Bo p 200502

India’s Balance of Payments
Concepts, Compilation and Recent Scenario
1950-51 to 2003-04

EPW Research Foundation*
February 2005

* An original note on the subject was published in the Economic and Political Weekly (EPW) of November
13-20, 1993. The same has been thoroughly revised and updated by Ms. Shilpa Jain for publication on
the website www.epwrf.res.in Mrs. Rema K. Nair undertook page-making.

Contents

Section No. Title Page No.

List of Exhibits and Appendices i

I Key Concepts 1
Current and Capital Accounts
Merchandise on FOB/ CIF basis
Invisibles
Capital Account

II Sources of BOP Data 5
Difference between RBI Balance of payments data and customs data
Apparent gaps in BOP data

III An Overview of India’s Balance of Payments 10

Notes 12

List of Text Tables

Text Table

1: India’s Foreign Trade:
A Comparison of DGCI & S and RBI Data 6

2: Foreign Exchange Reserves:
1950-51 to 2003-04 14

3: Financing of Current Account Deficits:
1950-51 to 2003-04 15

4: Balance of Payments-Selected Indicators:
1950-51 to 2001-02 17

List of Exhibits and Appendices
Title Page No.

Exhibits
Exhibit
A: Estimation of Invisible Accounts -
A Comparison of RBI Classification with the IMF Classification (IMF BOP MANUAL) 7

B: Estimation of Invisible Accounts -
A Comparison of RBI Classification with the IMF Classification (IMF BOP Yearbook) 8

Appendices
Appendix
1: Balance of Payments:
1950-51 to 1989-90 (Rs. Crore / Dollar Million) 19
1990-91 to 2003-04 (Rs. Crore) 23
1990-91 to 2003-04 (US Dollar Million) 26

2: Break-up of Invisibles on Current Account 29
(A) Travel Account 35
(B) Transportation Account :
(i) 1956-57 to 1989-90 (Rs. Crore) 36
(ii) 1990-91 to 2001-02 (Rs. Crore/ Dollar Million) 38
(C) Insurance Account :
(i) 1956-57 to 1996-97 (Rs. Crore) 40
(D) Investment Income Account :
(i) 1956-57 to 1996-97 (Rs. Crore) 42
(E) Government not included elsewhere Account :
(i) 1956-57 to 1989-90 (Rs. Crore) 46
(F) Miscellaneous Account :
(i) 1956-57 to 1989-90 (Rs. Crore) 48
(G) Official Transfer Payments Account :
(i) 1956-57 to 1989-90 (Rs. Crore) 52
(H) Private Transfer Payments Account :
(i) 1956-57 to 1989-90 (Rs. Crore) 55

3: Foreign Inevestment
(A),(B) Private Foreign Investment 58
(C) Foreign Investment Inflows 59

4: NRI Deposits
A Inflows under FCNR and NR(E)RA Accounts 60
NRI Deposits Outstanding 61

5: External Transactions as per CSO’s 62
National Account Statistics

India’s Balance of Payments
Concepts, Compilation and Recent Scenario: 1950-51 to 2003-04

I
Key Concepts

A
balance of payments statement is essentially a double entry system of record for a given period
of an economy’s two-way international transactions in the form of goods and services, receipts
and payments of incomes, transfers without quid pro quo and financial claims and liabilities. With
a view to standardising the concepts and definitions, classificatory schemes and conventions applied in
the compilation of balance of payment statistics by various countries, the International Monetary Fund (IMF)
has prescribed a Balance of Payment Manual.1 India, as in the case of other member countries of the IMF,
has adopted the same as a conceptual and methodological basis for compiling her balance of payment account.
However, there exist some departures from the IMF framework due to the constraints of data availability
and to take account of the country’s institutional structure.2
Principally, the balance of payment (BOP) account records transactions between a resident economic entity
and the rest of the world. Though the resident status of an individual is conceived in terms of the permanence
of interest within a given territory, the rule of thumb adopted for recognition of such permanence is a stay
of one year or more. Tourist and commercial travellers, employees of foreign governments and international
bodies on a mission of less than one year and seasonal workers from foreign countries, are all considered
as residents of the economy in which they normally live. Major exceptions to this are the official diplomatic
and consular representatives, members of armed forces and other government personnel of a foreign country
stationed in a given country who are treated (together with their dependents) as non-residents for the country
of their posting or as residents of the country they represent.

Current and Capital Accounts

In BOP accounting, transactions relating to goods, services and income, and current transfers constitute
the current account, while those relating to claims and liabilities of a financial nature and capital transfers
and acquisition or disposals of non-produced, non-financial assets which go to finance the deficit on current
account, or to absorb its surplus, form the capital account. The sum of these current and capital account
transactions together constitutes the basic balance on BOP and theoretically it should be finally rounded
up. The double-entry accounting should be closed with the help of: a) purchase and repurchase from the
IMF essentially as a multilateral agency for the countries’ BOP support, b) allocation of the IMF’s Special
Drawing Rights (SDRs) intended to supplement the relatively inadequate international reserves and also
to serve as a principle reserve asset of the international monetary system, and finally, c) the build-up or
drawdown of the country’s own reserve assets. Incidentally, the objective of SDRs serving as a principal
reserve asset was scuttled in the midst of the controversy regarding the justification or otherwise for additional
reserve assets.
The above is the theoretical position; in reality, due to myriad discrepancies arising from differences
in timing, coverage, valuation and possible inaccurate estimation (which also includes clandestine capital
flight through various devices), the credit side of the double entry accounting does not exactly match the
sum of all debit entries. Therefore, the balancing act is performed by an item called “errors and omissions”-
a negative sign in it implying an overstatement of receipts and an understatement of payments, generally
a combination of both, and the positive sign signifying the reverse. It is very often found that in years
of large depreciation of the rupee, the ‘errors and omissions’ remain negative.

