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Thursday, March 1, 2012

BALANCE OF PAYMENTS


CHAPTER 4


BALANCE OF PAYMENTS

4.1.   Balance of Payments (BoP) statistics systematically summaries the economic transactions of an economy with the rest of the World for a specific period. The Reserve Bank of India (RBI) is responsible for compilation and dissemination of BoP data. BoP is broadly consistent with the guidelines contained in the BoP Manual of the International Monetary Fund.

4.2.     Balance  of  payment  (BoP)  comprises  of  current  account,  capital account,  errors and omissions  and changes  in foreign  exchange  reserves. Under   current   account   of   the   BoP,   transactions   are   classified   into merchandise  (exports and imports) and invisibles. Invisible transactions are further  classified  into  three  categories,  namely  (a)  Services-travel, transportation, insurance, Government not included elsewhere (GNIE) and miscellaneous  (such  as,  communication,  construction,  financial,  software, news agency, royalties, management and business services); (b) Income; and (c) Transfers (grants, gifts, remittances, ets.) which do not have any quid pro quo.

4.3.     Under  the  Capital  Account,   capital  inflows  can  be  classified   by instrument (debt or equity) and maturity (short or long-term). The main components  of  the  capital  account  include  foreign  investment,  loans  and banking  capital.  Foreign  investment,  comprising  Foreign  Direct  Investment (FDI)  and  Portfolio  Investment  consisting  of  Foreign  Institutional  Investors (FIIs) investment, American Depository Receipts/Global Depository Receipts (ADRs/GDRs) represents non-debt liabilities, while loans (external assistance, external   commercial   borrowings   and  trade  credit)  and  banking   capital, including non-resident Indian (NRI) deposits are debt liabilities.

4.4.     The data on merchandise trade are available from two sources namely; (a)  from  the  Directorate  General  of Commercial  Intelligence  and  Statistics (DGCI&S) on customs basis; and (b) from RBI on payments (which includes both  receipts  and  payments)  basis.  The  Daily  Trade  Return  (DTR)  is the primary source of recording exports data at DGCI&S, while RBI relies mainly on the R-return furnished by Authorised Dealers (Ads) to compile the exports and imports data. The data on merchandise exports in BoP are compiled on the basis of information available from the DGCI&S, after adjusting for time and exchange rate differences. The merchandise export data is recorded on free  on  board  (F.O.B.)  basis.  It  may  be  noted  that  export  of  software  in physical form is captured by DGCI&S.

4.5.     The customs record data on imports on the basis of the Bill of Entry prepared for goods entering in the customs area. The data on imports under BoP statistics are compiled mainly on the basis of returns submitted by Ads supplemented by information on the transactions not passing through the banking  channel  such  as  imports  financed  through  credit  taken  abroad.

Imports under the BoP data are recorded on the basis of date of payment or date of disbursal of loans, which may differ significantly from the recording of imports at the Customs end on the basis of actual arrival of goods.

4.6.     Under the Capital Account,  both equity and debt flows are covered. Debt flows comprise commercial borrowings, external assistance, short-term trade credits and Non-Resident Indian (NRI) deposits, while the equity flows comprise   Foreign   Direct  Investment   (FDI)  and  Portfolio   Investment.   At present, direct investment into the country by non-residents is freely allowed in most sectors subject to certain sectoral ceilings on equity holdings. The FDI within the prescribed sectoral ceilings is freely allowed under RBI automatic route,  FDI  in  restricted  activities  and  in  excess  of  the  prescribed  sectoral ceilings  requires  prior  Government  approval  through  the  Secretariat  for Industrial  Assistance  (SIA)  and  the  Foreign  Investment  Promotion  Board (FIPB). The non-resident FDI investors are also allowed to raise their stakes through acquisition of shares. The portfolio investment consists of the amount raised  by Indian  corporate  through  Global  Depositary  Receipts  (GDRs)  or American Depositary Receipts (ADRs), investments in Indian stock markets by  foreign  institutional  investors  (FIIs)  and  high  net  worth  individuals  and offshore funds.

