Report On Balance Of Payment Analysis Economics Essay
ACKACKNOWLEDGEMENT
I would wish to show my interim study of my direction research undertaking of “ BALANCE OF PAYMENT ANALYSIS ” and would wish to describe my findings of my analysis half manner through the undertaking in this study.
I would wish to thank Prof. Gauri Shanker Hiremath for the support and the advice he has provided me through out this phase of the undertaking. I would besides wish to thank IBS for the larning experience they have provided me with their substructure ( the library ) throughout the research undertaking without which it would non hold been possible for make the great advancement that I have achieve during this phase.
Table of Contentss
EXECUTIVE SUMMARY 4
OBJECTIVE 5
METHODOLOGY 5
INTRODUCTIONaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦6
Analysis AND PROCEDUREaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦11
FINDINGS AND OBSERVATIONSaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦22
LIMITATIONSaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦24
REFERENCESaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..25
1. Executive Summary
The chief aim of this undertaking is to analyze balance of payment, understand the assorted constructs in it, and analyze the assorted factors impacting it, the importance of it and relevancy of it in universe economic system.
The undertaking has helped me derive great apprehension in the field of international finance and trade and which chiefly revolves around the construct of balance of payments and assorted factors impacting. The major factors which have been taken into consideration for the analysis are rising prices and exchange rate. Besides we would besides wish to make a little analysis on how balances of payments affect the growing rate of GDP in the economic system.
There has besides been an analysis on who are the major trading spouses of India and the major trading parts of the universe and the export, import between the states and the major trade goods between the states. It besides involves a tendency analysis of the balance of payments and besides the export, import and how the rising prices and the exchange rates of the state over a period of clip.
2. Aim:
Aims of the undertaking:
To analyze how exchange rate affects Balance of payments
To analyze how rising prices rate affects Balance of payments
To Balance of payments affects GDP and its growing rate
To see a tendency in the export and import between the assorted trading spouses which dominate the majority of its trade dealingss.
To besides detect the major trade goods, which forms a majority of the trade between the states.
3. Methodology:
Methodology used in the undertaking:
Initially the informations for balance of payments ( RBI ) , exchange rates ( IMF ) , rising prices rates ( IMF ) , import, export and trade good inside informations ( section of trade and commercialism ) , GDP values ( CIA fact book ) are all obtained.
From there the information is analyzed and is converted to a signifier where anything can be inferred and merely the information required is obtained and remainder of the information is removed
Then a tendency analysis is performed on the import, export and trade good which form the majority of the trade between the major trading spouses of the state utilizing the derived informations.
Using this data the relationship between rising prices, exchange rate and the balance of payments is found out utilizing arrested development and likewise the relationship between balance of payments and the growing rate of the GDP.
Therefore overall the balance of payment is regressed and analyzed.
4. Introduction:
4.1 BALANCE OF Payments:
A balance of payments ( BOP ) sheet is an accounting record of all pecuniary minutess between a state and the remainder of the universe. These minutess include payments for the state ‘s exports and imports of goods, services, and fiscal capital, every bit good as fiscal transportations. The BOP summarizes international minutess for a specific period, normally a twelvemonth, and is prepared in a individual currency, typically the domestic currency for the state concerned. Beginnings of financess for a state, such as exports or the grosss of loans and investings, are recorded as positive or excess points. Uses of financess, such as for imports or to put in foreign states, are recorded as a negative or shortage point.
When all constituents of the BOP sheet are included it must equilibrate – that is, it must sum to zero – there can be no overall excess or shortage. For illustration, if a state is importing more than it exports, its trade balance will be in shortage, but the deficit will hold to be counter balanced in other ways – such as by financess earned from its foreign investings, by running down militias or by having loans from other states.
While the overall BOP sheet will ever equilibrate when all types of payments are included, instabilities are possible on single elements of the BOP, such as the current history. This can ensue in excess states roll uping caches of wealth, while shortage states become progressively indebted.
There are 2 chief divisions of Balance of payments – current history and capital history.