Balance of Payments 2

Merchandise on FOB / CIF basis

The transactions relating to goods, services and income, constituting the current account on the BOP,
are functionally classified in two broad categories: merchandise and invisibles. As per the IMF Manual,
imports and exports of goods (merchandise) should be presented under free-on-board (f.o.b. basis), that
is, without including freight and insurance costs. Such freight and insurance paid to foreign shipping and
air carriers should be treated as an outgo (debit) under the invisible sub-items, transportation and insurance
services, while that earned by domestic carriers has to be treated as receipts (credit) under the same sub-
items. However, the BOP data put out by the Indian authorities (Reserve Bank of India as well as the
Government of India) make a major departure from the IMF manual in that while they present exports
on an FOB basis they set out imports on CIF (cost, insurance and freight) basis on the ground of the nature
of data availability, that is, while exports declarations are uniformally on f.o.b. basis, import invoices do
not distinguish between the cost of merchandise and freight and insurance. Incidentally, it is found that
many other countries conduct periodical sample studies of import invoices, which facilitate such a distinction
and estimate the proportion of freight, insurance and other distributive services in the total CIF value of
imports and thus apply the results for deriving the f.o.b. values of total imports also. Besides, the IMF
in its Year Book on Balance of Payment Statistics, presenting uniform BoP data for its member countries,
publishes India’s BOP with merchandise imports also on a f.o.b. basis.3 The IMF apparently has a method
of using global adjustment to the import data for converting c.i.f. into f.o.b. Interestingly, the RBI did conduct
such surveys in the past for converting into f.o.b. basis those export invoices which were on c.i.f. or c.i.
basis. Apparently a 1948 survey, which indicated that freight and insurance elements constituted of about
four per cent of the c.i.f. values of exports, is broadly considered valid for quite some years as per subsequent
surveys.4 Though, since October 1983 the relevant forms specify the f.o.b. value of exports the above survey
results are required to be used to estimate the freight and insurance components (i.e., under invisbles) now
on the given basis of fob value.
Foreign trade data relate to merchandise trade through all the recognized seaport, airports, land customs
stations and inland container depots of India. Data on exports, which include re-exports, relate to fob values
and imports relate to c.i.f. values. Exports are based on the general system of recording, according to which
re-exports relate to Indian merchandise previously imported into India.
The item Non-Monetary Gold Movement has been deleted from invisibles in conformity with IMF Manual
on BOP (4th edition) from May 1993 onwards; these entries have been included under merchandise. Similarly,
in accordance with the provisions of IMF Manual on BOP (5th edition), gold purchased from the government
of India by RBI has been excluded from the BOP statistics. Data from the earlier period have been amended
by making suitable adjustments in ‘other capital receipts’ and ‘foreign exchange reserves’. Imports relate
to foreign merchandise whether intended for home consumption, bonding or re-exploration. Trade balance
is defined as the difference between total exports and total imports (both merchandise).

Invisibles

As distinguished from the ‘visibles’ (merchandise) transactions, the invisibles account comprises costs
of services, income and transfer payments (ie, payments and remittances unrequited or without quid pro
quo or without any repayment obligations). The IMF manual classifies non-merchandise current account
transactions into as many as thirteen items and also obtains from the reporting country authorities and
publishes (supplemented by its own estimates) in its BOP yearbook fairly disaggregated information on
a number of countries. Exhibits I(A) and I(B) provide listings of current account transactions as per the
IMF Manual and as per the BOP yearbook, respectively; these also carry alongside the Indian system of
classifications. It is true that many other countries do not possess such detailed data and hence they club
certain items together and publish data on fewer heads. In the regular dissemination of BOP data, the Indian
authorities now provide the ‘invisibles’ account data under seven broad heads.
Within the above broad heads, however, the Reserve Bank of India has now begun to provide many more
details, which may be seen in disaggregated data presented in Appendix Tables 2(A) to 2(H). With a view

