BALANCE OF PAYMENT - CONCEPT, COMPONENTS, REASONS FOR CURRENT ACCOUNT DEFICIT IN BOP, MEASURE FOR MANAGING BOP.

CONCEPT 

         For analysing the performance of the company and its future prospects, the best way is to make use of various financial tools on the financial statement of the company, balance sheet, in the same way for analysing the performance and prospect of the country the financial statement referred is balance of payment . It shows recording of all transactions taking place in a particular financial year. Balance of payment is an accounting statement that records all economic transactions between the resident of a country and the resident of other countries within a given periods of time, usually one year, these financial transaction can be payment from exports and imports of goods, services , financial capital, and financial transfers.

        Positive side include surplus items like incomes from exports or the receipt of loans and investmentsand negative side include deficits items like expenses on imports or to invest in foreign countries. After including all the components they must balance each other. If exports are more than imports the trade balance would be surplus otherwise deficit.

       "The BOP account record all transactions between the "residents" of the country concerned and the other countries and the "residents" , include all individuals , businesses , government and their agencies and international organisation " .

COMPONENTS OF BOP

.    The Analysis of BOP can be done in terms of two major sub-devision :  Current Account and Capital Account .

(a) Current Account : The current account can be broken down into two parts ; Balance of Trade,  deals only exports and imports of visible items and Balance of invisible deals with net receipts of invisibles.

(i) Visible items or Merchandise : It include exports and imports of goods and exports are valued at free on board (FOB) prices whereas imports at cost insurance and freight (CIF) prices. It can be either government or private merchandise . Trade balance is the difference between export and import.

(b) Capital Account : Capital inflow can be classified according to the type of instruments whether debt or equity and the maturity periods short or long term. The important components of capital accounts are :

(i) Foreign investment :  Foreign investment involves foreign direct investment and portfolio investment. 

* Foreign Direct Investment (FDI) : FDI is a type of capital inflow to the developing economies and it can be used for updating technology and improving production capabilities , thus leading to economies growth of the country. 

* Portfolio Investment : It deals with foreign institutional Investment (FII) of the foreign investors GDR, ADR, and offshore funds.

(ii) Loans : loan consists of external commercial borrowing , external assistance and trade credit .

* External Commercial Borrowing : They are loans from external financial  organisations on commercial terms raised by indians companies . Indian companies can have access to foreign funds for infrastructure development , expanding the present production capacity or a new investment . ECB are generally permitted for infrastructure and capital intensive sectors like such as power , petroleum and oil, railways etc.

* External Assistance : It can take the form of international loans and grants , loans are repayable over time while grants are non returnable outright payments . The essential element is that they are given on concessional terms at a low interest rate for long repayment periods . From the point of view of the aiding country, purpose of the loan should be non commercial. 

(iii) Banking Capital : It consists of non-resident indian deposit and it is a major source of financing trade and current account deficits . It is a foreign currency deposits under FCNRA ( Foreign currency and non-resident account) by the NRI's .

REASONS FOR CURRENT ACCOUNT DEFICIT IN BALANCE OF PAYMENT (BOP) 

BOP deficits occur when we import more than exports.

(a) Regulating Exchange Rate : As the currency value keeps changing due to exchange rate   fluctuations. So, when the currency is overvalued imports will be cheaper thus, more improves and lesser exports due to high cost of exporting will lead to BOP deficits. Measures should be taken to regulate fluctuations in exchange rate.

(b) Inflation : Inflationary conditions makes lesser and import more competitive.

(c) Recession : Recession in other countries also affect our exports and they will buy less of our exports, worsening the current accounts. 

(d) Weakening of the Current Account : when the value of import increases at a higher rate than exports, the current account deficit increases thus weakening the current account.

(e) loans and borrowings : If countries take loans for its development from developed countries it causes deficit in BOP. 

MEASURES FOR MANAGING BOP

(a) Import Reduction Especially of non- essential goods :  Substitution of imported goods and minimizing their wastage , promoting use of non- conventional source of energy like wind, sun , wastage ,oil efficient and fuel saving technologies. 

(b) exporting more services : India has huge potential in service sector and exporting services can add to inflow of foreign currency . By increasing services in shipping , insurance  and banking sector to the foreign countries will increase our foreign exchange reserves.

(c) Meeting international standards in quality and efficiency :  Efficiency levels should be improved to meet international standards. Pricing of indians goods can compete with international prices only when products are comparable to international products.

(d) Tourism promotion : Encouraging visit of foreign to india by promoting indian culture , civilisation and geography can contribute to foreign exchange earnings, thus improving BOP deficits.

(e) Bilateral Agreement : BOP deficits can be minimized with the help of bilateral agreement with other countries, thus improving BOP of both countries . It is an arrangement specifying what and how much import and export will take place between the two countries.