The current history shows the net sum a state is gaining if it is in excess, or disbursement if it is in shortage. Current history is nil but the difference between a state ‘s entire exports of goods, services and transportations, and its entire imports of them. Current history balance computations exclude minutess in fiscal assets and liabilities
TheA capital accountA records the net alteration in ownership of foreign assets. It includes theA modesty accountA ( the international operations of a nation’sA cardinal bank ) , along with loans and investings between the state and the remainder of universe ( but non the hereafter regular refunds / dividends that the loans and investings output, those are net incomes and will be recorded in the current history ) . The net consequences includes foreign direct investing, plus alterations in retentions of stocks, bonds, loans, bank histories, and currencies.
In the context of BOP and international pecuniary systems, the modesty plus is the currency or other shop of value that is chiefly used by states for their foreign reserves.A BOP instabilities tend to attest as caches of the modesty plus being amassed by excess states, with shortage states edifice debts denominated in the modesty plus or at least consuming their supply. Under a gilded criterion, the modesty plus for all members of the criterion is gilded. In the Bretton Woods system, either gold or theA US DollarA could function as the modesty plus, though its smooth operation depended on states apart from the US choosing to maintain most of their retentions in dollars.
Following the stoping of Bretton Woods, there has been noA de jureA modesty plus, but the US dollar has remained by far the principalA de factoA modesty. Global militias rose aggressively in the first decennary of the twenty-first century, partially as a consequence of theA 1997 Asiatic Financial Crisis, where several states ran out of foreign currency needed for indispensable imports and therefore had to accept trades on unfavorable footings.
4.2 Exchange Ratess:
InA finance, theA exchange ratesA ( besides known as theA foreign-exchange rate, A forex rateA orA FX rate ) between twoA currenciesA stipulate how much one currency is deserving in footings of the other. It is the value of a foreign state ‘s currency in footings of the place state ‘s currency.A For illustration an exchange rate of 44A Indian rupeesA ( INR, Rs ) to theA United States dollarA ( USD, $ ) means that Rs 44 is worth the same as USD 1. TheA foreign exchange marketA is one of the largest markets in the universe. By some estimations, approximately 3.2 trillion USD worth of currency alterations custodies every twenty-four hours.
A market based exchange rate will alter whenever the values of either of the two constituent currencies change. A currency will be given to go more valuable whenever demand for it is greater than the available supply. It will go less valuable whenever demand is less than available supply.
Increased demand for a currency is due to either an increased dealing demand for money, or an increased bad demand for money. The dealing demand for money is extremely correlated to the state ‘s degree of concern activity, gross domestic merchandise ( GDP ) , and employment degrees. The more people at that place areA unemployed, the less the populace as a whole will pass on goods and services.A Central banksA typically have small trouble seting the available money supply to suit alterations in the demand for money due to concern minutess.
The bad demand for money is much harder for a cardinal bank to suit but they try to make this by adjustingA involvement rates. An investor may take to purchase a currency if the return ( that is the involvement rate ) is high plenty. The higher a states involvement rates, the greater the demand for that currency. It has been argued that currency guess can sabotage existent economic growing, in peculiar since big currency speculators may intentionally make downward force per unit area on a currency by shorting in order to coerce that cardinal bank to sell their currency to maintain it stable ( one time this happens, the speculator can purchase the currency back from the bank at a lower monetary value, shut out their place, and thereby take a net income ) .
4.3 INFLATION Ratess:
InA economic sciences, theA rising prices rateA is a step ofA rising prices, the rate of addition of aA monetary value indexA ( for illustration, aA consumer monetary value index ) . It is the per centum rate of alteration in monetary value degree over time.A The rate of lessening in theA buying powerA of money is about equal.
As rising prices additions, monetary values addition besides in other states from which we buy, because their rising prices increases their monetary values and therefore the cost of our imports. At the same clip monetary values are likely to increase besides because our authorities may be publishing more money to cover its ain shortage, to cover the sum by which its disbursement exceeds its income.
As monetary values addition so do per centum markups such as net incomes and dividends which in this manner addition automatically in line with increasing monetary values.
The higher monetary values are felt by pay and salary earners who demand additions in line with increasing monetary values, in line with the increasing cost of life. Monetary values addition as a consequence, the addition depending both on the extent to which pay and salary demands are satisfied and on how much of the monetary value consists of labor costs.
Our monetary values have increased, our exports have become more expensive, we sell less abroad, our payments shortage gets even worse. When this status persists and gets worse so we can devaluate our currency, the extent of the devaluation depending on whether we are devaluating: ( 1 ) A A A to remain competitory or ( 2 ) A A A to go more competitory.