3 Balance of Payments

to disseminating more disaggregated data on India’s trade and services, the RBI has published such statistics
separately for the period 1956-57 to 1998-99 in its monthly bulletins of March and April 1992 and in its
comprehensive publication Balance of Payments: 1948-49 to 1988-89 (July 1993); this practice has been
continued thereafter on an annual basis. Apart from some broad details presented in Appendix Table 2A,
attempts have been made to cull out more disaggregated data on invisibles from the above studies which
are presented in eight separate sets in Appendix Tables 2(A) to 2(H). As may be observed from these
disaggregated data, India has now begun to provide many more details; earlier income consisted only of
investment income whereas now one more sub-category ‘compensation of employees’ is added, in accordance
with the IMF’s Balance of Payments Manual (5th edition), 1993, under the head ‘income’ with effect from
1997-98. Earlier, the Indian practice was to record ‘compensation of employees’ under the head ‘services-
miscellaneous’. Since 1990-91, the value of defense related imports are recorded under imports (merchandise
debit) with credits financing such imports shown under “loans (external commercial borrowings) to India”
in the capital account. Based on the recommendations of a high-level committee in their Reports of Policy
Group and Task Force on External Debt Statistics of India, 1992, interest payments on defense debt owed
to the general currency area (GCA) are recorded under investment income (debit) and principal repayments
under debit to “Loans (external commercial borrowings) to India”.
The IMF classifies transfers as ‘current transfers’ and ‘capital transfers’. Transfers basically represent
receipts and payments without quid pro quo. Current transfers include those of general government (eg,
current international cooperation between different governments, payments of current taxes on income and
wealth, etc.) and other transfers (eg, workers remittances, premiums-less service charges), and claims on
non-life insurance. Definitionally, capital transfers should include:
(i) Transfer of ownership of fixed asset or
(ii) The forgiveness of a liability by a creditor when no counter-part is received in return, or
(iii) A transfer of cash when linked to, or conditional on, the acquisition or disposal of a fixed asset
(eg investment grant) by one or both parties to the transaction.
Finally, capital transfer should result in a commensurate change in the stocks of assets of one or both
parties to the transaction. Due to non-availability of data, the RBI is unable to provide such segregation
into current and capital transfers; instead it has segregated transfers into private and official. The term
‘transfers’ is used in India’s Balance of Payments in the same sense as unrequited transfers. Unrequited
transactions are transations such as gifts, grants, taxes, etc. where one transactor provides something of
economic value to another but doesnot receive a quid pro quo on which economic value can be assigned
in return. The economic value that is lacking on one side has to be balanced by an entry which is referred
to as unrequited transfers.
Government not included elsewhere represents remittances towards maintenances of foreign embassies,
diplomatic missions and international/ regional institutions.
Miscellaneous services encompass communication services, software services, construction services,
royalties, copyrights and licence fees, news agency services and others. Because of the emergence of software
services as a highly focused and dynamic area of export activity in the 1990s, it is shown as a separate
sub-item under ‘Miscellaneous’ since 2000-01.
Investment incometransactions 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 investments, 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, payments of taxes by non-
residents/refunds of taxes by foreign governments and interest/discount earnings on RBI holding of foreign
assets. Investment income payments comprise payment of interest on non-received deposits, payment of
interest on loans from non- residents, payment of dividend/profit to non-resident shareholders, reinvested
earnings of the FDI companies, payments of interest on debentures, FRNs, CPs, fixed deposits, government
securities, charges on SDRs and others.
Undistributed income or retained earnings of an enterprise held by non-residents are conceived of as a
payment of income to the foreign investor and simultaneous reinvestment of that income by the foreign


investor in the same resident direct investment enterprise. Such income is recorded as a component of foreign
investment income payment in the current account matched by the flow of foreign investment in the capital
account.
Even so, while the Indian classification of current transactions is found to be fairly comprehensive, some
loss of information in it relating to the following items is noticed:
(i) As explained earlier, data on insurance and freight on imports, which would constitute part
of the items transportation and insurance, are in fact included under merchandise.
(ii) Under the Indian classification, transactions relating to the life insurance business of the Life
Insurance Corporation of India or those relating to the general insurance business of the Indian
general insurance companies abroad for domestic hazards in those countries are clubbed under
the item insurance which also covers the insurance of merchandise trade. The IMF classification
places this under a separate item called ‘other goods, services and income’.
Expenditures of diplomatic missions in India or those of Indian missions abroad are not presented separately
in the Indian data, whereas the IMF publishes such data under the head ‘other foreign official, NIE’ even
for India separately.

Capital Account

Though the IMF manual distinguishes a large number of items under the capital account, India, as in
the case of many other countries, has dovetailed the accounting classification to fit into its own institutional
structure and analytical needs. Until the end of the 1980s, key sectors distinguished under the capital account
were: (i) private capital, (ii) banking capital, and (iii) official capital.
Private capital was sub-divided into (i) long-term and (ii) short-term, with loans of original maturity of
one year or less constituting the relevant dividing line. Long-term private capital, as published in the regular
BOP data, covered foreign investments (both direct and portfolio), long-term loans, foreign currency deposits
(FCNR and NRE) and an estimated portion of the unclassified receipts allocated to capital account. Banking
capital essentially covered movements in the external financial assets and liabilities of commercial and
co-operative banks authorised to deal in foreign exchange. Official capital transactions, other than those
with the IMF and movements in RBI’s holdings of foreign currency assets and monetary gold (SDRs are
held by the government), were classified into (i) loans, (ii) amortisation, and (iii) miscellaneous receipts
and payments. In the data base created here, statistical series on BOP for the period 1950-51 to 1989-90
are in this format (See Appendix Table 1A). Independent data published by the RBI give disaggregation
of FDI by approval categories and that of portfolio investments by types of flow. In FDI, there are three
sources of approvals: government [Secretariat of Industrial Approvals (SIA) and Foreign Investment
Promotion Board (FIPB)]; RBI; and NRI investments (See Appendix Table 3B). Likewise, RBI puts out
data on NRI deposits under different categories of deposits (Appendix Tables 4A and 4B).
For the subsequent period, from 1990-91 onwards, the classification adopted is as follows:
(i) Foreign investment, which is bifurcated into Foreign Direct Investment (FDI) and portfolio
investment. The FDI in India could be in the form of inflow of investment (credit) and outflow
in the form of disinvestments (debit) or abroad in the reverse manner. The portfolio investment5,
on the other had, comes in the form of Foreign Institutional Investors (FIIs), offshore funds
and Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). The data
on acquisition of shares (acquisition of shares of Indian companies by non-residents under section
5 of FEMA, 1999) has been included as part of foreign direct investment since January 1996.
(ii) Loans, which are further classified into external assistance, medium and long-term commercial
borrowings and short-term borrowings, with loans of original maturity of one-year or less
constituting the relevant dividing line. The principal repayment of the defense debt to the General
Currency Area (GCA) is shown under the debit to loans (external commercial borrowing to
India) for the general currency area since 1990-91.
(iii) Banking capital comprises external assets and liabilities of commercial and government banks
authorized to deal in foreign exchange, and movement in balance of foreign central banks and