4.7.     Some of the Important Terms used in the Chapter are:

Invisibles Travel Credit ― This item represents foreign tourists expenditure during their stay in India, expenditure incurred by resident travelers  abroad  and  on  the  debit  side  it covers  exchange  sold  for private and official travel.

Transportation   Transportation  covers  receipts  and payments  on account of international transportation services.

Insurance Insurance comprises receipts and payments relating to all type of insurance services as well as reinsurance.

Investment Income ― Receipts include interest earned on the investments  of RBI and on holdings of SDRs, and payments include interest and commitment charges on foreign loans, on purchases from the IMF and those on cumulative allocation of SDRs.

Government  not included elsewhere The item includes receipts and payments on account of maintenance of embassies and diplomatic missions and offices of international institutions as well as receipts and payments on government account not included elsewhere.

Miscellaneous This item covers, receipts and payments in respect of all other services such as communication services, construction services, software services, technical know-how, royalties etc.

Transfers of payments (official, private) represent receipts and payments without a quid pro quo. Official transfer receipts represent

contra entries for cash receipts and value of aid received in kind from foreign Governments and institutions and debits cover contributions to international organisations and official grants in cash or kind extended to foreign Government. Private transfer receipts include repatriation of savings,   remittances   for   family   maintenance,   contributions   and donations to religious and charitable institutions and the like.

Investment  Income  transactions    are  in  the  form  of  interest, dividend,   profit   and   others   for   servicing   of   capital   transactions. Investment income receipts comprise interest received on loans to non- residents, dividend/profit received by Indians on foreign investment, reinvested earnings of Indian FDI companies abroad, interest received on debentures, floating rate notes (FRNs), Commercial Papers (CPs), Fixed Deposits and funds held abroad by ADs out of foreign currency loans/export  proceeds, payment of taxes by non-residents/refunds  of taxes by foreign governments, interest/discount earnings of RBI investment etc. Investment income payments comprise payment of interest on non-resident  deposits,  payment of interest on loans from non-residents,   payment   of   dividend/profit   to   non-resident   share holders, reinvested earnings of the FDI companies, payment of interest on debentures, FRNs, CPs, fixed deposits Government securities, charges on Special Drawing Rights (SDRs) etc.

Foreign Investment Data on investment abroad, hitherto reported, have been split into equity capital and portfolio investment since 2000-
2001.

Foreign Direct Investment (FDI) to and by India up to 1999-2000 comprise mainly equity capital. In line with international best practices, the coverage of FDI has been expanded since 2000-2001 to include, besides equity capital, reinvested  earnings (retained earnings of FDI companies) and other direct capital (inter-corporate  debt transactions between related entities).

Portfolio investment mainly includes Flls investment, funds raised through GDRs/ADRs by Indian companies and through offshore funds..

External  assistance  by India  denotes  aid extended  by India  to other foreign Governments under various agreements and repayment of such loans.  External  Assistance  to India denotes  multilateral  and bilateral loans received under the agreements between Government of India and other Governments/International  institutions and repayments of such loans by India, except loan repayment to erstwhile Rupee area countries that are covered under the Rupee Debt Service.

Commercial borrowings cover all medium/long term loans. Commercial Borrowings by India denote loans extended by the Export Import Bank of India [EXIM Bank] to various countries and repayment of such loans.

A short term loan ― denotes drawals in respect of loans, utilized and repayments with a maturity of less than one year.

Banking capital comprises of three components : (a) foreign assets of Commercial Banks (ADs); (b) foreign liabilities of Commercial Banks (ADs); and (c) others. Foreign assets of Commercial Banks consist of (i) foreign currency holdings; and (ii) rupee overdrafts to non-resident banks.  Foreign  liabilities  of  commercial  banks  consists  of  (i)  Non- resident deposits, which comprises receipt and redemption of various non-resident   deposit  schemes;  and  (ii)  liabilities  other  than  non- resident deposits which comprises rupee and foreign currency liabilities to non-resident banks and official and semi-official institutions. Others under banking capital include movement in balances of foreign central banks and international institutions like IBRD, IDA, ADB, IFC, IFAD etc. maintained with RBI as well as movement in balances held abroad by the embassies of Indian in London and Tokyo.

