Balance of payment current account

1. Balance of Payment-Current account
Macroeconomic Presentation
September-18, 2014
Nitin Joshi
Pankaj Tolani
Sandeep Sharma
Satyajeet Singh
Shashank Shekhar

2. Agenda
2
Introduction
Calculation
Reducing current account deficit
Trends (BOP and Current a/c)
Conclusion

3. Introduction
The balance of payments of a country is a
systematic record of all economic/ monetary
transactions between residents of a country
and rest of the world.
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4. 4
Balance of Payment
Current A/c Capital A/c

5. Balance of Payment-Current Account
• Current account
– Balance of Trade
– Balance of Services (Invisibles)
• Transportations
• Travels
• Other Services(communications, computer services,
royalties & license fees, and many types of other
business services)
– Income
– Current transfers
• Government
• Other
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6. Agenda
6
Introduction
Calculation
Reducing current account deficit
Trends (BOP and Current a/c)
Conclusion

7. Calculation
• Double entry book keeping system
– Both sides of transactions debit and credit are
recorded
• Credit side shows receivables
• Debit side shows the payables
• The balance of each item shown under Net
balance.
• Sum of net balance gives “Current account
balance”
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8. Calculation
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Transactions Credit Debit Net Balance (+) or (-
)
Merchandise trade Exports Imports -------
Foreign travel Earnings Payments -------
Transportation
Earnings Payments -------
(Shipping)
Insurance premium Receipts Payments -------
Investment income Receipts Payments -------
Govt. (Purchases and
sale of goods and
services)
Receipts Payments -------
Miscellaneous Receipts Payments -------
Miscellaneous include – Motion picture royalties, telephone and telegraph services, fees for
copyright and consultancy etc

9. • CAB = X - M + CNYa +lc NuCTl ation
– X = Exports of goods and services
– M = Imports of goods and services
– NY = Net income abroad
– NCT = Net current transfers
• Theoretically, the balance should be zero, but in the real world this is
improbable
• A surplus is indicative of an economy that is a net creditor to the rest of
the world.
• The country is providing an abundance of resources to other economies,
and is owed money in return.
• A CAB surplus gives other economies the chance to increase their
productivity while running a deficit
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10. Calculation
– Current account deficit
• Occurs when a country's total imports of goods,
services and transfers is greater than the country's
total export of goods, services and transfers. This
situation makes a country a net debtor to the rest
of the world
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It is important to
understand from
where a deficit or a
surplus is stemming
because sometimes
looking at the current
account as a whole
could be misleading.

11. Calculation
• Current Account + Capital account=0
• In an open economy, part of domestic output is sold to
foreigners (exports) and part of spending by domestic residents
purchases foreign goods (imports).
– Spending by domestic residents
– Spending on domestic goods
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12. Calculation
• We will assume that domestic spending depends on the
interest rate and income
• Net exports
• A rise in foreign income, improves the home country’s trade balance
as it affects the foreign demand of our exports
• A rise in R or a real depreciation improves our trade balance as
demand shifts from goods produced abroad to those produced at
home.
• A rise in home income raises import spending and hence worsens the
trade balance.
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13. Calculation
• Figure shows the effect of a rise in foreign income.
• The higher foreign spending on our goods raises demand and hence,
at unchanged interest rates, requires an increase in output. This is
shown by the rightward shift of the IS curve
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14. Agenda
14
Introduction
Calculation
Reducing current account deficit
Trends (BOP and Current a/c)
Conclusion

15. Reducing deficit
• Devaluation of currency
• Deflation
• Supply Side Policies
• Protectionism
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16. Devaluation of currency
• If there is a devaluation in the currency, the
price of importing goods increases and
therefore the quantity demanded of
imports falls.
• Exports will be become cheaper and there
will be an increase in the quantity of
exports
• Therefore, assuming demand is relatively
price elastic, we would expect a
devaluation to lead to an improvement in
the current account.
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• However it does depend upon the elasticity

17. Deflation
• If a government reduces aggregate demand
by raising interest rates or increasing taxes
then people will have less money to spend
so they reduce consumption of imports.
• India has a high marginal propensity to
import.
• Deflationary policies will also put pressure
on manufacturers to reduce costs.
• With lower Aggregate Demand, growth is
likely to fall causing higher unemployment.
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18. Supply Side Policies
• Increase the productivity
& efficiency of the
economy
• Interventionist supply
side policies
• Free market supply side
policies
• AS will improve and
economy will become
more competitive
• Long term results 19