international institutions like, World Bank, IDA, ADB and IFC maintained with RBI. An
important component of banking capital is non-resident (NRI) deposits.
(iv) Rupee debt service contains interest payment on, and principal re-payment of, debt for the
erstwhile rupee payments area (RPA). (This is done based on the recommendation of high-level
committee on balance of payments.)
(v) Other capital is a residual item and broadly includes delayed exports receipts, funds raised and
held abroad by Indian corporate, India’s subscriptions to international institutions and quota
payments to IMF. Delayed export receipts essentially arises from the leads and lags between
the physical shipment of goods recorded by the customs and receipt of funds through banking
channel. It also includes rupee value of gold acquisition by the RBI (monetization of gold).
(vi) Movement in Reserves comprises changes in the foreign currency assets held by the RBI and
SDR balances held by the government 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, Yen and others) held in reserves. Furthermore, this item does not include
reserve position with IMF.
As per the earlier classification, institutional character of the Indian creditor/debtor formed the dividing
line for capital account transaction, whereas now it is the functional nature of the capital transaction that
dominates the classification.
FDI to and by India up to 1999-2000 comprised mainly equity capital. In line with international best
practices, the coverage of FDI has been expanded since 2000-01 to include, besides equity capital, reinvested
earnings (retained earnings of FDI companies) and ‘other direct capital’ (inter-capital debt transactions
between related entities). Data on equity capital include equity of unincorporated bodies. Reinvested earnings
for the latest year (2003-04) are estimated as average of the previous two years as these data are available
with time-lag of a year. In view of the above revision, FDI data are not comparable with similar data for
the previous years (Appendix Table 3C). In terms of standard practise of BOP compilation, the above revision
of FDI data would not affect India’s overall position as the accretion to the foreign exchange reserves would
not undergo any change. The composition of BOP, however, would undergo changes. These changes relate
to investment income, external commercial borrowings and ‘errors and omissions’. In case of reinvested
earnings, there is a contra-entry (payments) of equal magnitude under investment income in the current
account. ‘Other Capital’ reported as part of FDI inflow has been carved out from the figure reported under
external commercial borrowings by the same amount. ‘Other Capital’ by Indian companies abroad and equity
capital of unincorporated entities have been adjusted against ‘errors and omissions’ for 2000-01 and 2001-02.

II
Sources of BOP Data

The compilation of BOP data are considerably facilitated by two important prescriptions under foreign
exchange regulations, which are a universal feature in the governance of transactions in foreign exchange,
and which therefore have continued in India even after external sector liberalisation and replacement of
the Foreign Exchange Regulation Act (FERA), 1973 by the Foreign Exchange Management Act (FEMA),
1999. The prescriptions are: (i) all foreign exchange transactions are required to be channelled through
the banking system; and (ii) the authorised dealers (ADs) are required to submit various returns to the
RBI on those transactions (RBI 1987).
The compilation is thus done on the basis of such statistical returns submitted by ADs to the RBI. The
most important return is the well-known R returns, which covers export receipts, import payments, and
also non-merchandise transactions (current and capital) beyond a cut-off limit; this cut-off limit prescribed
for the supplementary statement of receipts in respect of purposes other than exports, was varied from time
to time; it was Rs 1 lakh and above for some time up to January 2001 but was raised to $ 10,000 and
above thereafter. These R return schedules, including the supplementary statement of receipts, for non-
merchandise transactions are now obtained from about 2,000 AD branches in electronic form. All of the