As a consequence of the devaluation our exports become inexpensive abroad but we have to pay more for imports. The increased cost of imports in bend additions our ain monetary values but merely to the extent to which imports figure in the monetary value. However, this has already been allowed for when make up one’s minding the extent to which we devalue.
The devaluation reduces our criterion of populating comparative to others abroad as they find our produce cheaper while we find theirs more expensive. We now have to bring forth and sell a greater volume of exports so as to gain as much foreign currency as we did earlier and have to sell even more if we are to better our place, if we are to profit from the devaluation.
4.4 GDP:
TheA gross domestic productA ( GDP ) orA gross domestic incomeA ( GDI ) is the sum of goods and services produced in a twelvemonth, in a state. It is the market value of all concluding goods and services made within the boundary lines of a state in a twelvemonth. It is frequently positively correlated with theA criterion of life, alternate steps to GDP for that intent.
mathrm { GDP } = C + mathrm { Inv } + G + left ( mathrm { ex-husband } – one
ight )
C – Consumption,
Inv – investing,
G – Government outgo
eX – exports
I – imports
From the expression it is apparent that balance of payments signifiers a portion and ball of our GDP and when it increases the GDP and growing rate additions and frailty versa is besides true.
5. Analysis AND Procedure:
The balance of payment informations is ab initio collected from Reserve bank of India. The important parametric quantities of current history balance, capital history balance and overall balance of payment is taken from the overall balance sheet. This is the important information required for our analysis. This information will so be regressed with rising prices, exchange rate ( which is obtained from IMF fiscal statistics ) and their consequence is observed on the balance of payments. This shall be portion of concluding consequences. The GDP values are obtained and regressed with the balance of payments and the consequence of balance of payments on the GDP and its growing rate is observed and is tabulated as a portion of the consequence.
Here is the balance of payment informations obtained for the period of 14 old ages from 1997 to 2010:
Year
CURRENT ACCOUNT BALANCE
Capital ACCOUNT BALANCE
ERRORS AND OMISSIONS
Overall BALANCE OF Payments
FOREX RESERVES
1997
-20883
36605
931
16,653
-16653
1998
-16789
35882
-848
18,245
-18245
1999
-20331
45328
2773
27,770
-27770
2000
-11431
41599
-2506
27,662
-27662
2001
3734
50589
2269
56,592
-56592
2002
19987
58506
3523
82,016
-82016
2003
1,904
5,561
59
7,524
-7524
2004
-12174
125367
2714
115,907
-115907
2005
-46856
108521
4231
65,896
-65896
2006
-20,765
48,035
1,736
29,006
-29,006
2007
-6,301
17,346
155
11,200
-11,200
2008
-9,019
11,135
119
2,235
-2235
2009
4,747
-5,288
841
300
-300
2010
-12,998
16,091
-952
2,141
-2,141
5.1 Exchange Ratess
As said before the exchange rates for the 14 old ages from 1997 to 2010 have been obtained from IMF fiscal statistics. This information is regressed with the balance of payment informations to detect the consequence of exchange rates on it. The consequences are tabulated. This is the information of exchange rates for 14 old ages:
Year
Annual exchange Rates ( Rs/ $ )
1997
36.2812
1998
41.3294
1999
43.1212
2000
45.0009
2001
47.2255
2002
48.6220
2003
46.5947
2004
45.2766
2005
44.0086
2006
45.1778
2007
41.1977
2008
43.3887
2009
48.3744
2010
45.7300
5.2 Inflation Ratess
As said before the rising prices rates for the 14 old ages from 1997 to 2010 have been obtained from IMF fiscal statistics. This information is regressed with the balance of payment informations to detect the consequence of rising prices rates on it. The consequences are tabulated. This is the information of rising prices rates for 14 old ages:
Year
Inflation rates ( % )
1997
7.164
1998
13.231
1999
4.67
2000
4.009
2001
3.779
2002
4.297
2003
3.806
2004
3.767
2005
4.246
2006
6.177
2007
6.372
2008
8.349
2009
8.664
2010
9.4
5.3 GDP VALUES:
As said before the GDP values for the 14 old ages from 1997 to 2010 have been obtained from CIA fact book. This information is regressed with the balance of payment informations to detect the consequence of GDP values on it. The consequences are tabulated. This is the information of GDP values for 14 old ages:
Year
GDP ( million dollars )
GDP growing rate ( % )
1997
1401934
12 %
1998
1616082
15 %
1999
1786525
11 %
2000
1925017
8 %
2001
2097726
9 %
2002
2261415
8 %
2003
2538171
12 %
2004
2877706
13 %
2005
3275670
14 %
2006
3790063
16 %
2007
4138749
9 %
2008
4511236
9 %
2009
4845068
7 %
2010
5276279
9 %
5.4 MAJOR EXPORT AND IMPORT BETWEEN THE Trading Spouses:
As per the aims the export and import between the major trading spouses is obtained from the section of trade and commercialism. Besides a tendency analysis is performed to see who is the taking the trade dealingss over a period of clip. Besides we can see the major trade goods ruling the trade dealingss between the trading spouses and which trade good is being exported more and which is imported more between the trading spouses.