Non-resident deposits ― Credits under this item include remittances received towards various non-resident deposit schemes which are continuing. Other schemes have been discontinued. A few of them are Non Resident  (External)  rupee Account  (NR(E)RA)  (Since  February,
1970),   Non-resident   Non-repartriable    Rupee   Deposits   (NRNRD)
introduced in June, 1992.

Others    These  include  movement  in  balances  of  foreign  central banks and international institutions like IBRD, IDA, ADB, IFC, IFAD etc. maintained with RBI as well as movement in balances held abroad by the Embassies of India in London and Tokyo. This also includes movements in technical credit granted to the erstwhile East European countries and their investments in Government Treasury Bills and deposits with the Government.

Rupee   Debt   Service      Interest   payments   on   and   principal repayments  on account of civilian and non-civilian  debt in respect of Rupee   Payment   Area   (RPA),   are   clubbed   together   and   shown separately under this item.

Other  capital   comprises  mainly  the  leads  and  lags  in  exports receipts (difference between the custom data and the banking channel data).This is a residual item and includes all capital transactions  not included elsewhere. It particularly includes funds held abroad, advance receipts under deferred exports, India’s subscription to International institution,  quota  payments  to IMF,  delayed  export  receipts, remittances towards recouping the losses of branches/subsidiaries and the like.

Movement in Reserves Movements in the reserves comprises changes  in  the  foreign  currency  assets  held  by  the  RBI  and  SDR balances held by the Govt. of India. These are recorded after excluding changes  on  account  of  valuation.  Valuation  changes  arise  because

foreign  currency  assets  are expressed  in US  dollar  terms  and they include the effect of appreciation/  depreciation  of non-US currencies (such as Euro, Sterling, and Yen) held in reserves.

4.8.     Some of the Important Highlights of the Sector are as follows :

          During 2010-11, the Balance of Payments has the higher current account deficit (`2025.32 billion) as compared with 2009-10 (`1806.26 billion).   This was due to the increase in the outflow investment income of (`633.52billion)  in 2010-11 as compared to (`342.80 billion) in 2009-10.

          The   trade   deficit   of   (`5950.28   billion)   is   higher   by   6%
in 2010-11 as compared to trade deficit of (`5607.46 billion )  in
2009-10.

          During  2010-11,  large  net  capital  amount  inflows  (`2731.33 billion) is higher than net capital amount inflows in 2009-10 (`2521.32  billion). It is mainly on account of higher net   short term loan (`501.77  billion) to India in 2010-11 as compared to
2009-10 (`348.78 billion) and higher Banking Capital (`220.25) in 2010-11  as compared  to (`98.44 Billion) in 2009-10,  which leads to net accretion of foreign exchange reserves of `594.49 billion   in   2010-11.   During   2009-10   the   foreign   exchange reserves was `249.83  billion. The foreign investors often view the size of the foreign exchange reserves as key input in taking investment decisions.

          The gross capital inflow (`13044.26)  in 2010-11 has increased by 38.3 % (from `9434.47 billion) in 2009-10.

          In 2010-11 Net Foreign Investment (`1721.54) has come down by 29.3% as compared to 2009-10, which was `2436.41 billion in 2009-10, which shows a massive improvement of net Foreign Investment over `226.85 billion in 2008-09.

          Portfolio  investment  witness  net  inflow  of  `1393.78  billion  in
2010-11 as against a net inflow of `1539.66  billion in 2009-10 and net outflow of `650.5 billion in 2008-09.

          During  2010-11  India  has  taken  maximum  loan,  i.e.  around
49.2% of total loan from International Development Association (IDA), followed by International Bank for Reconstruction and Development   (IBRD)  (24.8%)  and  then  Asian  Development Bank (ADB) (21.1%).

          During  the  same  period  i.e. in 2010-11,  in India,  out  of total utilized funds 21.7 % are from Asian Development Bank (ADB),
18.8%  are from  Japan  followed  by 13.9 % from  International
Development Association (IDA).

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