19. Protectionism
• Increased tariffs of quotas will reduce
imports and improve the current account
• Protectionism leads to retaliation so
exports will decrease
• Domestic industries may become
uncompetitive, because there is no
incentive.
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20. Protectionism
• Increased tariffs of quotas will reduce
imports and improve the current account
• Protectionism leads to retaliation so
exports will decrease
• Domestic industries may become
uncompetitive, because there is no
incentive.
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21. Agenda
22
Introduction
Calculation
Reducing current account deficit
Trends (BOP and Current a/c)
Conclusion

22. Trends
• India’s current account deficit (CAD)
narrowed sharply to $7.8 billion (1.7 per
cent of gross domestic product) in the first
quarter of 2014-15
• CAD was $21.8 billion (4.8 per cent of GDP)
in the year ago period for the same quarter.
• However, it was higher than $1.2 billion
(0.2 per cent of GDP) in Q4 of 2013-14.
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23. Current Account: India
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24. Current account to GDP
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25. Balance of Trade : India
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26. India exports
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27. India imports
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28. India Remittances
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Million USD

29. Major Item of BoP
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30. US vs India
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31. China vs India
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32. Largest trading partners of India
• According to the Department of Commerce,
the fifteen largest trading partners of
India represent 62.1% of Indian imports, and
58.1% of Indian exports as of December 2010.
• These figures do not include services or
foreign direct investment, but only trade in
goods
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33. Trade partners of India (millions
USD) FY 2012–2013
Country Exports Imports Total Trade Trade Balance
China 13,503.00 54,324.04 67,827.04 -40,821.04
Switzerland 1,116.98 29,915.78 31,032.76 -28,798.80
Saudi Arabia 9783.81 34,130.50 43,914.31 -24,346.69
Iraq 1,278.13 20,155.94 21,434.07 -18,877.81
Kuwait 1,060.80 16,569.63 17,630.43 -15,508.83
Indonesia 5,331.47 14,774.27 20,105.75 -9,442.80
South Korea 4,201.49 13,461.25 17,662.73 -9,259.76
Iran 3,351.07 11,603.79 14,954.86 -8,252.72
Germany 7,244.63 14,373.91 21,618.54 -7129.28
Japan 6,099.06 12,514.07 18,613.14 -6,415.01
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34. India’s Top Exports and Imports-
Commodities
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35. Q1, FY 14-15 CAD
• Lower CAD was primarily on account of a contraction in trade deficit
contributed by both a rise in exports and a decline in imports
• Exports, at $81.7 billion, increased by 10.6 per cent in the first quarter of
2014-15 as against a decline of 1.5 per cent in the first quarter of 2013-14.
• Imports, at $116.4 billion, moderated by 6.5 per cent as against an
increase of 4.7 per cent.
• The decline in imports was primarily led by a steep drop of 57.2 per cent
in gold imports, which amounted to $7 billion, significantly lower than
$16.5 billion
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36. • Non-gold imports recorded a modest rise of 1.3 per cent as against a
decline of 0.6 per cent in the corresponding quarter of last year reflecting
some revival in economic activity
• Net services receipts improved marginally on account of higher exports of
services. Net services at $17.1 billion recorded a growth of 1.2 per cent in
the first quarter of 2014-15.
• "As growth picks up non-oil non-gold imports shall start picking up so our
current account deficit will come under little more pressure. But the flip
side of that is our fiscal deficit will come under less pressure because
growth will pick up. WE have to manage both as we go along. My sense is
we are much better prepared our macro economic picture looks much
healthier”..... Raghuram Rajan , Governor RBI
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Q1, FY 14-15 CAD

37. Agenda
38
Introduction
Calculation
Reducing current account deficit
Trends (BOP and Current a/c)
Conclusion

38. Evaluation – Pros & Cons
• Pros of current account deficit
• Good for short term
• High money supply (from foreign borrowings)
leads to higher productivity & employment
• Decrease in imports by higher import duty by
the establishment to narrow the deficit
• Higher exports due to devaluation of domestic
currency against the foreign currency
• Development of infrastructure & introduction
of better foreign industrial practices in culture.
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39. • Cons of current account deficit
• Higher financing through borrowing burdens
the country with high interest payments
• Decline in confidence in the economy can lead
to withdrawal of investment & devaluation of
currency and inflation
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40. Conclusion
• Advantages or disadvantages of current
account deficit depends on its % of GDP.
• Depends on how the deficit is financed.
Financing it through long term capital
investment instead of borrowing is better
alternative.
• Depends upon the country in question.
Developing countries are more vulnerable.
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