R returns data cover forex transactions including their purpose-wise classification up to and above the cut-
off limit referred to above, and for the transactions below the limit, only total amount is given. Therefore,
to capture such purpose-wise classification in respect of the balance of forex transactions below the cut-
off limit of $10,000 now (about Rs 50,000), a sample survey of unclassified receipts is undertaken on a
quarterly basis. Thirdly, data on a number of what are called non-R return items, that is, items dealt with
directly by the government such as defence-related purchases and other official transactions, are supple-
mented from government sources and major diplomatic missions abroad (Washington, London and Tokyo).
Finally, there are three more other sources which supplement the above BOP data:
(i) a foreign currency gross provisional return (FCGPR) on capital account transactions including
all investment flows;
(ii) a BAL statement on balances in NRE deposit accounts; and
(iii) information, through fortnightly section 42(2) returns of banks, on their Nostro balances (normally
in credit) and Vostro balances (normally in debt).
In addition, there is yet another class of surveys on India’s ‘foreign liabilities and assets’, which has
finally culminated into a more comprehensive survey on international investment position (IIP). Earlier
this survey of foreign assets and liabilities was periodically undertaken to fill the gap in the capital
transactions of the private sector; this survey was also used to obtain data on direct investment flows on
a non-cash basis such as shares allotted to non-residents against import of plant and equipment or against
technical know-how fees, and direct investors’ portion of reinvested earnings. Now, the Indian government
has accepted Special Data Dissemination Standards (SDDS)6 prescribed by IMF in the aftermath of the
financial crisis of 1997-98, according to which, the IIP, amongst others, ‘has become the focus of attention
on account of its comprehensive coverage and the feasibility of assessing the impact of policies on the
composition of capital flows’ (RBI’s Annual Report, 2002-03, p.112). Under the SDDS, India was committed
to compile the IIP for the period ending March 2002. Accordingly, annual IIP of India for the years March
1997 to March 2002 have been placed on RBI’s website.

Apparent gaps in balance of payments data: -

(i) As pointed out earlier, there is the need to present import data in fob terms and thus give the
valuesof freight and insurance under invisibles more accurately.
(ii) IMF publications classify data on invisibles under 15 heads, whereas Indian BOP is generally
reported under 7 heads. Now that the RBI has begun collecting substantially more disaggregated
data, BOP classification may be expanded (Exhibit IA).
(iii) RBI was conducting sporadic studies on currency-wise pattern of exports and imports and
invisibles. It is hoped that these will be continued and that an analysis of the available data
may be undertaken more regularly such as once in two years.
(iv) Detailed dissemination of FDI inflows by sectors and by projects is needed. The advisory group
on data dissemination had in fact highlighted this requirement. Currently, the Secretariat of
Industrial Approvals (GoI) publishes in their SIA Newsletter (monthly) census list of FDI
approvals with brief details on individual proposals and some consolidated data on actual inflows.
RBI may attempt publishing similar data on the progress achieved in actual inflow of FDI and
technical collaborations, along with ‘individual profiles’ for major cases of inflows and projects
under implementation.

Difference between RBI balance of payments data and customs data.

As repeatedly reported by the RBI, a phenomenon in the external trade statistics of India has been the
significant divergence between the merchandise transactions, particularly on imports, as revealed by the
customs data compiled by the Directorate General of Commercial Intelligence and Statistics (DGCI and S)
and the BOP data published by the RBI on payment basis (see Table 1 below). Apart from valuation and
timing differences as between the customs data based on the shipment of goods and the booking of, say,

7

EXHIBIT A: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Manual)

I . IMF Classification of Invisibles II. Indian Classification of Invisibles

Category No. Nomenclature Brief Description Nomenclature Brief Description

Services:- 1 Transportation Includes sea transport and air tranport and Transportation Category 1under Services as per IMF specification.
other transport for passenger and freight traffic.
Balance of Payments

2 Travel Covers travel for business or personal purpose. Travel Category 2 under Services as per IMF specification.
3 Construction services Cover work performed on construction projects and
installations by employees of an enterprise in Insurance Categry 5 under Services as per IMF specification.
locations outside the economic territory of the
enterprise. G.n.i.e. Categry 11 under Services as per IMF specification.
4 Communication services Include telecommunications in turn including
transmission of sound, images, other Miscellaneous Includes cateory 3,4,6,7,8,9,10 under Services as per
information by various modes and their IMF specification.
maintenance and postal and courier services. Income Categry 1 and 2 under Income as per IMF specification.
5 Insurance services Cover the provision of insurance to non-residents
by resident enterprises covering freight and direct Official transfers Categry 1 under Transfers as per IMF specification.
insurance (life, accident, health etc. insurance).
6 Financial services Include intermediary service fees associated with Private transfers Categry 2 under Transfers as per IMF specification.
the line of credit, leasing etc. It also covers
commisssions related to transactions in securities.
7 Computer and information Include computer data and news-related
services service transaction covering data bases,
data processing, hardware consultancy.
8 Royalties and licence fees Cover receipts/payments due to sale of trademarks,
copyrights, patents, franchises due to the use of
produced originals such as films, manuscripts.
9 Other business services Services; operational leasing services; and miscella-
neous business, professional, technical services.
10 Personal, cultural and Include services associated with the production of
recreational services motion pictures on films or video-tape, radio and
television programmes
11 Government services n.i.e. Covers services associated with government
sectors or international or regional
organisations and not classified elsewhere.
Income:- 1 Compensation of Covers wages, salaries, other benefits in
employees cash or in kind of border, seasonal and
non-resident workers in embassies
2 Investment income Consists of direct and portfolio income, and
other income
Transfers:- 1 Official transfers Includes current international cooperation
between governments, payments of current
taxes on income and wealth
2 Private transfers Includes workers remittances, claims on
nomn-life insurance etc.

