insurance, transport etc.), dividend payment, interest payment etc. are not included. Balance of payment includes all visible and non visible items; hence it is a much wider concept. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

UNITLATERAL TRANFER ACCOUNT OFFICIAL SETTLEMENT ACCOUNT BALANCE OF PAYMENTS Components CURRENT ACCOUNT CAPITAL ACCOUNT UNITLATERAL TRANFER ACCOUNT OFFICIAL SETTLEMENT ACCOUNT IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

BALANCE OF PAYMENTS Components CURRENT ACCOUNT: Includes all visible exports and imports. Other invisible items like receipts and payments for various service like insurance, tourism etc. DEBIT 1. Merchandise Import 2. Invisible Import CREDIT 1. Merchandise Export 2. Invisible Export IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

Items in invisible export and import BALANCE OF PAYMENTS Items in invisible export and import Invisible import and export means the import-export of travel, transportation, insurance, investment income, govt. income not included elsewhere, miscellaneous(receipts and payments for patents and royalties), transfer payments official and transfer payments private. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

Few reasons of deficit in current account BALANCE OF PAYMENTS Few reasons of deficit in current account Liberalization which leads to import of goods. Increase in consumer demand (Even high export growth rate could not compensate this) Devaluation of rupees against the dollar. Heavy import of capital goods due to fast economic growth. Rapid industrialization. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

BALANCE OF PAYMENTS CAPITAL ACCOUNT PRIVATE CAPITAL: BANKING CAPITAL: LONG TERM CAPITAL: all capital invested for more than one year. Includes FDI and FII. Long term loans. Foreign currency deposits. Unclassified receipts 2. SHORT TERM CAPITAL: which is invested for less than one year. BANKING CAPITAL: External financial assets and liabilities of commercial and co- operative banks allowed to deal in foreign exchange. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma OFFICIAL CAPITAL: It is the capital hold by RBI in term of Foreign Capital.

BALANCE OF PAYMENTS CAPITAL ACCOUNT Capital outflow from home country to foreign country is treated as debit and inflow of capital from foreign country is in credit side. Eg: Reliance industries invested Rs. 1 billion in the Kingdom of Saudi Arabia, Debit of our capital account and credit in the accounts of Kingdom of Saudi Arabia. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

UNILATERAL TRANFER ACCOUNT (UTA) BALANCE OF PAYMENTS UNILATERAL TRANFER ACCOUNT (UTA) Unilateral transfer are ‘giving the gifts.’ It includes government grants, relief and AID etc. Eg: India’s grant to Nepal for it’s flood Tradegy. Debit of India’s BOP and credit of Uganda's BOP. CREDIT SIDE: Private remittance (payments) received from abroad. Pension Government grants from abroad. DEBIT SIDE: Private remittance (payments) to abroad. Grants to abroad. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

OFFICIAL SETTLEMENT ACCOUNT BALANCE OF PAYMENTS OFFICIAL SETTLEMENT ACCOUNT REPRESENTS: Official sale of Foreign Currency and other reserves to Foreign countries or official purchase or other reserves from foreign country. Credits: Money received from official sale of foreign currencies and reserves. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Debits: Payment done for official purchase of foreign currencies and reserves.

BALANCE OF PAYMENTS EQUAL EQUILIBRIUM DEMAND OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY EQUAL IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

BALANCE OF PAYMENTS DISEQUILIBRIUM NEGETIVE POSITIVE DEMAND OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY SUPPLY OF FOREIGN CURRENCY DEMAND OF FOREIGN CURRENCY IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma NEGETIVE POSITIVE

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM Development activities like establishment of industries, roads bridges, power plants etc. ECONOMIC FACTORS 1 Development Disequilibrium Increase of capital goods and Import of consumer goods increases. Income of people, aggregate demand, prices increases. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM ECONOMIC FACTORS Boom in the business activities in one country increases consumption, aggregate demand and prices more than production. 2 Cyclical Disequilibrium Depression leads to the increases of export; shifting the demand to another country. Boom and depression causes disequilibrium conditions. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM ECONOMIC FACTORS Result of increase in import due to high disposable income; high aggregate demand. 3 Secular Disequilibrium Developed countries prefer to import goods from other countries where goods are produced at lower cost of production. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM Changes in the economy includes shifts from agriculture to service, development of alternative source of supply, exhaustion of productive resource, changes in transport channel and cost. ECONOMIC FACTORS 4 Structural Disequilibrium IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma Structural changes leads to import of capital goods and consumer goods of the changed structure.

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM POLITICAL FACTORS Political uncertainties, instability, internal disturbances, war etc. Creates threats to industry and investment. Contributes to outflow of capital. Decline of domestic production; hence import of goods. Eg: Sri Lanka, Pakistan etc. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

CAUSES OF DISEQUILIBRIUM BALANCE OF PAYMENTS CAUSES OF DISEQUILIBRIUM SOCIAL FACTORS Drop out from existing culture. Changes in taste, fashion and preferences of people. CONTRIBUTES TO THE INCREASE IN IMPORTS AND DEFICIT IN BOP. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

METHODS OF CORRECTION OF DISEQUILIBRIUM BALANCE OF PAYMENTS METHODS OF CORRECTION OF DISEQUILIBRIUM Automatic Correction: Deficit indicates demand of foreign currency is higher and supply is less. Corrects automatically as the value of currency fluctuates. Deliberate Measures: Govt. efforts to correct/ control deficit in BOP. Includes monetary, trade and miscellaneous measures. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

METHODS OF CORRECTION OF DISEQUILIBRIUM BALANCE OF PAYMENTS METHODS OF CORRECTION OF DISEQUILIBRIUM Monetary Measures: A) Reduction in Money Supply: CRR (Cash Reserve Ratio) etc. will help in reducing money supply in the country. The result is decline in income, purchasing power, aggregate demand and consumption which further result in more export as domestic demand is less means positive BOP. B) Devaluation of currency: Results in discouragement to imports and encouragement to export. C) Exchange control: Prior permission is required for imports. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

METHODS OF CORRECTION OF DISEQUILIBRIUM BALANCE OF PAYMENTS METHODS OF CORRECTION OF DISEQUILIBRIUM Trade Measures: A) Export promotional measures: Abolishing export duties, export subsidies, encouragement of export oriented units (EOUs), Creation of export, Export Processing Zones (EPZs) , Free Trade Zones (FTZs), liberal loans for export oriented units, fiscal incentives, marketing incentives and facilities. B) Import Control Measures: Import duties, import quotas, import license, prohibiting import of certain items, increase in customs duty on import etc. c) Miscellaneous Measures: Loan in foreign currencies, attracting FDI, development of tourism, attracting NRI deposits etc. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

INDIA’s EFFORTS TO MAINTAIN BOP POSITION BALANCE OF PAYMENTS INDIA’s EFFORTS TO MAINTAIN BOP POSITION 1. Import Control: Reducing the dependency on foreign countries for different items like; food grains, cloth, paper, steel edible oils fertilizers etc. Export Promotion: Encouragement of export of engineering goods, handicrafts, technology etc. Attracting FDI. Liberalizing exchange rate : Based upon market forces. Liberalized export policy to encourage export. IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma

Thank You IBE/ CP - 105/ UNIT- 2/ SIRT-E/ DR. Rishi Sharma