5.4.1 EXPORT BETWEEN THE MAJOR COUNTRIES:
The tendency analysis of the export of India with its 15 major trading states in 14 old ages of informations from 1997 to 2010 as displayed by the saloon chart is shown as follows:
5.4.2 IMPORT BETWEEN THE MAJOR COUNTRIES:
The tendency analysis of the import of India with its 15 major trading states in 14 old ages of informations from 1997 to 2010 as displayed by the saloon chart is shown as follows:
5.4.3 EXPORT BETWEEN THE MAJOR Trading Region:
The tendency analysis of the export of India with the major trading parts of the universe in 14 old ages of informations from 1997 to 2010 as displayed by the saloon chart is shown as follows:
5.4.4 IMPORT BETWEEN THE MAJOR Trading Region:
The tendency analysis of the import of India with the major trading parts of the universe in 14 old ages of informations from 1997 to 2010 as displayed by the saloon chart is shown as follows:
5.4.5 MAJOR COMMODITIES EXPORTED:
The major trade goods exported over the last 2 old ages i.e. from 2009 to 2010 are shown as follows and the per centum of the trade goods exported is observed over this period:
Commodity
2009
2010 ( P )
A ) A PLANTATION
324.22
375.04
B ) A AGRI & A ; ALLIED PRDTS
4,997.70
4,908.14
C ) A MARINE PRODUCTS
568.72
618.74
D ) A ORES & A ; MINERALS
2,787.17
5,798.21
Tocopherol ) A LEATHER & A ; MNFRS
984.68
1,179.22
F ) A GEMS & A ; JEWELLERY
9,139.30
9,227.88
G ) A SPORTS GOODS
47.09
63.18
H ) A CHEMICALS & A ; RELATED PRODUCTS
8,042.11
10,203.19
I ) A ENGINEERING GOODS
14,116.28
13,916.60
J ) A ELECTRONIC GOODS
2,332.88
1,680.99
K ) A PROJECT GOODS
177.48
8.77
L ) A TEXTILES
6,977.81
8,206.78
M ) A HANDICRAFTS
67.15
83.57
N ) A CARPETS
237.1
353.25
O ) A COTTON RAW INCL WASTE
273.67
892.63
P ) A PETROLEUM PRODUCTS
7,592.28
12,462.32
Q ) A UNCLASSIFIED EXPORTS
3,790.08
6,907.09
Entire
62,455.71
76,885.62
5.4.6 MAJOR COMMODITIES IMPORTED:
The major trade goods imported over the last 2 old ages i.e. from 2009 to 2010 are shown as follows and the per centum of the trade goods exported is observed over this period:
Commodity
Apr-JulA 2009
Apr-JulA 2010 ( P )
% Growth
% Share
A ) A BULK IMPORTS
34,849.65
49,192.37
41.16
46.01
B ) A PEARLS, PRECIOUS & A ; SEMI-PRECIOUS STONES
3,925.85
8,632.88
119.9
8.07
C ) A MACHINERY
11,317.04
10,744.05
-5.06
10.05
D ) A PROJECT GOODS
1,392.10
2,157.83
55.01
2.02
Tocopherol ) A OTHERS
32,670.77
36,189.15
10.77
33.85
Entire
84,155.55
106,917.11
27.05
100
6. FINDINGS AND OBSERVATIONS:
Here are the findings and observations that could be deduced at this point of the undertaking:
India has ever had current history shortage station liberalisation except from 2001 to 2004 and in 2009.