Note: The recording of transportation and insurance transactions on a gross basis and their reclassification from merchandise to invisibles form part of the ongoing efforts to refine and
disaggregate the balance of payments statistics.
Source: IMF, Balance of Pyments Statistics, Yearbook, Volume 35, Part I, 1984

EXHIBIT B: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Yearbook)
I . IMF Classification of Invisibles I . IMF Classification of Invisibles
Item Nos. Nomenclature Brief Description Item Nos. Nomenclature Brief Description
(Credit and Debit) (Credit and Debit)

3 and 4 Shipment Freight and insurance charges on exports and 23 and 24 Other resident A miscellaneous category (like sale of embassy
inports official, Nie buildings, for instance)
5 and 6 Passenger services Passenger fares 25 and 26 Other resident All foreign embassy receipts and payments for
official, Nie diplomatic missions abroad including expenditures
7 and 8 Port services Bunkers, supplies of jet fuel, and repair services incurred by UN agencies and the agencies like
at ports and airports the World Bank, IMF and ADB.
9 and 10 Travel Tourists and other temporary visitors’s foreign 27 and 28 Labour income, Nie. Personal income earned/ remitted in respect of
exchange expenditure workers who stay outside the country of their
residence for less than one year I.e. for
temporary employment.
11 and 12 Re-invested earnings Share of undistributed earnings of companies with
on direct investment foreign shareholdings. This includes earnings of 29 and 30 Property income, Nie Receipts/payments for patents and royalties.
abroad branches of foreign companies unremitted
(including banking companies)
13 and 14 Other direct this section covers distributed earnings of 31 and 32 other goods, services This will cover:
investment income foreign controlled companies or profits remitted and incomes, Nie. (i) value added from re-exports
(distributed earnings) in the case of branches or interest payments (ii) local expenses of offshore companies
made to principals. (iii) motion picture film rental and management fees
(iv) net transactions from life insurance corporations
i.e all non-merchandise insurance and non-trade
15 and 16 Other investment this should include interest income receivable on services obtained from abroad.
income of resident foreign currency assets held abroad and also inte-
official, including rest paid on foreign debt held by government and 33 and 34 Migrants‘ transfer Remittance received /paid from/for temporary
interofficial government owned public utilities and agencies. migrants abroad other than those seeking
employment or initial arrivals
17 and 18 Other investment Foreign official interest income paid to a non- 35 and 36 Worker’s remittances Remittance of workers I.e. those who are for
income of foreign official organisation (credit) and a private regular employment but either than those in
official excluding organisation paying interest to a foreign official business. Also personal remittance by persons
interofficial organisation (debit) employed under technical assistance.
19 and 20 Other investment Covers: 37 and 38 Other private Personal remittances of a special nature such as
income (private to (i) Dividends on portfolio investment transfers pensions and social security receipts/payments
private) income in equities and all gilts
(ii) Interest earned/paid on bank deposits
(iii) Debentures and other debt securities 39 and 40 Interofficial transfers On the receipts side, contra-entries for all grants
(iv) This item also covers interest paid on foreign for technical assistance; also cancellation of
debt by public enterprises and also corporations debt is included in this item. Debits include
whose debt is guaranteed by local governments actual grant figures.

21 and 22 Inter-official, n.i.e. This should cover value of services obtained/ 41 and 42 Other transfers of This includes some transfers to resident govern-
rendered under aid programmes which are financed resident official ments like taxes from non-residents (like foreign
by grants and which has a contra entry under company registration fees) or on the debt side
item no 39 below. official transfers to private entities abroad like
pension payments.
43 and 44 Other transfers of This covers claims received from foreign social
foreign official security institution, pensions and scholarships, etc.
on the debit side, paymnts by private individuals
and organisations to foreign governments (foreign
social security institutions) and consular and
visa-fee payments.

(Contd)
Balance of Payments
8

9
Balance of Payments

EXHIBIT B: ESTIMATION OF INVISIBLE ACCOUNTS - A COMPARISON OF RBI CLASSIFCATION WITH THE IMF CLASSIFICATION (IMF BOP Yearbook) (Concluded)

II. RBI Classification

Nomenclature Corresponding Item Nos in above IMF Classification

1 Travel Item numbers 9 and 10 (including the relevant share from
unclassified receipts

2 Transportation Item numbers 3 and 4 (freight component only) and also 5
and 6 (passenger fares) and item numbers 7 and 8 (port
services)

3 Insurance Item numbers 3 and 4 (insurance component only).This item
also includes surplus funds received by Indian Insurance
companies from abroad (Item numbers 31 and 32)
4. Income :
Investment Income Item numbers 11 and 12, 13, 14 ,15 and 16, 17and 18 and 19
and 20
Compensation to employees Item numbers 27 and 28

5 Government N.i.e. Item numbers 23 and 24 and 25 and 26

6. Miscellaneous Item no 29 and 30

7 Transfer Payments

(I) Official Item numbers 21 and 22, 23 and 24, 39 and 40, 41 and 42
and 43 and 44
(ii) Private Item numbers 33 and 34, 35 and 36, 37 and 38.

