Balance of Payment
The balance of payment is the statement that files all the transactions between the entities, government anatomies, or individuals of one country to another for a given period of time. All the transaction details are mentioned in the statement, giving the authority a clear vision of the flow of funds.
After all, if the items are included in the statement, then the inflow and the outflow of the fund should match. For a country, the balance of payment specifies whether the country has an excess or shortage of funds. It gives an indication of whether the country’s export is more than its import or vice versa.
Types of Balance of Payment
The balance of payment is divided into three types:
Current account: This account scans all the incoming and outgoing of goods and services between countries. All the payments made for raw materials and constructed goods are covered under this account. Few other deliveries that are included in this category are from tourism, engineering, stocks, business services, transportation, and royalties from licenses and copyrights. All these combine together to make a BOP of a country.
Capital account: Capital transactions like purchase and sale of assets (non-financial) like lands and properties are monitored under this account. This account also records the flow of taxes, acquisition, and sale of fixed assets by immigrants moving into the different country. The shortage or excess in the current account is governed by the finance from the capital account and vice versa.
Finance account: The funds that flow to and from the other countries through investments like real estate, foreign direct investments, business enterprises, etc., is recorded in this account. This account calculates the foreign proprietor of domestic assets and domestic proprietor of foreign assets, and analyses if it is acquiring or selling more assets like stocks, gold, equity, etc.
Importance of Balance of Payment
A balance of payment is an essential document or transaction in the finance department as it gives the status of a country and its economy. The importance of the balance of payment can be calculated from the following points:
- It examines the transaction of all the exports and imports of goods and services for a given period.
- It helps the government to analyze the potential of a particular industry export growth and formulate policy to support that growth.
- It gives the government a broad perspective on a different range of import and export tariffs. The government then takes measures to increase and decrease the tax to discourage import and encourage export, respectively, and be self-sufficient.
- If the economy urges support in the mode of import, the government plans according to the BOP, and divert the cash flow and technology to the unfavorable sector of the economy, and seek future growth.
- The balance of payment also indicates the government to detect the state of the economy, and plan expansion. Monetary and fiscal policy are established on the basis of balance of payment status of the country.
Factors Responsible for Balance of Payment Crisis in India in 1991:-
The following factors are mostly responsible for this growing crisis in the balance of payments:
1. The first important factor responsible for this growing crisis in BOP was the policy of import liberalization introduced by the Congress (I) Government headed by Late Rajiv Gandhi resulting in a huge inflow of imports particularly after the announcement of Exim Policy in 1985.
2. The second factor responsible for the crisis was the existing heavy import base of the country. In-spite of attaining an encouraging 18.7 per cent annual growth rate of exports during Seventh Plan, which was even higher than the annual growth rate of imports (16.8 per cent), the BOP position deteriorate to a serious point as the country started with larger volume imports.
3. The third factor responsible for this BOP crisis is the higher import intensity in the industrial development resulting from import intensive industrialization process followed in the country for meeting the requirements of elitist consumption (viz., color TVs, VCRs, refrigerators, motor cycles, cars) etc.
4. The steep depreciation of rupee with dollar and other currencies during 1987-91 (from Rs. 12.82 per dollar in 1987 to Rs. 20.64 in April, 1991) had resulted in a considerable increase- in the value of imports.
5. The worsening of the current account deficit in BOP in 1990-91 and therefore was partly on account of Gulf war and the higher price of POL imports and higher volume of POL imports continuously.
6. The aggravation in trade deficit in recent years was also resulted from a deterioration in the invisibles account because of lower remittances and higher interest payments.
7. The current account deficit in 1990-91 weakened the ability to finance deficit massively. Political uncertainty at home, copied with rising inflation and widening fiscal deficits, led to a loss of international confidence. This had resulted drying up of commercial borrowing and an outflow of NRI deposits.
This forced substantial recourse to the IMF with net borrowing of $ 1.2 billion and a large reserve drawdown ($ 1.3 billion). After a further deterioration in the first quarter of 1991-92, the new government took a series of measures to restore viability in external payments.