Our balance of payments has ever been a healthy sum boulder clay 2007 when recession struck and we are retrieving from it.
It is besides to be noted that we have ever had capital history excess station liberalisation except 2009 when most MNC ‘s were still staggering from the wake of recession and were retreating money invested in our markets through FII ‘s. It is besides to be noted that we had a current history excess that twelvemonth and therefore gratefully we did non confront balance of payment crisis. This was chiefly due to our strong fiscal ordinance thanks to which we withstood recession due to authorities disbursement and strong domestic demand and our regulator RBI got applause universe broad for the stairss taken.
It should besides be noted that for most portion current history signifiers a really limited portion of balance of payment boulder clay 2007 and capital history and overall balance of histories about overlap with each other. Merely after recession struck have stairss taken by the regulator to cut down dependence on abroad influxs and to increase the domestic demand and overall exports.
The rupee has steadily depreciated from 1997 boulder clay 2003 after which rigorous enforcements have ensured that the rupee hovers merely around the fixed set with. In 2007 when recession struck the rupee appreciated so much despite the ordinance ensured by the RBI. Post recession rupee is merely vibrating merely around the set with set in order to guarantee the involvements of both importers and exporters are protected.
During 1997 and 1998 India suffered heavy rising prices chiefly due to the south East Asiatic crisis and we faced heavy losingss during this period. However post crisis we had merely an rising prices rate of 3 – 4 % boulder clay 2006 for a period of 8 old ages which was amongst the lowest of all time recorded universe broad during that period. In 2006 we had rampant growing rate due to which we had a steady inflationary tendencies in the twelvemonth boulder clay 2007. However in 2007 when recession struck there was a natural cut down in rising prices because FII ‘s withdrew their money. It should besides nevertheless be noted that due to strong domestic demand that rising prices has rose to 8 % which is still under allowable bounds till 2009. In 2010 we have shown a growing rate of 9 % which has led to high rising prices in early 2010 when it reached dual figures. Once once more thanks to stairss taken by RBI the rising prices is still under control but experts say more stairss demands to be taken to further convey it under control to progress to degrees like capital history convertibility.
With regard to GDP we have ever had dwelling growing rates above 8 % from 1997 except in 2009 when we the recession was merely over and we were coming out of it. It should besides be noted that 7 % in the period was above par and it should be credited to the sound fiscal construction of our state, and due to the immense domestic demand that should be satiated.
We can detect that our major trading spouse has taken a gradual displacement from USA in 1990 ‘s and 2000 ‘s till recession struck and our major spouse shifted to china. It should besides be noted that ab initio we were wholly depended on USA for our exports which formed up to 1/5th to 1/6th of our entire export. Gradually we have started diversifying our exports and imports and thereby we have reduced our overall hazard.
The last point is farther supported when we see part wise trading spouses than state wise. In early periods we can see that European brotherhood and North America accounted for up to half our exports but we could see observe that towards 2010 our trade dealingss with NE Asia and West Asia and North Africa which has ensured that our trade is good diversified thereby forestalling over exposure by depending wholly to a individual part.
In the trade goods exported we note a really important addition in crude oil merchandises, ores and minerals, chemical and related merchandises which is bound to bring higher borders and besides are non renewable resources which give us a higher degree of power in universe economic system. It should besides be noted that late 2 or 3 militias of crude oil have been found in Rajasthan by Cairn Energy ( which is to be taken over by Vedanta for one of the biggest return over universe broad ) which is likely to convey more money fluxing into our economic system. In the import front import of cherished rocks have tripled, though its partially for smoothing and exporting it as some of the concern work forces do in India or its for domestic ingestion as jewellery is a portion of civilization and tradition and plays a immense function in it. It should besides be noted that these besides make a good investing than outgo entirely because their value rises over a period of clip. It is besides a good mark that our import of furniture has reduced well which is marks that we are depending on our ain substructure and engineering and foreign dependance is reduced
7. Restriction:
Restrictions of the undertaking are:
The clip under which the analysis has to be done is a short clip so the undertaking can non be completed with flawlessness
Besides the subject of treatment is a really huge one and so the undertaking is done with the small apprehension that I could acquire keep of during the clip of analysis
Besides a figure of premises have been made in the analysis that is to be performed which might take to little inaccuracies but every bit far as it comes to my cognition that these ambiguities have been reduced.