Note: The recording of transportation and insurance transactions on a gross basis and their reclassification from merchandise to invisibles from part of the ongoing efforts to refine and disaggre-
gate the balance of payments statistics.
Source: IMF, Balance of Payments Statistics, Yearbook, Volume 35, Part I, 1984


imports on payments basis, a major cause for the difference in merchandise imports is that customs (DGCI
and S) data do not cover import of defence stores including defence equipment, while the RBI data cover
the same as and when these imports are paid for. Besides, RBI data have a lead in payments in regard
to imports under external assistance and commercial borrowings as the RBI records them when the payments
are made to suppliers while the DGCI and S data cover them when the goods arrive in the country in accordance
with the recommendations of the report of the technical group on reconciling balance of payments and
DGCI and S data sources on merchandise trade. Data on gold and silver brought in by the Indians returning
from transfer receipts since 1992-93 abroad have been included under import payments with contra entry
under private transfer receipts.
As the data in text Table 1 shows, the differences between the two sources have got widened, particularly
in the latter half of the last decade when defence purchases seems to have got expanded; it is quiet likely
that leads and lags between shipments and payment receipts may have also got widened.

Table 1: India’s Foreign Trade : A Comparison of DGCI & S and RBI Data
(Rupees, Crore)

Exports Imports Trade Balance
DGCI and S RBI Difference DGCI and S RBI Difference DGCI and S RBI Difference
(2-3) (5-6) (8-9)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

1980-81 6711 6666 45 12549 12876 -327 -5838 -6210 372
1981-82 7806 7766 40 13608 14260 -652 -5802 -6494 692
1982-83 8803 9137 -334 14293 15856 -1563 -5490 -6719 1229
1983-84 9771 10169 -398 15831 17093 -1262 -6060 -6924 864
1984-85 11744 11959 -215 17134 18680 -1546 -5390 -6721 1331
1985-86 10895 11578 -683 19658 21164 -1506 -8763 -9586 823
1986-87 12452 13315 -863 20096 22669 -2573 -7644 -9354 1710
1987-88 15674 16396 -722 22244 25693 -3449 -6570 -9297 2727
1988-89 20232 20647 -415 28235 34202 -5967 -8003 -13555 5552
1989-90 27658 28229 -571 35328 40642 -5314 -7670 -12413 4743
1990-91 32558 33153 -595 43193 50086 -6893 -10635 -16933 6298
1993-94 69751 71146 -1395 73101 83869 -10768 -3350 -12723 9373
1994-95 82674 84329 -1655 89971 112749 -22778 -7297 -28420 21123
1995-96 106353 108481 -2128 122678 146542 -23864 -16325 -38061 21736
1996-97 118817 121194 -2377 138920 173753 -34833 -20103 -52559 32456
1997-98 130101 132703 -2602 154176 190508 -36332 -24075 -57805 33730
1998-99 139753 144436 -4683 178332 199914 -21582 -38579 -55478 16899
1999-00 159561 165993 -6432 215236 240112 -24876 -55675 -74119 18444
2000-01 203571 205287 -1716 230873 270663 -39790 -27302 -65376 38074
2001-02 209018 214351 -5333 245200 274778 -29578 -36182 -60427 24245
2002-03 255137 254022 1115 297206 316450 -19244 -42069 -62428 20359
2003-04 291582 288769 2813 353976 365641 -11665 -62394 -76872 14478

Sources : Various issues of RBI Bulletin

III
An Overview of India’s Balance of Payments

Appendix Tables 1(A) to 5 present a detailed account of all the major components of India’s balance
of payments for about 54 years since 1950-51. A few special tables amongst them give further details
of some important sub-categories of invisibles and capital transactions. A text Table 2, depicts a profile
of end-year foreign exchange reserves including annual transactions with the IMF. A separate table presents
‘rest of the world account’ transactions as tabulated by the Central Statistical Organisation (CSO) in its
National Accounts Statistics (Appendix Table 6). A few analytical tables such as the one on financing of
current account deficit (Table 3) and another on selected indicators of BOP (Table 4) are also presented
as text tables. They make an attempt to provide a perspective of macro analysis that is possible of BOP
statistics. Apart from exports and imports of goods and services, the table on ‘rest of the world account’
provides data on (a) compensation of employees from, and to, the rest of the world; and (b) property and
entrepreneurial income similarly from, and to, the rest of the world. The objective of this note is to present
these data for use by research scholars and others and not to provide any detailed analysis. However,


opportunity is taken to make a few obser- Graph 1
Export and Import as Percentage of GDP
vations on what these mass of data reveal
30
essentially as a lead for their users.
First, there has occurred a quantum leap in
25
the proportion of India’s exports in GDP. For
over three decades, merchandise exports had
constituted around 4 to 5 per cent of GDP but 20

this has jumped to about 8 to 9 per cent in

Percentage
the 1990s (Table 4 in the text) and over 10 15

per percent in the latest two years. Further,
it is revealed that inclusive of exports of 10

services, the rise in the ratio of goods and
services to GDP has been much sharper, from 5

about a range of 8-9 per cent to 18-19 per cent.
Significantly, the rise in export earnings has 0

1961-62

1963-64

1965-66

1967-68

1969-70

1971-72

1973-74

1975-76

1977-78

1979-80

1981-82

1983-84

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

1999-00

2001-02

2003-04
been accompanied by similar sizeable increase
in imports as percentage of GDP. Although Years
Exports as % to GDP Imports as % to GDP
the physical trade to GDP ratio has not shown