8. Although there was a severe import compression during 1991-92 but the export performance in 1991-92 was disappointing with a marginal fall in exports in dollar terms reflecting depressed conditions in world markets and a virtual collapse in exports to the former Soviet Union. Thus in-spite of serious attempts, the trade deficit declined marginally by $ 4.7 billion compared with the previous year. However, the foreign exchange reserves of the country at the same time increased by S 3.57 billion.
9. The current global economic slowdown is mostly responsible for growing trade deficit and unfavorable balance of payments situation arising out of reduction in exports.
Solution to the Growing Problem of Deficits in Balance of Payments (BOP):
The growing and persistent deficits in the balance of payments cannot be solved by the use of accumulated foreign exchange reserves or through borrowing from the IMF or by the inflow of resources through external loans and grants. The basic factors responsible for this persistent balance of payments crisis must be dealt with seriously. Otherwise, the country will reach a situation like Argentina and Mexico and will lose its credit-worthiness in the international market.
Thus, under such a situation the ultimate solution lies in containing the import bill through severe compression on the one hand and to promote export to the maximum extent on the other. Prof. Sukhamoy Chakraborty in this connection observed, “In my judgment, India’s balance of payments is likely to come under pressure unless we carry out a policy of import substitution in certain crucial sectors. These sectors include energy, edible oil and nitrogenous fertilizers.”
1. Import Control:
Under the present circumstances, the country should reduce its dependence on those commodities in which it has its productive capacities. Accordingly, the country should try to increase the production of food grains, edible oils and completely stop its import of these commodities.
The country should increase the production of iron and steel, paper, fertilizers etc. by a higher degree of capacity utilization of these existing industrial units and thus reduce its imports. The country should also put a check on the ever increasing import of POL through both increased domestic production and curtailment of its wasteful and unlimited consumption.
Moreover, there should be a severe curb on the imports of luxuries. Besides, the country should try to adopt import substitution measures progressively and also discourage indiscriminate grant of licenses of foreign collaborations.
2. Export Promotion:
In order to tackle the balance of payments crisis more effectively, the country should try to promote exports of non-traditional items like engineering goods, processed foods (fish and meat preparation), fruits and handicrafts etc. Moreover, the country should try to diversify its export markets into some non-traditional areas and should derive sufficient export surplus by containing home consumption of those commodities.
In the mean time, the year 1991-92 closed with important changes in trade and exchange rate policies announced in the Budget for 1992-93. Due to considerable import compression on measures the total value of imports declined from $ 24,072 in 1990-91 to $ 19.411.
Moreover, there was a shift to a new system of exchange rate management after the introduction of the system of full convertibility of rupee and market exchange rate in 1993-94 and 1994-95 Budget. Again in order to eliminate the cumbersome system of import licensing characterized by bureaucratic delay and arbitrariness, the system of liberalization of import licensing and tariff reductions were introduced.
This would promote greater competitiveness of Indian industry and helped the country to promote exports in the long run. Thus care must be taken so that the fruits of import liberalization remain restricted to export oriented and import substitutions industries. Considering the growing balance of payment crisis in the country, timely action must be taken so as to overcome the impending crisis.
These timely actions should be taken in the following manner:
(i) Careful screening of imports as essential and non-essential and then strictly curtail the nonessential imports;
(ii) Intensifying drive towards export promotion seriously and also to diversify the exports of the country;
(iii) Encouraging implementation of measures towards import substitution and to attain self- reliance, and
(iv) To discourage indiscriminate grant of licences to foreign collaborations excluding the areas of adopting sophisticated technology.
However, the balance of payments position in India is not at all satisfactory and such unsatisfactory performance is mostly resulted from huge trade deficit arising out of persistently rising imports and slowly rising exports. Thus the ultimate solution to such critical problem rests on promotion of exports and restriction of imports to the unavoidable minimum simultaneously.
Comments
Post a Comment