Graph 2 any significant expansion in the second half
Total Merchandise as % to GDP
of the 1990’s, the ratio has significantly im-
30
proved in this millenium. On the other hand,
25 exports of services as percentage of GDP has
witnessed a more rapid and continuous rise.
20 It has grown from about 2.5-3.5 per cent for
Percentages

about two decades until the early 1990’s to 5
15
per cent in 1995-96 and to 8.8 per cent in 2003-
10 04, the most commendable feature being that
the growth in exports of both goods and ser-
5 vices have come about despite around 8 per
cent appreciation of the rupee against the dollar
0
in these two years; of course, in REER terms,
1961-62
1963-64
1965-66
1967-68
1969-70
1971-72
1973-74
1975-76
1977-78
1979-80
1981-82
1983-84
1985-86
1987-88
1989-90
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04

there has not been any change in the value of
the rupee.
Years
Total Merchandise as % to GDP
Secondly, the current account deficit – a
crucial macro economic indicator – has faced
Graph 3
a chequered trend. As percentage of GDP, Financing CAD
80000
it was around 2 per cent during the high
70000
investment phases of the second and third
60000
five-year plan periods (1956-57 to 1965-66)
and also during the decade of the 1980s. 50000

Interestingly, the 1990s in particular have 40000
Rs Crore

shown the lowest relative current account 30000

deficit so much so that by 2001-02, there 20000

has arisen a current account surplus, which 10000

has continued has continued till the first 0
1960-61

1962-63

1964-65

1966-67

1968-69

1970-71

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

quarter of 2004-05. Earlier, such a surplus -10000
was experienced in the mid-1970s when the -20000
national economy had similarly experienced Years

an investment famine. External assistance Commercial Borrowings Foreign Investments NRI Deposits


Thirdly, again, in the financing of current Graph 4
deficit (text Table 3 and Graph 3), there has Import Cover
occurred a significant change in the relative 60000 12.0
importance of various sources of finance
in this respect. While the role of external 50000 10.0
assistance has declined in the 1990s, the
importance of private investment flows, 40000 8.0
NRI deposits and commercial borrowings,
has increased. Separate information pro- 30000 6.0
vided on the first two items of investment
flows [Appendix Tables 3A, 3B and 3C] 20000 4.0

and NRI deposits (Appendix Tables 4A
10000 2.0
and 4B) speak of their importance in ab-
solute numbers.
0 0.0
Finally, above all, it is the phenomenal

2001-02
expansion in foreign currency assets in the
1990s that stands out. As indicated in the
Years
text Table 2, the country’s foreign exchange Forex Reserves Import Cover
reserves had generally remained low after
the sterling balances were brought down in the early phase of planning. The years when the reserves formed
more than three months’ import requirements, as in the 1970s and the early 1980s, were periods of considerable
recessionary conditions in Indian industry; in the early 1980s the reserves were also supported by the IMF drawals.
The same phenomena of recession as well as IMF and other exceptional drawings were prevalent in the
early 1990s; thereafter the foreign exchange reserves began to rise. But, the increases in reserves that have
occurred after 1995-96 or thereabout are of a different genre. Not only have there been no IMF borrowings
(in fact all repurchase obligations have been cleared), the recessionary conditions have not been as severe
as in, for instance, in the 1970s. In fact, inflows have been quite sizeable as a result of reduced merchandise
deficits, rapid increases in private inward remittances, and higher capital flows - all of which could not
probably have been absorbed even if the tempo of investment was stepped up.

Notes

[Acknowledment: An original note on the subject was published in the Economic and Political Weekly (EPW) of November
13-20, 1993. The same has been thoroughly revised and updated by Ms. Shilpa Jain for publication on the website
www.epwrf.res.in Mrs. Rema K. Nair undertook page-making.]
1
International Monetary Fund, Balance of Payments Manual, Fourth Edition, 1971.
2
The Reserve Bank of India has compiled and published its own manual setting out the concepts and methodology, the main
constitutents of BoP and source of data used. See Reserve Bank of India (1987), Balance of Payments Compilation Manual,
October, 1987.
3
See International Monetary Fund, Balance of Payments Statistics (various yearbook volumes)
4
See RBI,op cit, pp 21-22.
5
Portfolio investment mainly includes FIIs’ investment, funds raised through GDRs/ADRs by Indian companies and through
offshore funds. Data on investment abroad, hitherto reported, have been split into equity capital and portfolio investment since
2000-01.
6
A detailed note on the SDDS has been published by the EPW Research Foundation (2003) ; it is: “ International Reserve,
Foreign Currency Liquidity and External Debt: Data template”, Economic and Political Weekly, September 30, 2003.

Symbols and Abbreviations

1. The following symbols have been used throughout the article.
.. = data not available
-, 0 = nil or negligible
. = Denotes data not available separately and has been clubbed elsewhere.
2. f.o.b. = free on board
c.i.f- cost, insurance and freight.
3. NR(E)RA = Non-Resident (External) Rupee Account
4. FCNR (B) = Foreign Currency Non-Resident (Banks)
5. FCNR (A) = Foreign Currency Non-Resident (Accounts)

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